FAQs on OECD Pillar 2

Nilesh Patel – Former IRS Officer, Former Senior Manager Deloitte, CPA (USA)
nilesh@taxwize.in

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Table of Contents
Q. No. Question Page No.
1 What are the Pillar 2 Model Rules? 4
2 What do the Pillar 2 Model Rules contain? 4
3 What are GloBE (Global Anti Base Erosion) Rules? 5
4 What is Subject To Tax Rule (STTR)? 5
5 What is the scope of GloBE Rules? 6
6 Which Entities are excluded from the GloBE Rules? 6
7 How do the GloBE Rules operate? 7
8 What is Income Inclusion Rule (IIR)? 7
9 How does the Top-down Approach work for applying IIR? 9
10 Can you give an Example illustrating the application of the
split-ownership rules and the top-down approach in a
situation where the UPE and Partially-Owned Parent Entity
(POPE) are required to apply a Qualified IIR with respect
to the same LTCE?
11
11 What is IIR Offset Mechanism when Intermediate Parent
Entities are present in the MNE Group’s Structure?
13
12 What is Under Taxed Payments Rule (UTPR)? 15
13 How is the UTPR Top-up Tax Amount allocated to each
UTPR Jurisdiction?
16
14 Which Constituent Entities of the MNE Group are liable to
pay Top-up Tax under the UPTR?
16
15 How is the UTPR Top-up Tax Amount computed? 17
16 What is Switch-over-Rule? 19
17 What is the difference between Subject To Tax Rule
(STTR) and IIR/UTPR?
19
18 What is Qualified Domestic Minimum Top-up Tax? 21
19 What is Excess Profit? 22
20 What are the Steps involved in determining the Top-up Tax
liability of an MNE?
23
21 How is GloBE Income or Loss computed? 23
22 How are Adjusted Covered Taxes computed? 27
23 How is Effective Tax Rate (ETR) computed? 28

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24 How is Top-up Tax computed? 28
25 Which Entity pays the Top-up Tax? 30
26 Is MNE’s Global ETR of 15% or more a safe harbor? 30
27 What is GloBE Information Return? 31
28 When is Pillar 2 relevant? 32
29 When is Pillar 2 NOT relevant? 33
30 Can India be a safe jurisdiction for inbound MNEs? 34
31 How will inbound (into India) MNEs be affected adversely? 34
32 How will outbound Indian MNEs be affected? 35
33 What will be the effect of Pillar 2 on International Taxation? 36
34 How can Developing Countries benefit from Pillar 2? 38
35 What will be the effect of Pillar 2 on Transfer Pricing? 38
36 What should MNEs do? 39
37 What can Developing Countries do? 42
38 How will OECD Pillar 2 affect US GILTI (Global Intangible
Low Taxed Income)?
42
Closing Remarks
43

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OECD Pillar 2: Answers to Some Basic Questions
[October 2022]
On 20 December 2021, the Organisation for Economic Co-operation and
Development (OECD) released the Pillar 2 Model Rules as approved by the
OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The
Model Rules define the scope and key mechanics for the Pillar 2 system of global
minimum tax rules, which includes the Income Inclusion Rule (IIR) and the Under
Taxed Payments Rule (UTPR), referred to collectively as the “Global Anti Base
Erosion (GloBE) Rules.”
Subsequently on 14/03/2022 the OECD/G20 Inclusive Framework on BEPS
released a Commentary which elaborates on the application and operation of the
GloBE Rules agreed and released earlier on 20 December 2021. The GloBE
Rules provide a co-ordinated system to ensure that Multinational Enterprises (MNEs)
with revenues above EUR 750 million pay at least a minimum level of tax (15%) on
the income arising in each of the jurisdictions in which they operate.
The release of the Commentary to the GloBE Rules now provides MNEs and Tax
Administrations with detailed and comprehensive technical guidance on the
operation and intended outcomes under the rules and clarifies the meaning of certain
terms. It also illustrates the application of the rules to various fact patterns. The
Commentary is intended to promote a consistent and common interpretation of the
GloBE Rules that will facilitate co-ordinated outcomes for both Tax Administrations
and MNE Groups.
The OECD/G20 Inclusive Framework on BEPS will now develop an Implementation
Framework to support tax authorities in the implementation and administration of the
GloBE Rules.
Certain basic concepts of the GloBE Rules are presented in this write-up in the form
of Questions and Answers.

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1. What are the Pillar 2 Model Rules?
The Pillar 2 Model Rules1 are designed by OECD to ensure that large MNEs pay
a minimum level (15%) of tax on income arising in each jurisdiction where they
operate. The Rules are drafted as model rules that provide a template that
jurisdictions can translate into domestic law, which would then assist them in
implementing Pillar 2 within the agreed timeframe and in a coordinated manner.
Essentially the Pillar 2 Model Rules seek to prevent harmful tax competition
among Countries and the consequent ugly race to the bottom.
The Pillar 2 Model Rules consist of three rules:
(i) Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity
in respect of the low taxed income of a constituent entity of the MNE
Group; and
(ii) Undertaxed Payment Rule (UTPR) which denies deductions or requires
an equivalent adjustment to the extent the low taxed income of a
constituent entity is not subject to tax under an IIR; and
(iii) Subject to Tax Rule (STTR), a treaty-based rule, that allows source
jurisdictions to impose source taxation on certain payments if those
payments are subjected to tax below a minimum rate by the jurisdiction
where the recipient entity is located.
The IIR and UTPR, also called GloBE Rules (Global Anti Base Erosion Rules)
will have the status of ‘common approach’ which implies that Inclusive
Framework members are not required to adopt these rules, but if they choose to
adopt these rules then they will implement and administer them as per the
agreed rules.
2. What do the Pillar 2 Model Rules contain?
The Pillar 2 Model Rules contain 10 chapters.
➢ Chapter 1 addresses questions of Scope,
➢ Chapters 2-5 contain the Key Operative Rules,
1 OECD (2021), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti Base
Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS

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➢ Chapter 6 deals with Mergers and Acquisitions,
➢ Chapter 7 provides special rules that apply to certain Tax Neutrality and
existing Distribution Tax Regimes,
➢ Chapter 8 deals with Administration,
➢ Chapter 9 provides for Rules on Transition, and
➢ Chapter 10 contains Definitions.
The Pillar 2 Model Rules have been designed to make sure they accommodate a
diverse range of tax systems, including different tax consolidation rules, income
allocation, entity classification rules etc., as well rules for specific business
structures such as joint ventures and minority interests.
3. What are GloBE (Global Anti Base Erosion) Rules?
GloBE Rules is the main component of Pillar 2 Model Rules. The GloBE Rules
together with the Subject To Tax Rule (STTR) are the two components that form
the OECD’s Pillar 2 recommendations for taxing the income of MNEs in each
jurisdiction where they operate.
You can find more information about the GloBE Rules below but before that let
us see what is the Subject To Tax Rule (STTR).
4. What is Subject To Tax Rule (STTR)?
The STTR is a treaty-based rule, which may override treaty benefits in existing
treaties in respect of certain payments - covered payments between connected
persons - where those payments are not subject to a minimum level of tax in the
recipient jurisdiction2.
The STTR together with the GloBE Rules form the Pillar 2 Model Rules.
The STTR complements the GloBE Rules by subjecting covered payments
between connected persons to withholding tax (or other taxes) at source and
adjusting eligibility of payees for benefits under the Tax Treaties. The STTR aims
to protect the right of Developing Countries to tax certain base-eroding
payments, like interest, fees for services and royalties, when they are not taxed
in the recipient jurisdiction up to a minimum rate of 7.50% - 9.00%.
2 Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint, 14 Oct 2020

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The STTR entails revision of Tax Treaties and may be implemented by way of a
Multi-Lateral Instrument.
Where the STTR applies, treaty relief that would otherwise have been provided
may be denied, with the maximum applicable withholding tax expected to be
7.5% to 9.00%. The STTR will apply before the GloBE Rules [consisting of
Income Inclusion Rule (IIR) and Under Taxed Payments Rule (UTPR) discussed
below]. Any tax collected under the STTR will be factored into the Global
Minimum Tax calculations for the purposes of the IIR and UTPR.
Currently, the Pillar 2 Model Rules do not provide guidance on the STTR.
Instead, the STTR has been left for future guidance.
5. What is the scope of GloBE Rules?
The GloBE Rules [consisting of Income Inclusion Rule (IIR) and Under Taxed
Payments Rule (UTPR) discussed below] apply to Constituent Entities that are
members of an MNE Group that has consolidated annual revenue of EUR 750
million or more in the Consolidated Financial Statements of the Ultimate Parent
Entity (UPE) in at least two of the four Fiscal Years immediately preceding the
tested Fiscal Year3. In certain cases, the application of the consolidated revenue
threshold is modified. If one or more of the Fiscal Years of the MNE Group is of a
period other than 12 months, for each of those Fiscal Years the EUR 750 million
threshold is adjusted proportionally to correspond with the length of the relevant
Fiscal Year. Entities that are Excluded Entities are not subject to the GloBE
Rules.
6. Which Entities are excluded from the GloBE Rules?
MNE Groups that either have no foreign presence or that have less than EUR
750 million in consolidated revenues are not in scope of the GloBE Rules -
Group Entities of such MNE Groups are Excluded Entities.
In addition, the GloBE Rules do not apply to government entities, international
organisations and non-profit organisations (preserving domestic tax exemptions
for sovereign, non-profit and charitable entities), nor do they apply to entities that
3 Please refer to Article 1.1 of the Model GloBE Rules

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meet the definition of a pension fund, investment fund or real estate fund
(preserving the widely shared tax policy of not wishing to add an additional layer
of taxation between the investment and the investor)4. These entities are
excluded even if the MNE Group they control remains subject to the GloBE
Rules.
7. How do the GloBE Rules operate?
MNEs in scope of the GloBE Rules calculate the Effective Tax Rate (ETR) of
Group Entities for each jurisdiction in which they operate, and pay Top-up Tax
for the difference between their ETR per jurisdiction (Jurisdictional Blending) and
the 15% minimum rate. Such Top-up Tax is generally paid in the jurisdiction of
the Ultimate Parent Entity (UPE) of the MNE, or otherwise the jurisdiction of the
Intermediate Parent Entity or the Partially-Owned Parent Entity, under the
Income Inclusion Rule (IIR). But if the IIR is not enacted by the jurisdiction of the
UPE or the jurisdiction of the Intermediate Parent Entity or the Partially-Owned
Parent Entity, leading to the result that the Top-up Tax is not brought within the
charge of an IIR, then the Top-up Tax is paid under the Under Taxed Payments
Rule (UTPR).
A de minimis exclusion applies where there is a relatively small amount of
revenue and income in a jurisdiction. The Rules also contemplate the possibility
that jurisdictions introduce their own Domestic Minimum Top-Up Tax based on
the GloBE mechanics thereby preserving a jurisdiction’s primary right of taxation
over its own income. Such Domestic Minimum Top-Up Tax is fully creditable
against any Top-Up Tax liability under GloBE Rules.
8. What is Income Inclusion Rule (IIR)?
IIR is an integral part of the GloBE charging provisions. The IIR imposes a Top-
up Tax with respect to Low Taxed Constituent Entities (Entities subject to tax
below the minimum tax rate of 15%), of a MNE Group, that are subject to an
ETR below the Minimum Rate.
4
Please refer to Article 1.5 of the Model GloBE Rules

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The IIR is applied by certain Parent Entity - which can be a UPE that is not an
Excluded Entity, or an Intermediate Parent Entity, or a Partially-Owned Parent
Entity - in the MNE Group using an ordering rule that generally gives priority in
the application of the rule to the entities closest to the top in the chain of
ownership (the “top-down” approach). IIR thus imposes Top-up Tax at the level
of the shareholder where the income of a controlled foreign entity is taxed at
below the effective minimum tax rate. Thus, the IIR works like a Controlled
Foreign Corporation (CFC) Rule.
Under the GloBE Rules, the ETR of each jurisdiction, is determined based on the
consolidated covered taxes and consolidated adjusted GloBE income of all the
MNE Group Entities located in that jurisdiction (Jurisdictional Blending). The ETR
of the MNE Group in each jurisdiction is compared with the minimum tax rate of
15%. Any shortfall is called Top-up Tax. Such Top-up Tax is charged to the UPE
to bring the tax paid in every jurisdiction equal to the minimum tax rate of 15%.
For collection of Top-up Tax, the IIR is applied by and collected in the jurisdiction
of the Head Office (Ultimate Parent Entity). The IIR applies in respect of Top-up
Tax in each jurisdiction in which the MNE Group has a subsidiary or branch.
However, the IIR does not apply to Group Entities located in jurisdiction of the
Ultimate Parent Entity (UPE) itself.
We can say that the IIR requires a Parent Entity to pay its allocable share of the
Top-up Tax of a Low Taxed Constituent Entity (LTCE). The IIR includes an
ordering rule that operates through a top-down approach, starting with the UPE.
If the UPE is not located in a jurisdiction that has implemented the GloBE Rules
(and the IIR), the highest Parent Entity (Intermediate Parent Entity) in the
ownership chain that is located in a jurisdiction that has implemented GloBE
Rules pays its allocable share of the Top-up Tax.
An exception to the top-down approach applies in split-ownership situations. A
Partially-Owned Parent Entity applies the IIR in priority over its controlling
Parent. This ensures that the income of a LTCE is subject to the IIR without
requiring a Parent to apply the IIR with respect to income that it does not own
entirely.

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Identification of the Parent Entity liable for the Top-up Tax under the IIR
i. Ultimate Parent Entity - The Ultimate Parent Entity (UPE) of the MNE
Group is primarily liable for the Top-up Tax of all LTCEs.
ii. Top-down approach - 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.
iii. Partially-Owned Parent Entities - A Partially-Owned Parent Entity is a
Constituent Entity that has more than 20% of the Ownership Interests held
by non-group members. In such a case Top-up Tax is imposed on
Partially-Owned Parent Entities, that are subject to the IIR, in priority to
the top-down approach
A Parent Entity’s allocable share of the Top-up Tax under the IIR is based on its
Inclusion Ratio, which is effectively determined based on the Parent Entity's
share of ownership in the LTCE. If the Parent Entity directly (or indirectly) owns
100% of such entity, its Inclusion Ratio for that entity generally is 100%. In a
split-ownership situation, the Inclusion Ratio is determined on a pro-rata basis.
An IIR offset mechanism applies in situations where multiple entities in the chain
apply the IIR with respect to a Low-Taxed Constituent Entity. For example, this
may be the case if a Partially-Owned Parent Entity is held by two Parents, only
one of which applies a Qualified IIR. In such case, the UPE that applies the IIR is
required to reduce its allocable share of Top-Up Tax by an amount equal to its
share of Top-up Tax imposed at the level of the Partially-Owned Parent Entity.
9. How does the Top-down Approach work for applying IIR?
Application of Top-down Approach for applying IIR is illustrated by way of the
following Example.
Example
i. This example illustrates the application of the top-down approach in a
situation where the UPE is not required to apply a Qualified IIR.
ii. A Co is located in Country A and is the UPE of the ABC Group. A Co
directly owns B Co 1 and B Co 2, both located in Country B. B Co 1 and B
Co 2 each hold 50% of the Ownership Interests in C Co, which is a

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Constituent Entity located in Country C. The Ownership Interests of C Co
are ordinary common stock that carry an equal right to profit distributions
and capital. A Co, B Co 1, B Co 2 and C Co are the only Constituent
Entities in the ABC Group.
iii. A Co, B Co 1 and B Co 2 all have an ETR for the relevant Fiscal Year that
is above the Minimum Rate of 15%. However, C Co is an LTCE located in a
Low-Tax Jurisdiction. Of the three jurisdictions, only Country B has
implemented a Qualified IIR. A diagram illustrating the holding structure
and location of the members of the ABC Group is set out below.
iv. Country C is a Low-Tax Jurisdiction and C Co is a LTCE for the purposes
of the GloBE Rules. Any Top-up Tax determined for C Co will therefore be
subject to charge under an applicable IIR.
v. A Co is the UPE and would have the priority to collect the Top-up Tax
under the IIR if Country A had introduced a Qualified IIR. In this case,
however, only Country B has introduced a Qualified IIR and thus the
Intermediate Parent Entities (B Co 1 and B Co 2) are required to apply the
IIR. B Co 1 and B Co 2 must apply the IIR based on their Allocable Share
of the Top-up Tax (50% each) of C Co. So, B Co 1 and B Co 2 pay (50%

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each) the Top-tax under the IIR equal to the full amount of C Co’s Top-up
Tax.
10. Can you give an Example illustrating the application of the split-ownership
rules and the top-down approach in a situation where the UPE and
Partially-Owned Parent Entity (POPE) are required to apply a Qualified IIR
with respect to the same LTCE?
Example
i. A Co is located in Country A and is the UPE of the ABCD Group. A Co owns
Controlling Interests in three Constituent Entities: B Co, C Co and D Co,
respectively located in Countries B, C and D. A Co owns 60% of the
Ownership Interests in B Co, while the remaining 40% are held by third
parties. B Co, in turn, wholly owns C Co and C Co wholly owns D Co. The
Ownership Interest of B Co, C Co, and D Co are ordinary common stock that
carry an equal right to profit distributions and capital. A diagram illustrating the
holding structure and location of the members of the ABCD Group is set out
below.

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ii. D Co is located in a Low-Tax Jurisdiction for the purposes of the GloBE Rules
and therefore any Top-up Tax determined for D Co will be subject to charge
under an applicable IIR.
iii. A POPE is a Constituent Entity that: (a) owns (directly or indirectly) an
Ownership Interest in another Constituent Entity of the same MNE Group; and
(b) more than 20% of its Ownership Interests (in its profits) are held directly or
indirectly by persons that are not Constituent Entities of the MNE Group5. The
indirect ownership test does not consider the Ownership Interests owned by
non-Constituent Entities through the UPE.
Here, B Co is a POPE because (a) it owns an Ownership Interest in C Co and
(b) 40% of its Ownership Interests are owned by persons that are not
Constituent Entities of the ABCD Group. C Co also meets the definition of a
POPE because (a) it owns an Ownership Interest in D Co and (b) 40% of its
Ownership Interests are owned indirectly by persons that are not Constituent
Entities of the ABCD Group (through B Co).
However, D Co is not a POPE because, while 40% of its Ownership Interests
are owned indirectly by person that are not Constituent Entities of the MNE
Group (through B Co and C Co), D Co does not own an Ownership Interest in
any Constituent Entity of the MNE Group.
iv. A POPE is required to apply the IIR based on its Allocable Share of the Top-
up Tax of the LTCE notwithstanding that the UPE or an Intermediate Parent
Entity is also required to apply the IIR. Thus, both B Co and C Co would be
required to apply the IIR because they have an Ownership Interest in D Co.
However, Model GloBE Rules restrict C Co from applying the IIR because it is
wholly owned by another POPE (B Co)6. Consequently, B Co applies the IIR
and pays tax equal to 100% of the Top-up Tax of D Co.
v. The existence of a POPE does not preclude the UPE from also applying a
Qualified IIR. However, the IIR offset mechanism requires the UPE to reduce
its Allocable Share of the Top-up Tax by the portion that is brought into charge
6 Please refer to Article 2.1.5 of the Model GloBE Rules

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by the POPE. Accordingly, A Co is required to reduce its Allocable Share of
the Top-up Tax of D Co to zero.
11. What is IIR Offset Mechanism when Intermediate Parent Entities are
present in the MNE Group’s Structure?
Application of IIR Offset Mechanism in a situation where two Intermediate Parent
Entities apply a Qualified IIR, with respect to the same LTCE, is illustrated by
way of the following Example.
Example
i. A Co is the UPE of ABCD Group. A Co is located in Country A and owns
Controlling Interests in three subsidiary companies: B Co, C Co and D Co,
respectively located in Countries B, C and D. D Co is an LTCE located in a
Low-Tax Jurisdiction. A Co, B Co, C Co and D Co are the only Constituent
Entities in the ABCD Group. Only Countries B and C have implemented the
GloBE Rules.
ii. A Co has a 100% Ownership Interest in B Co and a 60% Ownership Interest
in C Co. B Co has the remaining 40% Ownership Interest in C Co, which is
not a Controlling Interest for the purposes of this example. C Co, in turn, has a
100% Ownership Interest in D Co. The Ownership Interests of C Co are
ordinary common stock that carry an equal right to profit distributions and
capital. A diagram illustrating the holding structure and location of the
members of the MNE Group is set out below.
<<<<<<<<<<<<< This space is intentionally kept blank >>>>>>>>>>>>>>>>>>>

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iii. The Top-up Tax of D Co is EUR 10 million. The UPE (A Co) is not required to
apply the IIR as Country A has not implemented the GloBE Rules.
iv. C Co is an Intermediate Parent Entity and is therefore required to apply the
IIR because it owns an Ownership Interest in an LTCE (D Co)7. C Co’s
obligation to apply the IIR is not switched-off because the Parent Entity
holding its Controlling Interests (A Co) is not required to apply the IIR.
v. B Co is also required to apply the IIR because it is an Intermediate Parent
Entity that owns 40% of an LTCE (D Co) and its Controlling Interests are not
held by a Parent Entity that is required to apply the IIR (A Co is not required to
apply the IIR). B Co’s Allocable Share of the Top-up Tax, however, is reduced
by the amount that is equal to the portion brought into charge by the lower-tier
Parent Entity (C Co) through which its Ownership Interest in D Co is held. A
table illustrating the numerical results of this example is set out below.

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Entity Direct
Ownership
Interest in
D Co
Indirect
Ownership
Interest in
D Co
Inclusion
Ratio
Allocable
Share of Top-
up Tax
IIR off-set Final Top-up
Tax liability
A Co - 100%
(60%+40%)
- - - -
B Co - 40% 0.4 EUR 4 million EUR 4 million EUR 0
C Co 100% - 1.0 EUR 10 million - EUR 10 million
12. What is Under Taxed Payments Rule (UTPR)?
Countries are not obliged to apply an IIR. Failure of Countries to apply and
implement IIR could undermine the impact of the GloBE Rules and create an
incentive for MNEs to locate the Parent Entity in Countries that have no IIR.
Pillar 2 addresses this by introducing a backstop rule, the UTPR. This rule
allocates the Top-up Tax on the profits of LTCEs, including those in the Parent
Entity’s Country, to the other Countries in which the MNE carries on its business
activities.
The UTPR provides a mechanism for making an adjustment in respect of the
Top-up Tax that is calculated for an LTCE to the extent that such Top-up Tax is
not brought by any Parent Entity (Ultimate Parent Entity or Intermediate Parent
Entity or Partially-Owned Parent Entity) within the charge of an IIR for the reason
that the jurisdiction of the Parent Entity has not enacted the IIR. Thus, the Total
UTPR Top-up Tax Amount is determined by reference to the amount of Top-up
Tax that is not already subject to IIR.
Under UTPR, the Constituent Entities of an MNE Group, located in the
jurisdiction implementing UTPR, will be denied deduction on payments made by
Constituent Entities (or required to make an equivalent adjustment under
domestic law) in an amount resulting in their having an additional cash tax
expense equal to the UTPR Top-up Tax for the fiscal year allocated to that
jurisdiction. There are no requirements that the payments subject to the
deduction limitations are made to any LTCEs of the MNE Group. Thus, even the
payments made to high-taxed constituent entities or third parties can be subject

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to limitation under UTPR or, in effect, disregarded under UTPR in computing
ordinary corporate income tax.
13. How is the UTPR Top-up Tax Amount allocated to each UTPR Jurisdiction?
The Total UTPR Top-up Tax Amount is allocated to each UTPR Jurisdiction by
multiplying the Total UTPR Top-Up Tax Amount with the jurisdiction’s UTPR
Percentage. A jurisdiction’s UTPR Percentage is determined on the basis of two
factors that reflect the relative substance of the MNE Group in each of the UTPR
jurisdictions, with each factor given equal weight:
i. The Employee Factor - this is the number of Employees in the UTPR
jurisdiction relative to the total Employees for all UTPR jurisdictions.
ii. The Tangible Assets Factor - this is the Net Book Value of the Tangible
Assets in the UTPR jurisdiction relative to the total Tangible Assets for all
UTPR jurisdictions.
As regards LTCEs located in the UPE jurisdiction, Top-up Tax from those LTCEs
may be allocated to that jurisdiction under the UTPR, if the MNE Group’s ETR in
the UPE jurisdiction is below the agreed minimum rate and the IIR itself does not
apply to the jurisdiction of UPE.
The IIR has priority over the UTPR, and no Top-up Tax shall be allocated under
the UTPR if that LTCE is controlled, directly or indirectly by a foreign Constituent
Entity that is subject to an IIR which has been implemented in accordance with
the GloBE Rules. This means that the Top-up Tax of a LTCE allocated under the
UTPR is reduced by the Top-up Tax that is brought into charge under a Qualified
IIR. In many cases this will mean that the UTPR does not result in additional
Top-up Tax, unless the ETR in the IIR jurisdiction itself is below 15%.
14. Which Constituent Entities of the MNE Group are liable to pay Top-up Tax
under the UPTR?
Any Constituent Entity of the MNE Group, that is located in a jurisdiction that has
implemented the UTPR in accordance with the GloBE rules (a UTPR
Jurisdiction), is liable to pay Top-up Tax under the UPTR. So, only the
Constituent Entities of the MNE Group, that are subject to a UTPR in the
jurisdiction where they are located, are required to pay the Top-up Tax by

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applying the UTPR (UTPR Taxpayers). Therefore, the Top-up Tax is allocated
only among Constituent Entities that are subject to a UTPR in the jurisdiction
where they are located. Constituent Entities that are not subject to a UTPR in the
jurisdiction where they are located are not allocated any Top-up Tax in respect of
their own deductible payments.
A UTPR Taxpayer may consist of only one Constituent Entity or several
Constituent Entities that are located in the same jurisdiction. Several Constituent
Entities of the MNE Group can form only one UTPR Taxpayer, for instance, if
they belong to a tax consolidated group under the tax laws of that jurisdiction.
Combining several Constituent Entities into a single UTPR Taxpayer has the
effect of aggregating the amounts of intra-group payments that these Constituent
Entities made to or received from any other Constituent Entities. In addition, this
also results in disregarding the intragroup payments made between the
Constituent Entities that form the same UTPR Taxpayer. Combining these
Constituent Entities do not affect the total amount of Top-up Tax that is allocable
to the UTPR Taxpayers. The possibility of combining, or not, several Constituent
Entities in a given jurisdiction to form one single UTPR Taxpayer depends on the
domestic law of a particular jurisdiction.
15. How is the UTPR Top-up Tax Amount computed?
Computation of the UTPR Top-up Tax Amount is illustrated by way of the
following Example.
Example
i. Assume A Co is the UPE of the ABC Group. A Co is located in Jurisdiction A.
A Co directly owns 100% of B Co, 55% of C Co and 100% of D Co,
respectively located in Jurisdictions B, C and D. Assume B Co has a 40%
Ownership interest in C Co, and that the remaining 5% ownership interests of
C Co are held by minority shareholders. A diagram illustrating the holding
structure and location of the members of the ABC Group is set out below.

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ii. Assume C Co is a LTCE and Jurisdictions A and C have not implemented the
GloBE Rules whereas Jurisdictions B and D both have implemented a
Qualified IIR and a Qualified UTPR. Assume the Top-up Tax of C Co is EUR
100.
iii. A Co is not required to apply a Qualified IIR. B Co’s allocable share of the
Top-up Tax of C Co equals 40%. In such situation B Co is required to apply a
Qualified IIR with respect to 40% of the Top-up Tax of C Co8. B Co is thus
liable for a Top-up Tax of EUR 40.
iv. A Co’s Ownership Interest in C Co equals to 95% in total (40% indirectly held
via B Co and 55% directly held). Therefore, not all of A Co’s Ownership
Interest in C Co are held by a Parent Entity that is required to apply a
Qualified IIR with respect to C Co.
v. The Top-up Tax of EUR 100 of C Co is reduced by the amount of B Co’s
allocable share of C Co’s Top-up Tax (EUR 40) to compute the UTPR Top-up
Tax Amount that is allocated under the UTPR. In this example, the UTPR
Top-up Tax Amount is EUR 60 (= 100 – 40).

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16. What is Switch-over-Rule?
Concerns about the intended application of IIR and UTPR can arise where a
Parent Entity jurisdiction, which would otherwise apply the IIR has entered into
bilateral Tax Treaties in which it has adopted the exemption method (instead of a
credit method) to eliminate double taxation of income arising in the other
jurisdiction. In such cases, under IIR and UTPR, the jurisdiction of the Parent
Entity will not be able to tax the income of a Permanent Establishment (PE) of
the Parent Entity located in other jurisdiction.
To overcome such limitation, a Switch-over-Rule (SOR) in a Tax Treaty can be
provided to facilitate the application of the IIR by the jurisdiction of the Parent
Entity to tax the income of the PE in those cases where the IIR applies as a
matter of domestic law. The SOR could safeguard the application of the IIR by
the residence state with respect to a PE. The rule would, by virtue of its domestic
law trigger, only apply when and to the extent that a resident of a Contracting
State is required to apply the IIR with respect to a PE in the other Contracting
State.
We can therefore say that the IIR and UTPR are complemented by the SOR
which would permit a residence jurisdiction to switch from an exemption to a
credit method where the profits attributable to a PE, or derived from immovable
property (which is attributable to a PE), are subject to an effective rate below the
minimum rate.
17. What is the difference between Subject To Tax Rule (STTR) and IIR/UTPR?
(For Answer to ‘What is STTR?’ please refer to the Answer to Question No. 4.)
There are several key differences between the STTR and the IIR/UTPR:
• STTR may apply irrespective of the size of the MNE Group i.e., the EUR
750 million threshold may not apply.
• STTR only applies to certain categories of related party payments.
• STTR complements GloBE, but it works in priority to GloBE (i.e. IIR and
UTPR)
• Implementation of STTR will be pursuant to a treaty like instrument in the
nature of MLI

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➢ OECD will publish STTR model rules and multilateral instrument in
near future
➢ MLI will override existing treaty benefits and provide for
additional/higher source taxation rights if the tax rate in the recipient
jurisdiction is less than 7.50% - 9.00%
• STTR will grant taxation rights to payer jurisdiction (source country) when
connected recipient’s nominal rate of taxation for the transaction, in the
recipient jurisdiction, is less 7.50% - 9.00%
➢ Headline rate of 7.50% - 9.00% will be adjusted for standard rebate /
deductions, incentives, grant of exemption, etc. to test 7.50% - 9.00%
threshold
• STTR will grant source taxation at a rate higher of (i) 9.00% on gross
basis; or (ii) existing treaty rate
➢ Applicability expected to be tested on a transaction-to-transaction
basis
• STTR applies only to “Covered Payments” made to “Connected Persons”
• Connected persons is defined widely and can extend to entities not
included in the Consolidated Financial Statement
➢ It generally covers entity having 50% interest or two entities with
common stakeholder of > 50% interest
➢ Could be narrower / wider than Associated Enterprise (AE)
✓ Connected person threshold is 50% interest against 26% for AE;
✓ Unrelated major lender may be AE though not a connected
person
• In any case, unlike IIR/UTPR, STTR is not restricted only to Constituent
Entities which are part of the Consolidated Financial Statement
Right to adopt STTR can be exercised by a Developing Country (i.e., Country
with per capita income of < $ 12,535; Eg: India, China, Brazil, Mexico) at its
option, and the counter party (whether a Developing or a Developed Country) ‘to’
accept the request to adopt STTR.

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18. What is Qualified Domestic Minimum Top-up Tax?
Qualified Domestic Minimum Top-up Tax (QDMT) means a tax that applies to
Excess Profit (explained in the Answer to the following Question) of the domestic
Constituent Entities of an MNE Group located in a particular jurisdiction, and
operates to increase domestic tax liability (in such jurisdiction), with respect to
Excess Profit, to the Global Minimum Rate of 15%. Essentially, QDMT refers to a
minimum tax regime that is implemented in the domestic legislation of a
particular jurisdiction and that mimics the impact of the GloBE Top-up Tax on
domestic companies of a MNE Group located in that jurisdiction. In other words,
QDMT is a tax that is applied to excess profits of domestic in-scope entities and
is incorporated into the domestic law of a jurisdiction.
Thus, QDMT allows jurisdictions to introduce a minimum corporate tax rate of
15% and maintain a competitive tax regime. Under the QDMT regime a low tax
jurisdiction can itself elect to levy the additional tax due (Top-up Tax), rather than
allow a jurisdiction upwards in the ownership chain to collect the Top-up Tax by
levying it on an UPE (or an Intermediate Parent Entity or Partially-Owned Parent
Entity) of an MNE Group under IIR or on a Constituent Entity of an MNE group
under UTPR. This preserves a jurisdiction’s primary right of taxation over income
arising in its own jurisdiction.
So, by introducing QDMT a Country collects the tax revenue that would
otherwise have been collected by another Country under GloBE Rules through
the IIR or the UTPR. A country can introduce a QDMT in order to ensure that the
taxes due in its jurisdiction are not collected by another country.
Effectively, once the Domestic Minimum Tax, enacted by a particular jurisdiction,
satisfies the QDMT conditions as laid down in the GloBE Model Rules, any
QDMT paid by an entity will be fully creditable against any liability under GloBE
Rules. In most cases QDMT will cancel out the Top-up Tax entirely. This
increases the acceptability of the GloBE Rules but at the same time it may vitiate
the desired objective to reduce tax competition.

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19. What is Excess Profit?
The Excess Profit is the amount of profit, determined on a jurisdictional basis,
upon which the Top-up Tax is levied. The Excess Profit for the jurisdiction is the
amount remaining after applying a Substance-based Income Exclusion for the
jurisdiction. Taxpayers can elect to apply (or not apply) the Substance-based
Income Exclusion. Where a taxpayer elects not to apply the Substance-based
Income Exclusion, the Excess profit is equal to the Net GloBE Income for the
jurisdiction.
Stated in other words, the Substance-based Income Exclusion for a jurisdiction
reduces the Net GloBE Income in order to determine the Excess Profit, which is
taken into account for purposes of computing the Top-up Tax. An annual election
is available not to apply this exclusion.
Broadly, the Excess Profit is computed in the following manner:
First, a Constituent Entity aggregates its Net GloBE Income as well as its
Adjusted Covered taxes with those of other Constituent Entities located in the
same jurisdiction to determine the ETR and Top-up Tax Percentage for each
jurisdiction (Jurisdictional Blending). If that jurisdiction is a Low-Tax Jurisdiction,
then the Substance-based Income Exclusion is applied to the total GloBE
Income in the jurisdiction in order to determine the Excess Profits in that
jurisdiction. The Top-up Tax Percentage is then applied to such Excess Profit in
order to determine the Top-up Tax for each Low-Tax Jurisdiction.
Substance-based Income Exclusion
The Substance-based Income Exclusion amount for a jurisdiction is the sum of
the Payroll Carve-out and the Tangible Asset Carve-out for each Constituent
Entity (other than Investment Entities) in that jurisdiction.
The Payroll Carve-Out for a Constituent Entity located in a jurisdiction is equal to
specified percentage of its Eligible Payroll Costs of Eligible Employees that
perform specified activities for the MNE Group in such jurisdiction.
The Tangible Asset Carve-Out for a Constituent Entity located in a jurisdiction is
equal to specified percentage of the carrying value of Eligible Tangible Assets
located in such jurisdiction. Eligible Tangible Assets are:

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i. Property, plant, and equipment located in the jurisdiction
ii. Natural resources located in the jurisdiction
iii. A lessee’s right of use of tangible assets located in the jurisdiction
iv. A license or similar arrangement from the government for the use of
immovable property or exploitation of natural resources that entails
significant investment in tangible assets
The computation of carrying value of Eligible Tangible Assets is based on the
average of the carrying value (net of accumulated depreciation, amortization, or
depletion including any amount attributable to capitalization of payroll expense)
at the beginning and ending of the Reporting Fiscal Year as recorded for the
purposes of preparing the Consolidated Financial Statements of the UPE.
Special rules apply for the computation of the Eligible Payroll Costs and Eligible
Tangible Assets of Permanent Establishments and Flow-through Entities.
20. What Steps are involved in determining the Top-up Tax liability of an MNE?
Broadly, the steps in determining the Top-up Tax liability of an MNE include:
i. Identifying the MNE Group, its Constituent Entities, and their location
ii. Computing GloBE Income or Loss
iii. Computing Covered Taxes
iv. Computing the ETR and Top-up Tax at a jurisdictional level
(Jurisdictional Blending)
v. Paying Top-up Taxes under IIR and UTPR
21. How is GloBE Income or Loss computed?
The computation of GloBE Income or Loss is a central element of the GloBE
Rules and plays an important role in the calculation of ETR.
The computation of the GloBE Income or Loss starts with net income or loss
used in preparing the consolidated financial statements of the UPE before
making any consolidation adjustments to eliminate intra-group transactions.
To get from this starting point to GloBE Income or Loss, adjustments are
required for:
• The Net Amount of certain Tax Expense (including Tax Credits)

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• Excluded Dividends
• Excluded Equity Gains or Losses
• Included Revaluation Method Gains or Losses
• Gains or Losses from Disposition of Certain Assets and Liabilities
• Asymmetric Foreign Currency Gains or Losses
• Policy Disallowed Expenses
• Prior Period Errors and Changes in Accounting Principles
• Accrued Pension Expense
Transactions between Constituent Entities located in different jurisdictions must
be consistent with the Arm’s Length Principle and the same transaction amount
needs to be recorded in the accounts of Constituent Entities. A loss from a sale
or other transfer of an asset between Constituent Entities within the same
jurisdiction must be consistent with the Arm’s Length Principle if it is included in
the GloBE income.
The UPE may elect to apply a consolidated accounting treatment (for a
mandatory period of five years), to transactions between Constituent Entities in
the same jurisdiction that are included in a tax consolidation group, to eliminate
income, expenses, gains and losses.
The GloBE Income or Loss of a Low-tax Entity excludes expenses attributable to
intra-group financing arrangements that are reasonably anticipated not to be
included in the taxable income of a High-tax Counterparty over the expected
duration of the arrangement.
Specific rules apply to taxes paid by insurance companies that are charged to
policyholders and to equity increases and decreases related to Tier One Capital
of regulated entities.
Further, specific adjustments to Financial Accounting Net Income or Loss are
required in the case of corporate restructurings and with respect to distribution
regimes.
An annual election is available to make adjustments, with a four-year look-back
period, in the case of an overall aggregate gain derived from the disposition of
local tangible assets to third parties by the Constituent Entities in a jurisdiction.

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When applying this election the ETR and Top-up Tax, if any, for any previous
Fiscal Year must be re-recalculated.
International Shipping Income
Certain income from International Shipping and Ancillary Activities is excluded
from GloBE Income or Loss. Qualifying International Shipping Income relates to
the transportation of passengers or cargo in international traffic, including the
leasing of a ship on a time charter basis (or on a bareboat basis but only if
leased to another Constituent Entity).
Ancillary Activities are specified activities that are performed primarily in
connection with the transportation of passengers or cargo in international traffic.
The qualifying net income from ancillary activities of all Constituent Entities in a
jurisdiction is capped at 50% of such entity’s qualifying net income from
International Shipping activities.
In order to qualify for the exclusion, a Constituent Entity must demonstrate that
the strategic or commercial management of all ships concerned is effectively
carried on from within the jurisdiction where the entity is located.
Allocation to Permanent Establishments
Specific rules apply to allocate GloBE Income or Loss between a Permanent
Establishment and its Head Office (the Main Entity).
For this purpose, a Permanent Establishment includes a place of business:
(a) that is treated as a Permanent Establishment in accordance with an
applicable tax treaty and taxed in accordance with a provision similar to Article
7 of the OECD Model Tax Convention on Income and Capital;
(b) where the income attributable to the place of business is taxed under a
jurisdiction’s domestic tax law on a net basis (this includes a deemed place of
business);
(c) where the place of business is situated in a jurisdiction that has no
corporate tax income system; or
(d) if not described in (a)-(c), a place of business through which operations are
conducted outside the jurisdiction of the Head Office, provided that the
jurisdiction exempts the income attributable to those operations.

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Generally, the net income as reflected in the separate financial accounts of the
Permanent Establishment should be followed. Where separate accounts do not
exist, then the net income will be the amount that would have been reflected if
the Permanent Establishment had prepared standalone financials in accordance
with the UPE’s accounting standard.
The financial accounts will be adjusted, if necessary, to only reflect the income or
loss attributable to the Permanent Establishment based on the applicable Tax
Treaty, Domestic Law or OECD Model Tax Convention (depending on the type
of Permanent Establishment), regardless of the actually taxed income.
The Net Income or Loss of a Permanent Establishment generally will not be
included in the GloBE Income or Loss of the Main Entity. There is one exception
to this rule: when a Permanent Establishment has a loss that is treated as an
expense in the income tax calculation of the Main Entity and is not offset against
an item of income subject to tax in both the jurisdiction of the Permanent
Establishment and the jurisdiction of the Main Entity.
Allocation to Flow-through Entities
Special rules apply for the allocation of income or loss of Flow-through Entities.
A Flow-through Entity is an entity that is tax transparent with respect to its
income, expense, profit or loss in the jurisdiction where it is created. Such entity
may be tax resident and subject to covered tax on its income and profit in
another jurisdiction. Flow-through Entities also include Reverse Hybrid Entities,
which are flow-through entities that are not tax transparent in the jurisdiction of
their owners.
The income or loss of these entities is first reduced to account for the ownership
interest of entities that are not part of the MNE Group. Then the income or loss is
allocated to a Permanent Establishment of the Flow-through Entity if the
business is carried out through a Permanent Establishment. The remaining
income or loss generally is allocated to the owners of the Flow-through Entity in
accordance with their ownership interests. The calculation is performed
separately for each ownership interest. However, if the Flow-through Entity is the
UPE or a Reverse Hybrid Entity, the remaining income is allocated to the UPE or
the Reverse Hybrid Entity.

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22. How are Adjusted Covered Taxes computed?
Adjusted Covered Taxes are the taxes attributable to the GloBE Income or Loss
of each Constituent Entity. Adjusted Covered Taxes of a Constituent Entity for a
Fiscal Year start with the current tax expense accrued in its Financial Accounting
Net Income or Loss and is adjusted by the following amounts:
• The net amount of any Additions and Reductions to Covered Taxes
• The Total Deferred Tax Adjustment Amount
• Any increase or decrease in Covered Taxes recorded in Equity or Other
Comprehensive Income relating to GloBE Income or Loss that is subject
to tax under local tax rules
The additions to Covered Taxes of a Constituent Entity is the sum of any amount
of:
• Covered Taxes accrued as an expense in the profit before taxation in the
financial accounts
• GloBE Loss Deferred Tax Asset that is used under the GloBE Loss
Election
• Covered Taxes paid in the Fiscal Year in relation to an uncertain tax
position that has reduced Covered Taxes in a previous Fiscal Year
• Credit or refund of a Qualified Refundable Tax Credit reducing the current
tax expense
The reductions to Covered Taxes of a Constituent Entity is the sum of any
amount of:
• Current tax expense with respect to income excluded from the
computation of GloBE Income or Loss
• Credit or refund in respect of a Non-Qualified Refundable Tax Credit that
is not recorded as a reduction to the current tax expense
• Covered Taxes refunded or credited, except for any Qualified Refundable
Tax Credit, that were not treated as an adjustment to current tax expense
• Current tax expense that relates to an uncertain tax position
• Current tax expense that is not expected to be paid within three years of
the last day of the Fiscal Year

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Further we need to subtract several types of Covered Taxes, including the
amount of Covered Taxes with respect to income excluded from the computation
of GloBE Income or Loss.
Please note that Deferred Tax Liability is added to compute Adjusted Covered
Taxes.
23. How is Effective Tax Rate (ETR) computed?
The ETR of an MNE Group is computed for each jurisdiction on basis of
Jurisdictional Blending in the following manner:
Sum of Adjusted Covered Taxes of each Constituent Entity located in the Jurisdiction
___________________________________________________________________
Net GloBE Income of all Constituent Entities located the Jurisdiction for the Fiscal Year
The Net GloBE Income of a jurisdiction for a Fiscal Year is the positive amount, if
any, resulting from:
GloBE Income of all Constituent Entities in the jurisdiction Less GloBE Losses
of all Constituent Entities in the jurisdiction
Adjusted Covered Taxes and GloBE Income or Loss of Investment Entities are
excluded from the determination of the jurisdictional ETR and the determination
of Net GloBE Income.
24. How is Top-up Tax computed?
The starting point for the calculation of the Top-up Tax liability of a Constituent
Entity is the determination the Top-up Tax Percentage for a jurisdiction for a
Fiscal Year, which is the positive percentage point difference, if any, between the
15% Global Minimum Rate and the ETR.
Broadly, the steps in determining the Top-up Tax liability of a MNE include:
i. Identifying the MNE Group, its Constituent Entities, and their location
ii. Computing GloBE Income or Loss of all Constituent Entities located in a
particular jurisdiction
iii. Computing covered taxes
iv. Computing the ETR and top-up tax at a jurisdictional level
The Top-up Tax Percentage for a jurisdiction, for a Fiscal Year, is applied to the
Excess Profit for the jurisdiction. As explained above in Answer to Question No.

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19 the Excess Profit is the excess, if any, of the Net GloBE Income over the
Substance-based Income Exclusion. The Substance-based Income Exclusion
refers to the Payroll Carve-out and the Tangible Asset Carve-Out.
The Jurisdictional Top-up Tax for a jurisdiction, for a Fiscal Year, is (i) the Top-
up Tax Percentage multiplied by the Excess Profit, plus (ii) the Additional Current
Top-up Tax, less (iii) the Domestic Top-up Tax.
The Additional Current Top-up Tax is:
(i) the amount of additional tax due because of an adjustment of the ETR of
a prior year, or
(ii) for situations where -
➢ there is no Net GloBE income, but
➢ where the Adjusted Covered Taxes are less than zero, and
➢ Adjusted Covered Taxes are less than the amount of Expected
Adjusted Covered Taxes (i.e., the GloBE Income or Loss multiplied
by the 15% minimum rate),
the difference between Adjusted Covered Taxes and Expected
Adjusted Covered Taxes.
The Domestic Top-up Tax is the amount payable under a Qualified Domestic
Minimum Top-Up Tax of the jurisdiction for the Fiscal Year (Please refer to the
Answer to Question No. 18).
Finally, the Top-up Tax is allocated to each Constituent Entity of a jurisdiction
that has GloBE Income, based on the ratio of that ‘Constituent Entity’s GloBE
Income’ to the ‘Aggregate GloBE Income of all Constituent Entities in that
jurisdiction’.
De minimis Exclusion
Under an annual elective de minimis exclusion, the Top-up Tax for the
Constituent Entities located in a jurisdiction is deemed to be zero for a Fiscal
Year if:
• The Average GloBE Revenue of the GloBE Revenue of all Constituent
Entities located in that jurisdiction is less than €10 million; and

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• The Average GloBE Income or Loss of the GloBE Income or Loss all
Constituent Entities located in that such jurisdiction is a loss or is less than
€1 million.
To calculate these averages, the GloBE Revenue and the GloBE Income or Loss
for the two preceding years are taken into account together with the GloBE
Revenue and the GloBE Income or Loss for the current year.
Minority-Owned Constituent Entities
Specific rules apply for a minority-owned sub-group (when the GloBE Rules
apply as if it was a separate MNE Group) and for minority-owned Constituent
Entities that are not part of a minority-owned sub-group (when the GloBE Rules
apply on a stand-alone basis).
25. Which Entity pays the Top-up Tax?
There is hierarchy, as under, for payment of Top-up Tax:
i. The State of LTCE has the first priority to recover Top-up Tax from the
LTCE by way of QDMT if that State has enacted QDMT – Please refer to
the Answer to Question No. 18 (QDMT).
ii. If the State of LTCE does not recover QDMT, then the State of UPE (or
Intermediate Parent Entity or Partially-Owned Parent Entity) has the
second priority to recover Top-up Tax from the UPE by way of IIR if that
State has implemented GloBE Rules - Please refer to the Answer to
Question No. 8 (IIR).
iii. If the State of UPE (or Intermediate Parent Entity or Partially-Owned
Parent Entity) does not recover IIR, then the States of High-taxed (tax rate
of more than 15%) Constituent Entities have the third priority to recover
Top-up Tax from the Low-taxed Constituent Entities by way of UTPR if
those States have implemented GloBE rules - Please refer to the Answer
to Question No. 12 (UTPR).
26. Is MNE’s Global ETR of 15% or more a safe harbor?
No.

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Despite High-taxed Constituent Entities in some Countries LTCEs in other
Countries will be subject to the Top-up Tax to bring their Jurisdictional ETR up to
the minimum tax rate of 15%. No set-off is provided for any taxes paid by High-
taxed Constituent Entities in excess of the minimum tax rate of 15%. That is
because there is no Global Blending (to set-off high taxes paid in some
jurisdictions against low taxes paid in other jurisdictions) but only Jurisdictional
Blending.
27. What is GloBE Information Return?
The information necessary to compute the ETR of each jurisdiction has to be
reported by way of filing a GloBE Information Return9. The GloBE Information
Return is a return in a standardised template form that provides a Tax
Administration with the information it needs to evaluate the correctness of a
Constituent Entity’s tax liability under the GloBE Rules.
Article 8.1 of the Model GloBE Rules places an obligation on each Constituent
Entity to file a GloBE Information Return with the Local Tax Administration. This
return can be filed by each Constituent Entity directly with its Local Tax
Administration or through a Designated Local Entity on behalf of one or more
Constituent Entities located in the same jurisdiction. However, a Constituent
Entity may not be in the best position to collect the information necessary to
complete the GloBE Information Return, particularly if most of the information on
that return concerns other members of the MNE Group. In many cases, it is
expected that the UPE, or a Designated Filing Entity appointed by the MNE
Group, would be in a better position to collect such information, much of which
may already be collected in the preparation of the MNE Group’s Consolidated
Financial Statements.
Accordingly, while each Constituent Entity is obligated to file a GloBE
Information Return with the Tax Administration of the jurisdiction where it is
located, a Constituent Entity is discharged from this obligation when the UPE or
a Designated Filing Entity files the GloBE Information Return with the Tax
Administration of the jurisdiction where it is located and the Competent Authority

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of that jurisdiction has a bilateral or multilateral agreement or arrangement in
effect to automatically exchange the GloBE Information Return with the
Competent Authority of the jurisdiction of the Constituent Entity.10
In this way the return filing obligations operate so that the UPE or a Designated
Filing Entity of the MNE Group can file a single GloBE Information Return
covering all Constituent Entities in the MNE Group, which can be provided to all
Tax Administrations with a Constituent Entity(ies) located in their jurisdiction
through appropriate international exchange mechanisms.
28. When is Pillar 2 relevant?
• Every in-scope MNE Group has to bear minimum 15% tax on its “excess”
profit from each jurisdiction (including HQ jurisdiction) even if -
➢ At group level, MNE may have incurred loss as per Consolidated
Financial Statement, but there are some low tax jurisdictions which
have reported profit
➢ ETR of MNE group as per Consolidated Financial Statement is far in
excess of 15%
• MNEs are expected to bear 15% tax in each jurisdiction – regardless of tax
policy, tax incentives, treaty relief or any other reason whatsoever
• Interlocking and rule order ensure that if jurisdiction of shortfall fails to
recover the shortfall, some other jurisdiction can recover the shortfall
• Every jurisdiction where the MNE Group operates and which has enacted
GloBE Rules is within GloBE even if -
➢ Income is of active nature but profit earned is “excess profit” i.e., more
than “moderate profit” (moderate profit is based on eligible payroll cost
carve-out and eligible tangible assets carve-out as explained in the
Answer to Question No. 19)
➢ Business presence is in high tax jurisdiction, but tax is relieved due to
economic incentives under that jurisdiction’s domestic laws, or tax is

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non-chargeable in such jurisdiction due to territorial taxation norms
adopted in domestic laws
29. When is Pillar 2 NOT relevant?
GloBE Rules are not applicable in the following situations:
• When MNEs have revenue of < €750 million as per Consolidated
Financial Statement
• Global Minimum Tax is not chargeable at level of individuals owning
wealth through different companies/entities
• Any enterprise which has income from exports but has no PE in other
jurisdictions
• If income as earned in a jurisdiction is less than ‘moderate’ profit due to
existence of meaningful substance (eligible manpower and eligible
tangible assets)
• Entity in Low Tax Jurisdiction is investment holding company and its
income comprises of dividend, capital gains, or income or profit on fair
valuation of its holdings
➢ Holding should be either within Group, JV, or Associates, or other
investments provided it is ≥ 10%
➢ Holding of < 10% is considered Portfolio Investment and its dividend
or gain is subjected to GloBE
• If some entity in overseas Low Tax Jurisdiction is considered POEM
resident of India it is regarded as located in India, and will not be a LTCE
under GloBE Rules.
• De-minimis exclusion: If the Average (3 year average) GloBE Revenue of
the Low Tax Jurisdiction as a whole is < € 10 million (Rs. 85 crores) and
Average (3 year average) GloBE Income or Loss of the Low Tax
Jurisdiction is < € 1 million (Rs 8.5 crores) as calculated by applying
GloBE Rules (on a jurisdictional basis)
• Sector carve out: Income from international shipping and specified
ancillary activities is not subject to Global Minimum Tax

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• Excluded Entities: Government, international organisations, non-profit
organisations, pension funds and investment funds are outside the scope
of Global Minimum Tax
• Natural persons/individuals are outside the scope of GloBE, though trusts
and partnerships are in scope
30. Can India be a safe jurisdiction for inbound MNEs?
For the following reasons India can be a safe jurisdiction for inbound MNEs:
• India has phased out incentives
• Entities are subject to MAT/AMT
• Corporate Tax Rate triggers tax at 25%/17% tax rate
• Permanent disallowances (e.g. Sec. 14A) will only enhance ETR
• Investment linked incentive deduction results in timing difference - GloBE
addresses timing mismatches through Deferred Tax Assets/ Deferred Tax
Liabilities
• Past losses will be available through Deferred Tax Assets
• Incentives under Sec. 80JJAA or concession under Patent Box Regime
(PBR) ‘may’ potentially trigger GloBE but only if profits are in excess of
moderate levels (Substance Based Income Exclusion: Payroll and
Tangible Assets carve outs)
• Jurisdictional blending will require aggregation of all Indian operations (i.e.
PE taxation @40%; presumptive tax cases; Sec.10AA incentivised units,
etc.)
The devil, however, is in the details. For example, loss on transfer of shares is
not taken into account for computing GloBE Income. But such loss is taken into
account for computing Taxable Income. As a result, the ETR will reduce and
Top-up Tax under the GloBE Rules may be payable. Global Minimum Tax will
also be payable if the ETR falls below 15% due to certain weighted deductions
and incentives until they are completely phased out.
31. How will inbound (into India) MNEs be affected adversely?
India will most likely enact the necessary GloBE Rules. So, even though India is
not a low-tax (less than 15%) jurisdiction various deductions and incentives

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available under the Indian Domestic Tax Law can result in the Indian Entity/PE of
the MNE Group paying tax of less than 15% in India. If that happens the Indian
Entity will be classified as LTCE and will be subjected to Top-up Tax. Such Top-
up Tax might be collected as under:
• The Indian Entity might pay the Top-up Tax in India under QDMT if
enacted by India.
• Otherwise, the UPE or Intermediate Parent Entity or Partially-Owned
Parent Entity might pay the Top-up Tax in their respective Jurisdictions
under IIR depending on which Jurisdictions have enacted GloBE Rules.
• If the QDMT and IIR do not apply, then UTPR will be enforced to collect
the Top-up Tax in Jurisdictions which have enacted the UTPR.
32. How will outbound Indian MNEs be affected?
Outbound Indian MNEs will have to pay Top-up Tax under the GloBE Rules if
any entities belonging to the Indian MNE Group are classified as Low Taxed
Constituent Entities (Entities subject to tax below 15% in their jurisdictions).
Such Top-up Tax will have to be paid by the outbound Indian MNEs as under:
• The LTCE of the Indian MNE Group might pay the Top-up Tax in its
jurisdiction under QDMT if enacted by that jurisdiction.
• Otherwise, the UPE (Indian) or Intermediate Parent Entity or Partially-
Owned Parent Entity might pay the Top-up Tax in their respective
Jurisdictions under IIR depending on which Jurisdictions have enacted
GloBE Rules.
• If the QDMT and IIR do not apply, then UTPR will be enforced for
collecting the Top-up Tax in Jurisdictions which have enacted the UTPR.
Just because some Entities of the Indian MNE Group are located in High Tax
Jurisdictions (above 15% tax rate) will not save the LTCEs from Top-up Tax.
That is because GloBE Rules do not follow Global Blending but instead follow
Jurisdictional Blending.
Example: Dividend received by Indian UPE from Foreign Subsidiary
Say, an Indian UPE holds an Operating Foreign Subsidiary in Country 2 (a Low
Tax Jurisdiction) through an Intermediate Holding Company in Country 1 (a Low

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Tax Jurisdiction). The Operating Foreign Subsidiary pays dividend to the
Intermediate Holding Company which in turn pays such dividend to the Indian
UPE. The ETR of the Operating Foreign Subsidiary is below 15%.
The Intermediate Holding Company’s dividend income is excluded from GloBE
Income due to specific exclusion. Further the Intermediate Holding Company
does not pay any local tax on the dividend income. The Indian UPE pays tax of
34% on dividend income. That tax paid by the Indian UPE is allocated to the
Intermediate Holding Company (which anyway has no Top-up Tax liability) but
not to Operating Foreign Subsidiary (which is LTCE and has Top-up Tax
liability).
If the Country 2 (Country of Operating Foreign Subsidiary) does not collect the
Top-up Tax under QDMT, then the Indian UPE will have to pay IIR to Indian Tax
Authority on Top-up Tax liability of the Operating Foreign Subsidiary. This tax is
additional tax and cannot be adjusted or set off in any tax computation.
Had the Indian UPE held the Operating Foreign Subsidiary directly, tax paid by
the Indian UPE on dividend income could have got attributed to the Operating
Foreign Subsidiary. That could have led to more than 15% ETR of the Operating
Foreign Subsidiary.
This example shows that there will be need to reconsider the presence of
Intermediate Holding Company in a Low Tax Jurisdiction.
33. What will be the effect of Pillar 2 on International Taxation?
Pillar 2 is focused on a Global Minimum Tax. Its objectives include:
• Eliminating tax avoidance and tax havens;
• Addressing harmful tax competition;
• Ensuring the coherence of international tax rules;
• Creating a transparent tax environment;
• Ensuring income is taxed at an appropriate rate; and
• Setting forth a common approach for a Global Minimum Tax for
multinational enterprises (MNEs) with a turnover of more than €750 million.
Due to cross-border trade and multiple geographies, MNEs can park their profits
in no-tax or low-tax jurisdictions and reduce their global ETR. To address this

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issue, Pillar 2 proposes a Global Minimum Tax of 15%. This should discourage
MNEs from artificially shifting profits to no-tax or low-tax jurisdictions.
Pillar 2 will neutralise Tax Incentives provided by a Country to attract Foreign
Investments. Even if the Country providing Tax Incentives does not impose the
Global Minimum Tax under the GloBE Rules, other Countries where the
Constituent Entities of the MNE Group are located can impose and collect the
Global Minimum Tax.
Pillar 2 versus Tax Treaty Provisions
It is pertinent to assess the possible points of friction between the Pillar 2 GloBE
Rules and the existing Tax Treaty framework.
• A question arises whether the IIR conflicts with treaty provisions when
applied by the Country of the UPE. It could be argued that IIR disregards
the concept of separate entities and, by doing so, disturbs the balance of
allocating taxing rights as agreed by the Countries in tax treaties.
• In light of the fact that allocation of taxing rights is a sensitive issue, it may
be worthwhile to explore the option of inserting a safeguard clause in tax
treaties, which would authorise the application of the IIR.
• The UTPR is designed as a backstop. It could be possible that UTPR is
inapplicable if all Countries in the world introduce IIR. If some Countries do
not introduce IIR, then it could be possible that UTPR applies. Therefore, it
is important to discuss the treaty compatibility of this rule in an extensive
manner.
• The model UTPR is a fundamental departure from the economic allegiance
doctrine that is the bedrock of the century-old international tax consensus.
According to the economic allegiance doctrine, a country’s competence in
taxing a person’s income depends on the person’s economic allegiance
with that country. The outcome of applying the model UTPR would be
inconsistent with the economic allegiance doctrine as a Country will be able
to collect taxes under UTPR, on income of a non-resident generated in
Other Country, without any role in generation of that income.
• The model UTPR also departs from the guiding principle in the original
base erosion and profit-shifting project: Profits should be taxed in the

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jurisdiction where they are derived. That value creation principle is most
relevant in the BEPS Actions 8-10 on transfer pricing, which was
incorporated into the OECD transfer pricing guidelines. Value creation can
be evidenced by production and other economic activities; ownership of
financial capital and intangible property; and the development,
enhancement, maintenance, protection, and exploitation of intangibles. By
allocating the Top-up Tax according to a formula that is not connected to
the generation of the undertaxed profits, the model UTPR ignores the value
creation principle and is indifferent toward the alignment of the location of
taxation with the location of value creation.
• Further, implementation of STTR will require a Multi-Lateral Instrument
because STTR will affect taxation under Tax Treaties.
• In addition, the SOR will also affect the exemption versus tax credit under
Tax Treaties for relieving doubles taxation.
34. How can Developing Countries benefit from Pillar 2?
The Global Minimum Tax will benefit Developing Countries by increasing their tax
revenues. This revenue gain is expected to come from the following sources:
i. Jurisdictions will increase tax rates or introduce a QDMT to ensure that
insufficiently taxed profits in the jurisdiction are taxed at the minimum tax rate.
Failing this, the jurisdiction of the parent entity will collect the Top-up Tax
(under IIR), or it can be collected as a backstop (under UTPR) by other
jurisdiction(s) with subsidiaries.
ii. Developing Countries will be able to include Subject To Tax provisions in their
Tax Treaties to tax payments made by residents of their jurisdictions to
connected persons residents in other jurisdictions, if such payments are taxed
in the recipient jurisdictions at low rates.
iii. Pillar 2 is expected to reduce the incentive for MNEs to shift profits to no or
low-tax jurisdictions.
35. What will be the effect of Pillar 2 on Transfer Pricing?
Because the GloBE rules look at an MNE group’s effective tax rate (ETR) on a
country-by-country basis, the question of how a group’s profits are allocated
between countries is of fundamental importance. In common with most countries’

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domestic tax systems, the GloBE rules require cross-border intra-group
transactions to be priced in accordance with the arm’s length principle (ALP).
So, the core GloBE transfer pricing rule is straightforward: transactions between
Constituent Entities located in different jurisdictions must be priced in
accordance with the ALP if that differs from the price recorded in the entities’
accounts. The GloBE rules rely on normal OECD transfer pricing principles for
determining what that arm’s length price is.
Importantly, the GloBE rules apply on the basis that the local tax authorities of
the Constituent Entities are best placed to judge whether the pricing of a
transaction complies with the ALP. There is therefore a presumption that if those
local tax authorities agree a transfer pricing adjustment, or agree that no
adjustment is required, or decline to challenge the returned position, then the
transaction is appropriately priced and no further adjustment is required for
GloBE purposes. Taxpayers can therefore rely on bilateral APAs or the
conclusions of local tax audits, and this cannot be called into question by a third
tax authority that is applying the IIR or UTPR. This is a pragmatic approach that
should limit the scope for the GloBE rules to create new transfer pricing
controversy for MNE Groups.
One should bear in mind, however, that Pillar 2 could reduce MNEs’ incentives
to shift profit to low-tax jurisdictions, because Pillar 2 aims to reduce the
differences in ETRs - differences which are one of the main drivers of profit
shifting - across jurisdictions. Further, jurisdictional blending would also resist
profit shifting to low-tax jurisdictions, because under jurisdictional blending both
high and low tax rates are not blended globally to establish the ETR.
36. What should MNEs do?
Uneven implementation of Pillar 2 across 130 plus Countries could challenge
taxpayers for years to come and compliance risk may be high given the global
nature of the provisions. The possibility for uneven implementation remains,
despite the detail provided in the model rules: domestic legislation around the
world will of course differ when it comes to detailed design principles. While the
OECD has taken huge strides toward developing this framework, it is specific

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domestic legislation as enacted by Countries that will determine how Pillar 2
operates in practice.
Where to start – Key considerations for Multinational Tax Functions
While lawmakers, regulators and tax authorities scramble to bring in the new
regime, taxpayers are faced with some vexing questions. With only partial details
available, organisations face challenges devising strategies, systems, and
processes to deal with the GloBE Rules. The new calculations (of GloBE
Income, Adjusted Covered Taxes, Excess Profits, ETR, etc.) and tax
compliance burdens will impact the MNEs. Moreover, the application of the new
tax regime will require global connectivity amongst tax groups in a manner
unprecedented before. Tax departments of MNEs will be heavily reliant on global
coordination to ensure proper application of the law and related provisions. So,
where should taxpayers start?
There are several key aspects of Pillar 2 that should draw attention from tax
functions of MNE Groups. While the provisions of Pillar 2 are not yet final,
businesses should evaluate how Pillar 2 impacts them and plan accordingly.
i. Covered Taxes
A constituent entity’s Covered Taxes are a fundamental component of the
GloBE. Covered Taxes are defined as the current tax expense for the fiscal
year adjusted by several amounts including additions and reductions for
certain items, deferred tax adjustments, and adjustments for taxes recorded
in equity or other comprehensive income. Taxes recorded for uncertain tax
positions are not considered covered taxes.
Organisations should compile an inventory of potentially covered taxes by
jurisdiction to determine what taxes may or may not be available for GloBE
purposes. For instance, Adjusted Covered Taxes of investment entities are
excluded from the determination of the ETR.
ii. GloBE Income or Loss
Another major input required is the amount of GloBE Income or Loss for a
particular constituent entity. The GloBE Income or Loss is generally defined

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as the financial accounting net income, or loss, subject to certain
adjustments. The net income, or loss, is determined before intercompany
adjustments or consolidating entries. The net income or loss is adjusted for
net tax expense, dividends, gains, and losses on disposal of shares, pension
expenses and other specific adjustments.
As local Countries implement the new law MNE Groups will be well served to
understand (i) how each entity’s net book income will be impacted, and (ii)
the variance of the book income with the tax income. In addition, MNEs may
begin to include this information when making planning decisions about
locations for income-producing activity and assets.
iii. Modelling Effective Rates and Potential Top-up Tax
For each fiscal year the ETR of the MNE group for a jurisdictional group with
GloBE Income shall be equal to the adjusted Covered Taxes divided by the
Net GloBE Income for the jurisdiction for that fiscal year. With accurate
modelling of the Covered Taxes and GloBE Income or Loss on a
jurisdictional basis, taxpayers can begin to identify where the Minimum Rate
(15%) exceeds the ETR, potentially resulting in the imposition of a Top-up
Tax. This information can be valuable from a preparedness and planning
perspective. This information should become part of the data set of
considerations for organisations making business decisions potentially
having bearing on the imposition of the Global Minimum Tax.
iv. Global Tax Coordination
Successful navigation of the GloBE will require an experienced multi-
jurisdictional team managing data and developments for their respective
parts of the organisation. In addition, stakeholders from outside tax
department of MNEs will need to be part of the process to ensure that the
relevant financial accounting data and underlying details are available.
Global business developments teams may want to consider future
investments and transactions considering the new rules and potential
associated tax burdens to ensure that the return on any venture is
appropriately measured. Finally, existing tax planning should be revisited to

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ensure that the desired outcome of such planning will still be attainable post
Pillar 2 implementation. Complex structures and tax-sensitive intercompany
transactions will require a fresh review and potential adjustments in relatively
short order.
Taxpayers who establish processes, controls, and strategies that are flexible and
compatible with the global changes will see a competitive advantage.
Nevertheless, these changes are unprecedented for which businesses need to
evaluate their current models and ensure that they are future ready.
37. What can Developing Countries do?
The Global Minimum Tax of 15% proposed under the GloBE Rules will have
profound implications for the use of tax policy to attract investment. Whether
through statutory tax rates or incentives such as tax holidays, zero-tax zones,
and tax credits, Countries have long used tax policy to attract inbound MNE
investment. With the introduction of the Global Minimum Tax, Countries will no
longer be able to grant zero or low rates (with an ETR of less than 15%). Further,
incentives such as tax holidays and zero-tax zones will be nullified. While certain
incentives will no longer be GloBE compliant, Countries will still have the scope
to introduce Pillar 2 compliant incentives. These can include unlimited loss carry-
forward, accelerated depreciation, and GloBE compliant refundable tax credits.
Countries can look to optimize their offering of tax incentives within the
parameters of the new regime, recognizing that Pillar 2 incentivizes only real
investment.
Further, the Developing Countries should enact QDMT as well as negotiate with
Tax Treaty Partners for STTR.
38. How will OECD Pillar 2 affect US GILTI (Global Intangible Low Taxed
Income)?
On 20 December 2021, the OECD released Pillar 2 Model Rules for
implementation of the 15% Global Minimum Tax. Since that time, commentators
and MNEs have believed that proposed changes to US GILTI will bring it into
conformity with OECD Pillar 2 and create a level playing field for US MNEs.

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There has been, in the tax community, a view that the US GILTI regime will be
modified, so that it applies on a country-by-country basis and the ETR will be
brought in line with the OECD Pillar 2’s 15% global minimum tax rate.
Commentators and MNEs have noted what appears to be a serious flaw for the
United States in the OECD Pillar 2 Model Rules. The US Congress has enacted
a number of tax credits associated with various activities that it wants to
incentivize, such as research and development, low-income housing and
renewable (green) energy. Such tax credits reduce a US corporation’s ETR. If a
US corporation’s ETR falls below the 15% minimum tax rate under OECD Pillar
2, foreign affiliates of the US corporation may be required to make up the
difference by making Top-up Tax payments under the OECD Pillar 2 IIR or
UTPR to their home jurisdictions.
As a result, investments in domestic activities or projects that the US Congress
seeks to encourage will be curtailed because the tax benefit intended by
Congress to encourage those investments would be captured by foreign
governments (through the OECD Pillar 2 IIR and UTPR), rather than the US
company making the US investment.
Closing Remarks
The OECD Pillar 2 Model Rules are still not complete in all respects. The GloBE
Implementation Framework will provide further guidance on the following aspects:
➢ whether or to what extent a Transfer Price needs to be adjusted to reflect
the Arm’s Length Principle
➢ situations where adjustments are necessary to avoid double taxation or
double non-taxation under the GloBE Rules
➢ development of bilateral or multilateral agreement or arrangement
between Competent Authorities that provides for annual automatic
exchange of information that is included in the GloBE Information Return
➢ amendments to the GloBE Information Return, including the time frame
and the method for the filing
➢ development of GloBE Safe Harbours in order to limit unnecessary
compliance and administrative burden for MNE Groups and tax

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administrations - GloBE Safe Harbours would allow an MNE Group to
avoid the ETR and Top-up Tax calculation in respect of its operations that
are likely to be taxable at or above the Minimum Rate
➢ development of processes and providing of guidance to facilitate the co-
ordinated implementation of the GloBE Rules
Implementation of STTR will be pursuant to a treaty like instrument in the nature of
MLI. OECD will publish STTR model rules and the related MLI in the near future. The
MLI will override existing treaty benefits and provide for additional/higher source
taxation rights if the tax rate in the recipient jurisdiction is less than 7.50% - 9.00%. It
remains to be seen to what extent the Developed Countries join hands with the
Developing Countries for an effective STTR MLI.
While the OECD has taken huge strides toward developing Pillar 2 Model Rules, it is
Specific Domestic Legislation as enacted by various Countries that will determine
how Pillar 2 operates in practice.
Will the ugly race to the bottom in the form of harmful tax competition be stopped?
Let us wait and watch as the New Regime of International Taxation gradually
unfolds.
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