Pillar 2 / GloBE

Pillar 2 / GloBE Deep Dive

The OECD/G20 Pillar 2 framework introduces Global Anti-Base Erosion (GloBE) rules that ensure large multinational groups pay a minimum effective tax rate of 15% on income arising in each jurisdiction where they operate.

GloBE Overview

The GloBE rules apply to multinational enterprise (MNE) groups with consolidated annual revenue of at least EUR 750 million in at least two of the four preceding fiscal years. The rules impose a minimum effective tax rate (ETR) of 15% on a jurisdictional basis.

Where the ETR in a jurisdiction falls below 15%, a top-up tax is charged to bring the effective rate up to the minimum. The rules include a substance-based income exclusion (SBIE) that carves out a portion of income attributable to tangible assets and payroll.

Charging Rules

Three interlocking mechanisms ensure the minimum tax is collected:

Income Inclusion Rule (IIR)

The primary rule. The ultimate parent entity (or intermediate parent in certain cases) includes its share of the top-up tax for low-taxed constituent entities in its own tax liability. Applied top-down through the ownership chain.

Undertaxed Profits Rule (UTPR)

The backstop rule. Where the IIR does not fully cover the top-up tax (e.g., because the parent jurisdiction has not adopted GloBE), the UTPR allocates the residual top-up tax to other group entities based on a formulaic approach (employees and tangible assets).

Qualified Domestic Minimum Top-up Tax (QDMTT)

A domestic top-up tax that jurisdictions may adopt to collect the top-up tax themselves, before IIR or UTPR apply. A QDMTT that meets GloBE standards reduces the top-up tax available for collection under IIR/UTPR to zero.

Top-Up Tax Calculation

The top-up tax for a jurisdiction is computed in a series of steps:

  1. Determine GloBE income or loss for each constituent entity in the jurisdiction, starting from financial accounting net income with specified adjustments.
  2. Compute adjusted covered taxes — current tax expense adjusted for items such as deferred tax, uncertain tax positions, and non-creditable taxes.
  3. Calculate the jurisdictional ETR — total adjusted covered taxes divided by total net GloBE income in the jurisdiction.
  4. Determine the top-up tax percentage — the difference between 15% and the jurisdictional ETR (if the ETR is below 15%).
  5. Apply the substance-based income exclusion — carve-out equal to 5% of eligible payroll costs plus 5% of the carrying value of eligible tangible assets (after the transition period).
  6. Compute the top-up tax amount — the top-up tax percentage multiplied by the excess profit (GloBE income minus SBIE).

Safe Harbours

Safe harbours reduce compliance burden by allowing MNE groups to treat the top-up tax in a jurisdiction as zero without performing the full GloBE calculation:

Transitional CbCR Safe Harbour

Available for fiscal years beginning on or before 31 December 2026 (and ending before 30 June 2028). Top-up tax is deemed zero if the jurisdiction meets one of three tests based on existing Country-by-Country Reporting data: simplified ETR test (>= 15%), de minimis test, or routine profits test.

Permanent Safe Harbour (QDMTT)

A jurisdiction's QDMTT that meets specific accounting standard, consistency, and administration requirements can serve as a permanent safe harbour, eliminating the need for IIR/UTPR calculations for that jurisdiction.

Permanent Safe Harbour (Simplified Calculations)

Expected to allow use of simplified income and tax computations based on CbCR data or qualified financial statements, subject to conditions on data quality and the jurisdiction's tax rate.

ETR Computation

The GloBE effective tax rate is computed per jurisdiction (not per entity) and requires careful determination of both numerator and denominator:

Covered Taxes (Numerator)

Current tax expense per financial accounts, adjusted for: deferred tax (subject to recapture), taxes allocated from other entities, withholding taxes on distributions, CFC taxes allocated to the CFC, and exclusion of disqualified refundable credits.

GloBE Income / Loss (Denominator)

Financial accounting net income/loss with adjustments for: excluded dividends and equity gains (participation exemption), excluded international shipping income, prior period errors, changes in accounting principles, pension fund and reinsurance adjustments.

Substance-Based Income Exclusion

Reduces the excess profit subject to top-up tax. Calculated as 5% of eligible payroll costs (employees performing activities in the jurisdiction) plus 5% of net book value of eligible tangible assets (with higher transitional percentages through 2032).

Implementation Status

The EU adopted the Minimum Tax Directive (2022/2523) in December 2022, requiring Member States to implement the IIR from 31 December 2023 and the UTPR from 31 December 2024. Most EU Member States have transposed the directive, though implementation details vary.

Globally, adoption is uneven. Key jurisdictions including the UK, South Korea, Japan, Switzerland, and Canada have adopted or are implementing GloBE rules. The United States has not adopted the GloBE model rules, though its existing GILTI regime provides a form of minimum taxation.

Important

The transitional CbCR safe harbour expires in 2028 — groups should prepare for full GloBE calculations well in advance.