On 20 December 2021 the OECD published the document Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two).
The Global Anti-Base Erosion (GloBE) Rules provide for large multinational enterprise groups to pay a minimum level of tax in each jurisdiction where the entities in the group are doing business. A top-up tax is imposed on the profits arising in a jurisdiction if the effective tax rate, calculated for each jurisdiction where business operations are carried out, is below the minimum rate.
The rules outline the scope of the GloBE Rules, defining terms such as a group; a multinational enterprise group; a constituent entity; an ultimate parent entity and an excluded entity. The rules also set out the constituent entities in the group that may become liable for any top-up tax; and they look at the portion of the top-up tax that could be charged to those entities.
Income Inclusion Rule
The income inclusion rule (IIR) would permit inclusion of the income of a low taxed constituent entity in the tax base of the ultimate parent entity if the tax on that income did not reach the minimum effective tax rate, as set out in Article 2.1 to Article 2.3 of the rules.
Effective Tax Rate
The rules outline the steps in the calculation of the effective tax rate (ETR) under the GloBE Rules. The relevant ETR is arrived at by calculating the income or loss for each constituent entity in the multinational group and then identifying the taxes attributable to that income.
If the effective tax rate is found to be below the minimum rate, the difference between the rates (top-up tax percentage) is then applied to the income in the jurisdiction to calculate the top-up tax due. The top-up tax would be due on a pro-rata basis from the constituent entities in the jurisdiction.
Undertaxed Payments Rule
Where there is remaining top-up tax after the IIR has been applied, the Undertaxed Payments Rule (UTPR) can be used to allocate the residual top-up tax. This rule would allow the jurisdiction of the payer to deny a tax deduction or to make an equivalent adjustment if a payment is made to a low taxed constituent entity.
Administration
The rules also cover administrative aspects of the GloBE Rules including information filing requirements and the application of safe harbours. A constituent entity would have a deadline of 15 months to file the standardised GloBE information return (18 months in the first transitional year) to the tax authority in its own jurisdiction.
GILTI
In the agreement of 8 October 2021 the Inclusive Framework agreed to give consideration to the issue of how the US Global Intangible Low-Taxed Income (GILTI) regime will be integrated with the GloBE Rules. One important criterion for compatibility would be that the ETR calculation for purposes of the GILTI should be made per jurisdiction rather than globally. Currently the GILTI is not applied per jurisdiction. Agreement on the interaction of the GILTI with the GloBE rules is not likely to be reached until the final details of further proposed legislation in the US are known.
