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PART 1: The GloBE rules Pillar 2 explained


In October 2021, over 135 jurisdictions, members of the BEPS Inclusive Framework (including Mauritius) agreed to a plan to update key elements of the international tax system which are considered no longer appropriate in a globalised and digitalised economy. The Inclusive Framework (IF) members in fact agreed on a two-pillar solution. Pillar 1 aims to ensure a better distribution of taxation of Multinationals according to the countries in which they operate. Pillar 2, on the other hand, aims to control tax competition on corporate profits by introducing a global minimum tax of 15% via the GloBE Rules.
This article is only the beginning of a series of articles we intend to publish on the OECD Inclusive Framework two-pillar solution. For a start we will focus on Pillar 2 (GloBE Rules) which will cause a dramatic change in the Global tax architecture and may have an impact on businesses carried out by large MNEs in Mauritius. However, as the GloBE Rules are quite lengthy and complex, this present edition covers only a few things namely the meaning of GloBE Rules, their aims & scope and the mechanism adopted for computing the Global Minimum Tax.

Meaning of the GloBE Rules, their aims and scope

The GloBE Rules, an acronym for Global Anti-base erosion rules, are designed to ensure that large MNEs pay a minimum level of tax (15%) on the income arising in each jurisdiction in which they operate. The Rules will generally apply to the MNE groups and their constituent entities that are subject to Country-by-Country Reporting (CbCR) obligations described in in the BEPS Action 13 Report. More particularly, the Rules will apply to MNEs that have consolidated revenues of EUR 750 million in at least two out of the last four years. A single entity located in one jurisdiction which has a Permanent Establishment (PE) in another jurisdiction is also deemed to be a multinational enterprise when applying the test. However, the GloBE Rules specifically exclude investment funds, pension funds, governmental entities, international and non-profit bodies, which typically benefit from an exemption from tax under the laws of the jurisdiction where they are incorporated. A de minimis exclusion also applies where in a jurisdiction there is a relatively small amount of revenue (less than EUR 10 million) and profit (less than EUR 1 million).

Top-up Tax Mechanism

The tax imposed under the GloBE Rules is a “top-up-tax” calculated and applied at a jurisdictional level. The GloBE rules use a standardised base (GloBE income) and definition of covered taxes to identify those jurisdictions where an MNE is subject to an Effective Tax Rate (ETR) below 15%. It then
imposes a co-ordinated tax charge that bring the MNE’s ETR on that GloBE income up to the minimum rate (after considering a substance-based carve-out). Put simply, GloBE income will be reduced for any jurisdiction where eligible payroll costs or eligible tangible assets are present in that jurisdiction. This means that the GloBE will apply to income that is over and above 10% of the eligible payroll costs and 8% of the carrying value of eligible tangible assets. These rates will be reduced to 5% over a ten-year period.

The five-step approach when calculating the GloBE Top-up Tax

Step 1: Scoping

The first step is to determine the constituent entities within the scope of the GloBE Rules. Therefore, in step 1 an MNE Group will determine whether it is within the scope of the GloBE rules and identifies the constituent entities within the Group and their location.

Step 2: GloBE Income

The second step is to calculate the GloBE income of each constituent entity in accordance with the applicable accounting standards of the consolidated financial statements (e.g., IFRS). While countries are required to adopt the GloBE rules, jurisdictions that adopt the GloBE rules will use a common tax base for the purpose of determining the Effective Tax Rate.

Step 3: Covered Taxes

The third step is to determine taxes attributable to income of a constituent entity. Here again a common definition of covered taxes will be used for the purpose of determining whether an MNE is subject to an Effective Tax Rate below the agreed minimum rate of 15% in any jurisdiction where it operates.

Step 4: Effective Tax Rate and Top-up Tax

The fourth step is to calculate the Effective Tax Rate (ETR) of all constituent entities located in the same jurisdiction and determine resulting top-up Tax.
In the event an MNE is subject to an ETR below 15% in any jurisdiction, step 4 sets out the mechanism for calculating the top-up tax in respect of that low tax jurisdiction.

ETR = Covered Taxes / GloBE Income = (say) 10%
Therefore, Resulting Top-up Tax (15% – 10%) = 5%

If the calculation of the ETR in step 4 results in a tax rate of less than 15%, a top-up tax will usually be incurred to ensure an income taxation of at least 15%. However, with the substance based carve-out mentioned above this can be avoided if or to the extent that the group can prove investments in “substance” (i.e., tangible fixed assets and employees), because in this respect a routine return on

such investments is effectively tax free. This substance carve-out is quite different from the substance requirements under the BEPS Action 5 (Countering Harmful Practices) as under the GloBE Rules the substance must be met directly by the constituent entities and cannot be satisfied through indirect means i.e., through outsourcing to an agent or management company in the jurisdiction where the constituent entity is operating.

Step 5: Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR)

Impose Top-up Tax under IIR and UTPR in accordance with the agreed rule order. The GloBE rules are not mandatory but have been agreed as a “common approach”. That is countries that choose to introduce the GloBE rules have agreed to do so in a consistent and co-ordinated way. The inter-locking nature of the GloBE means that their adoption by a critical mass of jurisdictions will be sufficient to ensure that MNEs are required to pay the minimum level of tax on their profits arising in each jurisdiction where they operate.

The IIR imposes a Top-up Tax on the ultimate parent entity (UPE) of a low taxed foreign subsidiary. If the UPE is not required to apply an IIR, the Top-up Tax is imposed on the next intermediate parent entity in the ownership chain that is subject to the IIR (Top-down approach).

In case there are partially owned parent entities (i.e., Constituent entities that have more than 20% of the ownership interests held by non-group members) Top-up Tax is imposed on those partially owned parent entities that are subject to the IIR in priority to the top-down approach.

The Top-up Tax is attributed to parent entities in proportion to their ownership interests in those entities that have low taxed income.

The UTPR acts as a back-up mechanism as it seeks to deny deductions where low -tax members of a group are not subject to the IIR.

Pillar 2 also includes a Subject to Tax Rule (STTR)which permits some jurisdictions to withhold tax on certain types of related party payments (such as royalties) when such payments are not subject to a minimum tax rate. it is based on the rationale that a source jurisdiction that has ceded taxing rights in the context of an income tax treaty should be able to apply a top up tax to the agreed minimum rate where, as a result of BEPS structures relating to intragroup payments, the income that benefits from treaty protection is not taxed or is taxed at below the minimum rate in the other contracting jurisdiction. Specifically, the STTR targets those cross-border structures relating to intragroup payments that exploit certain provisions of the treaty in order to shift profits from source countries to jurisdictions where those payments are subject to no or low rates of nominal taxation. By restoring taxing rights to the source state in these cases, the STTR is designed to help source countries to protect their tax base, notably those with lower administrative capacities.

A treaty-based switch- over rule has also been proposed in order to restrict the treaty permanent Establishment (PE) exemption when the profit of the PE is subject to an IIR.

The use of some simple examples may help to demystify the complexities involved in the imposition of the Top-up Tax.


We hope the above will help our readers to have an insight into this major reform in international tax viz the Global Minimum Tax (GMT). In our next edition of our series of articles on the OECD Inclusive Framework two-pillar solution, we plan to come up with some simple examples that may help to demystify the complexities involved in the imposition of the Global Minimum Tax (GMT). So don’t miss that next edition where we will also try to touch on the OECD Pillar 2 Model Rules and the Commentary relating to those Model Rules.


Head of Tax Advisory Services Dept
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