OECD’s Pillar Two Rules Could Have Lasting Impact on Multinational Groups

Tax Strategist InsightTax Strategist Insight

The Organisation for Economic Co-operation and Development (OECD) released global anti-base erosion (GloBE) model rules as part of the framework for the Pillar Two global minimum tax on December 20, 2021, and released commentary and illustrative examples on the model rules on March 14, 2022. The commentary and examples elaborate on the application and operation of the rules and clarify certain terms.

The purpose of the GloBE rules is to limit tax competition among countries by ensuring that large multinational enterprise (MNE) groups pay a minimum level of tax on the profits arising in each jurisdiction where they operate. The GloBE rules propose to do this by implementing a “top-up tax” on an MNE group’s “low-taxed income” —  i.e., profits arising in jurisdictions where the effective tax rate is below a minimum rate of 15%. Currently, 137 member jurisdictions have signed on to implement the Pillar Two global minimum tax, which must be done through each jurisdiction’s local rules. The OECD has set a target of 2023 for member jurisdictions to implement the GloBE rules.


Overview of the Model Rules

The Pillar Two model rules are designed to ensure that large MNEs pay an effective tax rate of at least 15% on income arising in each jurisdiction where they operate. The GloBE regime applies to constituent entities (CEs) that are members of an MNE group that has annual revenue of EUR 750 million or more in the ultimate parent entity’s (UPE’s) consolidated financial statements in at least two of the last four years. For purposes of the GloBE rules:

  • An MNE group is any group of entities that are related through ownership or control, such that the assets, liabilities, income, expenses and cash flows of those entities are included in the consolidated financial statements of the UPE.
  • A CE is any entity or permanent establishment that is included in an MNE group.
  • A UPE is an entity that owns a controlling interest in any other entity and is not owned with a controlling interest by another entity.

The model rules require MNEs to determine, based on a prescribed formula, the jurisdictions where their CEs have undertaxed income (i.e., profits that are taxed at an effective rate of less than 15%). Undertaxed profits are subject to an additional top-up tax that is applied through any of the following mechanisms:

  • A domestic top-up tax enacted by the low-tax jurisdiction.
  • Two interlocking GloBE regime rules: the income inclusion rule (IIR), under which taxing rights to the undertaxed amounts are allocated to the group’s UPE (or the next highest parent company if the UPE has not adopted the IIR); and the undertaxed payments rule (UTPR), which allocates taxing rights over the undertaxed amounts to other entities within the MNE group based on the locations of employees and assets.
  • The “subject to tax rule” (STTR), which is a treaty-based rule that denies deductions or imposes a tax where the income is subject to tax at a treaty rate below 9%.

Calculating the Effective Tax Rate

The GloBE regime applies a top-up tax when the MNE group’s effective tax rate in a jurisdiction is below 15%. The effective tax rate of the MNE group in a particular jurisdiction is calculated by dividing the sum of the adjusted covered taxes of each CE located in the jurisdiction, by the MNE group’s net GloBE income in the jurisdiction.


Adjusted Covered Taxes

Covered taxes for purposes of the GloBE rules include income taxes, taxes on distributed profits, taxes in lieu of a corporate income tax, and taxes on retained earnings and corporate equity. Covered taxes generally do not include top-up taxes. A CE’s adjusted covered taxes are the covered taxes reported in the CE’s financial accounts with certain adjustments including, among others, additions for covered taxes accrued as an expense in the CE’s taxable income and reductions for current tax expense that relates to uncertain tax positions.


Net GloBE Income

The GloBE regime uses financial net income or loss as the starting point for determining the GloBE income or loss of a CE. A CE’s financial net income or loss is the net income or loss that is used for preparing the consolidated financial statements of the UPE prior to the elimination of intra-group items and other exclusions. Any intergroup transactions must be adjusted, as necessary, to meet the standards of the arm’s length principle. Certain types of income from specific activities, such as international shipping income, are excluded from the GloBE rules. The MNE group’s net GloBE income in a jurisdiction is the sum of the GloBE income minus the sum of the GloBE losses of all CEs in a jurisdiction.


Calculating the Top-Up Tax

If a low-tax jurisdiction does not impose its own domestic top-up tax, the GloBE rules require the MNE group to calculate and pay a top-up tax on any undertaxed income via the IIR or UTPR.



The IIR is the GloBE regime’s primary mechanism for imposing a top-up tax on profits subject to an effective tax rate below 15%. Under the IIR, a top-up tax is paid to the jurisdiction of the UPE that has a “qualified IIR,” in proportion to the UPE’s ownership interests in low-taxed group members. If the UPE’s jurisdiction does not have a qualified IIR, then the top-up tax moves to the next highest parent entity in the ownership chain that has a qualified IIR, if such parent entity has an ownership interest in, and consolidates with, the low-taxed group member. To be a qualified IIR for purposes of the GloBE rules, the jurisdiction’s rules must be equivalent to and administered consistently with the GloBE IIR provisions.



The UTPR is the backup mechanism for imposing a top-up tax. The UTPR comes into play if there is low-taxed income that is beneficially owned by a UPE and that is not subject to tax under the IIR. In this case, each CE (other than an investment entity) located in one or more jurisdictions with a UTPR must pay its share of the top-up tax via a denial of a deduction or an equivalent adjustment under domestic law. The amount of the low-taxed entity’s top-up tax that was not imposed under the IIR is allocated based on a formula that takes into account the relative number of employees and tangible assets in each UTPR jurisdiction.



The STTR is a tertiary mechanism for imposing tax on low-taxed profits, which would be implemented by member states through income tax treaties. The STTR would generally deny deductions or impose tax where income is subject to tax at a treaty rate below 9%. The OECD has announced it will publish further details regarding the scope and application of the STTR at a later date. 


How BDO Can Help

While most companies understand the purpose and intent of Pillar Two, not all currently understand how to apply the GloBE rules given their complexity. BDO can assist MNEs with understanding, evaluating and modeling the impacts of the Pillar Two GloBE regime on their global tax liabilities and with evaluating potential opportunities for achieving a more efficient tax structure. For more information, contact BDO.


Have Questions? Contact Us


Tax Strategist Resources

Tax Strategist

Valuable information on tax opportunities to help businesses and individuals minimize their total tax liability.

Be informed. Be agile. Be a strategist.


Tax Strategist
Webcast Series

Every business decision has a tax implication. A trusted advisor can help guide you and protect your company’s bottom line. Make sure you have the right strategies in place.