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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 - 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.

Top-up Tax

The starting point for the calculation of the Top-up Tax due for 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% minimum rate and the ETR.

This percentage is applied to the Excess Profit for the jurisdiction for the Fiscal Year, which 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, described below.

Finally, the Jurisdictional Top-up Tax for a jurisdiction for a Fiscal Year is the sum of (i) the Top-up Tax Percentage multiplied by the Excess Profit, increased by (ii) the Additional Current Top-up Tax and reduced by (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 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. Qualified Domestic Minimum Top-Up Tax refers to a minimum tax regime that is implemented in the legislation of a jurisdiction and that mimics the impact of the GloBE top-up tax on domestic companies.

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 over the Aggregate GloBE Income of all Constituent Entities in that jurisdiction.

Substance-based Income Exclusion

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.

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 5% of its Eligible Payroll Costs of Eligible Employees that perform activities for the MNE Group in such jurisdiction, other than Eligible Payroll costs that are:

• Capitalized and included in the carrying value of Eligible Tangible Assets

• Attributable to excluded International Shipping Income and Qualified Ancillary International Shipping Income

The Tangible Asset Carve-Out for a Constituent Entity located in a jurisdiction is equal to 5% of the carrying value of Eligible Tangible Assets located in such jurisdiction. Eligible Tangible Assets are:

• Property, plant, and equipment located in the jurisdiction

• Natural resources located in the jurisdiction

• A lessee’s right of use of tangible assets located in the jurisdiction

• 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 and 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.

As was provided in the October Statement, under transition rules, the 5% rate is increased to 10% for the Payroll Carve-out and 8% for the Tangible Asset Carve-out and phased down to 5% over ten years under a specified schedule.

Additional Current Top-up Tax

Rules are provided for situations when the ETR and Top-up Tax for a prior Fiscal Year is required or permitted to be recalculated pursuant to an ETR Adjustment.

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 such jurisdiction is less than €10 million; and

• The Average GloBE Income or Loss of 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 subgroup (under which 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 subgroup (under which the GloBE rules apply on a stand-alone basis).

Example:

The simplified example below illustrates step-by-step how the computation of the ETR would operate.

Chapter 6 – Corporate Restructurings and Holding Structures

Chapter 6 contains rules relating to certain reorganizations. Relating to the scope rules in Chapter 1, this chapter provides further rules for calculating the consolidated revenue threshold in the case of merger and demerger transactions that took place in the prior four-year period. It also provides special rules for the application of the GloBE rules when assets and liabilities are transferred and when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year. Chapter 6 also brings certain Joint Ventures within the scope of the GloBE rules. Finally, this Chapter sets out how the rules should apply in the context of certain multi-parented MNE Groups.

Application of consolidated revenue threshold to group mergers and demergers

Rules are provided that broadly guide how MNE Groups should take into account the impact of mergers and demergers in the context of the €750 million Consolidated Revenue Threshold for determining whether the GloBE rules apply to the relevant group in a particular Fiscal Year.

The individual revenues (as shown in their Consolidated Financial Statements) of the merging groups for each Fiscal Year prior to the merger are required to be added together. Where the sum of the merging group’s revenues in a particular Fiscal Year is at least €750 million, the merged MNE Group will be considered to have met the consolidated revenue threshold for that income year.

On this basis, when measuring a merged MNE Group’s consolidated revenue for the four previous years, if a merger has taken place in that period, the consolidated revenue for purposes of considering the €750 million threshold in each year leading up to that merger is the sum of the consolidated revenues of each of the merging groups.

A similar approach is taken where a standalone entity merges with another entity or group, but does not itself have Consolidated Financial Statements (due to not being a member of any group) for a year. In such circumstances, an aggregation is required of the revenues shown in the standalone Financial Statements or Consolidated Financial Statements (as relevant), and the combined MNE Group will be deemed to have met the consolidated revenue threshold in relation to a year if the sum of the revenues for that year is at least €750 million.

Finally, a demerged group is treated as meeting the consolidated revenue threshold:
 

• In the first Fiscal Year ending after the demerger, if the demerged group itself had annual revenues of at least €750 million in that year

• In the second to fourth Fiscal Years ending after the demerger, if the demerged group had annual revenue of at least €750 million in at least two of the Fiscal Years following the year of demerger
   

For purposes of these rules, mergers are defined by the creation of common control and demergers are defined by a cessation of consolidation by the same UPE.

Constituent Entities joining and leaving an MNE Group

Modifications apply to the GloBE rules in situations where entities join or leave MNE Groups during a Fiscal Year as a result of transfers of direct or indirect Ownership Interests in the relevant entity.

A joining or leaving entity (the “target entity”) is treated as a member of the MNE Group for the joining or leaving year, if any portion of its assets, liabilities, income, expenses or cash flows are ”included on a line-by-line basis” (i.e., consolidated) in the Consolidated Financial Statements of the UPE in that year. In particular, the MNE Group must only take into account the income and taxes of the target entity that are taken into account in those Consolidated Financial Statements of the UPE.

In addition, the target entity must use its historical carrying value of assets and liabilities in determining its GloBE Income or Loss and Adjusted Covered Taxes. As a result, any step-up or step-down recorded in carrying amounts as a result of an acquisition will be ignored.

Additional clarifications on the interaction with other concepts in the GloBE rules include:

• In computing Eligible Payroll Costs, only those payroll costs of the target entity that are reflected in the UPE’s Consolidated Financial Statements may be taken into account

• The calculation of the carrying value of the Eligible Tangible Assets of the target entity is apportioned to reflect the period during the relevant Fiscal Year that the target was a member of the MNE Group

• Deferred tax assets and liabilities of the target entity (other than the GloBE Loss Deferred Tax Asset) that are transferred to the new MNE Group are required to be treated by the new MNE Group as if it had controlled the target entity when they arose

Where deferred tax liabilities of the target have previously been taken into account in calculating the entity’s Total Deferred Tax Adjustment Amount, the amount shall be treated as having been reversed in the disposing MNE Group, and treated as arising in the acquiring MNE Group. This will effectively reset the five Fiscal Year period in respect of the deferred tax liability in the hands of the acquiring MNE Group.

Where the target entity is a Parent Entity and is a member of two or more different MNE Groups during the relevant acquisition year, it is effectively required to apply the IIR provisions separately for each MNE Group.

Where a jurisdiction in which a target Constituent Entity is located treats the acquisition or disposal of a Controlling Interest in the entity as an acquisition or disposal of the underlying assets and liabilities of the entity and imposes a Covered Tax on such disposal, equivalent treatment is provided under the GloBE rules. This treatment is also extended to certain Tax Transparent Entities.

Transfer of assets and liabilities

Special rules also are provided for situations where assets and liabilities are transferred, including business acquisitions and disposals (i.e., transfers of a going concern). Modifications are required to reflect the impact of these transactions on the computation of GloBE Income or Loss for the disposing and acquiring entities.

The implications of such a transfer differ in three alternative scenarios:

• Firstly, as a base case, the disposing entity includes the gain or loss on disposition in the computation of its GloBE Income or Loss, and the acquiring entity determines its GloBE Income or Loss based on the carrying value of assets and liabilities (as determined under the UPE’s accounting standard)

• However, if the transfer is part of a GloBE Reorganization, the transfer is effectively disregarded, with the disposing entity disregarding any gain or loss, and the acquiring entity adopting the carrying values from the disposing entity

• Finally, if the transfer is part of a GloBE Reorganization and the disposing entity recognizes a Non-qualifying Gain or Loss, such gain or loss is to be recognized by the disposing entity in its GloBE Income or Loss, and corresponding adjustments to the carrying amounts acquired by the acquiring entity are made

For these purposes, a GloBE Reorganization is defined to cover a broad range of transactions where the following criteria are satisfied:
 

• Equity interests are issued as consideration for the transfer

• The gain or loss arising to the disposing entity upon the transfer is (wholly or partially) not subject to tax

• Under its local tax laws, the acquiring entity effectively inherits the tax basis in the assets from the disposing entity

A Non-qualifying Gain or Loss is defined as the lesser of:
 

• The gain or loss of the disposing entity that is subject to tax in its jurisdiction

• The financial accounting gain or loss arising in connection with the relevant GloBE Reorganization

In certain jurisdictions, entities are required or permitted to make fair value adjustments to the tax base of its assets or liabilities. In this regard, an election is available that will allow such entities to:
 

• Reflect such fair value adjustments in the computation of GloBE Income or Loss, either in that Fiscal Year or spread across a five-year period

• Use the revised fair values for future calculations of GloBE Income or Loss

Joint Ventures
 

Associates in which investments are recorded using the equity method are generally not included as Constituent Entities of the MNE Group due to an absence of control, and any profits recorded (and the associated taxes) in respect of such investments are excluded from the calculation under the GloBE rules.

However, a modification to this treatment is provided in the context of certain Joint Ventures and their subsidiaries. For these purposes, Joint Venture is defined as an Entity:
 

• Whose financial results are reported using the equity method in the UPE’s Consolidated Financial Statements

• That has at least 50% of its Ownership Interests held directly or indirectly by the UPE

For these purposes, Ownership Interests is defined to mean any equity interest that carries rights to the profits, capital or reserves of an Entity and/or its Permanent Establishments.

The GloBE rules are effectively applied to calculate the Top-Up Tax of the Joint Venture and its JV Subsidiaries as if they were a separate MNE Group, with the Joint Venture as the UPE, subject to specified modifications.

Parent Entities holding a direct or indirect Ownership Interest in a Joint Venture or JV Subsidiary then apply the IIR to their share of the Top-up Tax calculated in respect of the members of the JV Group.

To the extent there is an amount of JV Group Top-up Tax remaining after the respective Parent Entities in the group have applied any Qualified IIRs, the remaining amount is added to the Total UTPR Top-up Tax Amount.

Multi-Parented MNE Groups

Finally, special rules are provided for Multi-Parented MNE Groups, such as dual-listed or stapled structure groups, which would otherwise present unusual difficulties in applying the GloBE rules.

For these purposes, Multi-Parented MNE Group is defined as two or more Groups where both of the following criteria are satisfied:
 

• The UPEs of the Groups enter into a Stapled Structure arrangement or a Dual-listed arrangement

• At least one Entity or Permanent Establishment of the combined Group is located in a different jurisdiction than the other Entities of the combined Group

Broadly, such Multi-Parented MNE Groups are treated as a single MNE Group for the purposes of the GloBE rules, and the Consolidated Financial Statements prepared for the combined Multi-Parented MNE Group are utilized for these purposes.

Each of the Parents in the Multi-Parented MNE Group is required to apply the IIR to their allocable share of the Top-up Tax of Low-taxed Constituent Entities and Constituent Entities. Likewise, the UTPR is applied by Constituent Entities in the Multi-Parented MNE Group taking into account the Top-Up Tax of all Low-Taxed Constituent Entities of the wider Multi-Parented MNE Group.

Such Multi-Parented MNE Groups may elect to designate a single entity to file the GloBE Information Return in respect of the combined Multi-Parented MNE Group. If no such election is made, each UPE is required to submit the GloBE Information Return.

Chapter 7 - Tax neutrality and distribution regimes

Chapter 7 covers the application of the GloBE rules to certain tax neutrality and other distribution regimes. More specifically, it provides special rules in relation to UPEs that are subject to a tax neutrality regime (such as a tax transparency regime or a deductible dividend regime). It also provides special rules for certain tax regimes that subject an Entity to tax on its earnings when those earnings are distributed or deemed distributed. Lastly, it provides special rules for controlled lnvestment Entities that seek to preserve the tax neutrality of these Entities without giving rise to any leakage under the GloBE rules.

Special rules are provided for UPEs that are either Flow-Through Entities or subject to a Deductible Dividend Regime.

A Flow-Through Entity is an entity that is fiscally transparent in the jurisdiction where it is located. A Deductible Dividend Regime is a regime that allows a deduction for distributions of profits to owners. UPEs that are Flow-through Entities or are subject to Deductible Dividend Regimes are allowed to exclude GloBE Income attributable to each Ownership Interest²² or Deductible Dividend²³ under specified circumstances. The GloBE Income of the UPE can be reduced by the GloBE Income of a holder of an ownership interest or a dividend recipient that is subject to tax on such income at a nominal rate equal to or higher than the 15% minimum rate. Additionally, the UPEs can exclude income that is attributable to interests of natural persons or Government Entities, International Organizations, Non-Profit Organizations or Pension Funds that are resident in the UPE jurisdiction and hold 5% or less of the profits and assets of the UPE. Flow-through Entity UPEs must reduce their GloBE Loss by the amount of GloBE Loss attributable to each Ownership Interest unless the holders are not allowed to use the loss in computing their separate taxable income. UPEs that reduce their GloBE Income under these rules must also reduce their Covered Taxes (other than the Taxes for which the dividend deduction is allowed) proportionately to ensure a proper ETR calculation.

An annual election is available with respect to a Constituent Entity subject to an Eligible Distribution Tax System. This is a corporate income tax system that imposes a tax generally payable when the corporation distributes or is deemed to distribute profits to its shareholders or incurs certain non-billable expenses. The system must impose a rate equal to or higher than the 15% minimum rate and must have been in force on or before 1 July 2021. The election can be made by the Filing Constituent Entity and allows the Deemed Distribution Tax to be included in the Adjusted Covered Taxes for the year. The Deemed Distribution Tax is equal to the lesser of the following: (1) the amount of Adjusted Covered Taxes necessary to increase the ETR for the jurisdiction to the Minimum Rate or (2) the amount of tax that would have been due if the entity had distributed all its income. An Annual Deemed Distribution Recapture Account will be established when the election is made to track the extent to which Deemed Distribution Tax is actually paid. A loss on the recapture account would be able to be carried forward for four years and, if not paid, would ultimately be applied as a reduction to the Adjusted Covered Taxes for that fourth year.

Special rules also apply for Investment Entities. Investment Entities are defined as (1) an Investment Fund or a Real Estate Investment Vehicle, (2) an Entity that is at least 95% owned directly by an Investment Fund or a Real Estate Investment Vehicle or through a chain of such entities and operates exclusively or almost exclusively to hold assets or invest funds for the benefit of these Investment Entities or (3) an Entity owned at least 85% by an Investment Fund or a Real Estate Investment Vehicle provided that substantially all its income is Excluded Dividends or Excluded Gain or Loss for the purposes of the GloBE Income or Loss calculation. These rules do not apply to Investment Entities that are Tax Transparent Entities.

The rules aim to ensure that the MNE Group is subject to GloBE with respect only to its allocable share in Investment Entities. A variation of the Substance-based Income Exclusion applies.

Under certain circumstances, a Filing Constituent Entity can elect to treat an Investment Entity as a Tax Transparent Entity for a period of five years. This election is only available if the Constituent Entity that owns the Investment Entity is subject to a mark-to-market tax regime on its ownership interests in the entity a tax rate that equals or exceeds the 15% minimum rate.

A Taxable Distribution Method election is available for a Constituent Entity’s interest in an Investment Entity, if the Constituent Entity is subject to tax on the distributions from the Investment Entity at a rate that is equal or higher than the 15% minimum rate. This is a five-year election.

Chapter 8 – Administration

Chapter 8 addresses certain administrative matters. It sets out an obligation to file a standardized information return (the GloBE Information Return) that will provide tax authorities with the information required to assess the tax liability under the GloBE rules. It also provides for the development of optional safe harbors to reduce the compliance and administrative burden. Finally, it references the future development of agreed administrative rules, guidance and procedures as part of the implementation framework.

The GloBE Information Return

A Constituent Entity subject to GloBE rules located in an implementing jurisdiction must file a Globe Information Return with the local tax administration in a standard template no later than 15 months after the last day of the Reporting Fiscal Year. The return can be filed directly by the Constituent Entity or by a Designated Local Entity located in that same jurisdiction on its behalf.

Under these rules, a Constituent Entity is discharged from its filing obligation when the UPE or a Designated Filing Entity files the GloBE Information Return with another jurisdiction that has an agreement (a Qualifying Competent Authority Agreement) to exchange the return with the tax administration of the Constituent Entity’s jurisdiction. In those cases, a Constituent Entity or a Designated Local Entity located in the implementing jurisdiction shall notify the tax administration where it is located of the identity of the entity that is filing the GloBE Information Return and the jurisdiction in which it is located. This mechanism would allow filing of a single GloBE Information Return covering all Constituent Entities in the MNE Group.

The GloBE Information Return will include the following information concerning the MNE Group:
 

• Identification of the Constituent Entities and their status, including their tax identification numbers, and the jurisdiction in which they are located, as well as the overall corporate structure of the MNE Group

• The information required for purposes of computing the ETR for each jurisdiction and the Top-up Tax of each Constituent Entity

• The allocation of Top-Up Tax under the IIR and the UTPR Top-Up Tax Amount to each jurisdiction

• A record of the elections made in accordance with the relevant provisions of the GloBE rules

• Other information that is agreed as part of the implementation framework (which is under development) and is necessary to carry out the administration of the rules

The domestic laws of the implementing jurisdiction with respect to penalties and confidentiality of the returns will apply to the GloBE Information Return.

Safe harbors

In order to limit the compliance and administrative burden associated with the application of the GloBE rules, the Model Rules refer to the development of optional safe harbors under which MNE Groups will not need to undertake the GloBE rules calculations in respect of entities that are likely to be taxed above the 15% minimum rate. If an election is made, the Top-up Tax for that jurisdiction (the safe harbor jurisdiction) will be deemed to be zero for that fiscal year.

The rules also provide tax administrations with a mechanism that allows them to challenge the use of a GloBE safe harbor. In such cases, the tax administration challenging the application of the safe harbor will provide notification, within 36 months after the filing of the GloBE Information Return, of specific facts and circumstances that may have materially affected the eligibility for the safe harbor and will invite the impacted Entities to clarify within six months the effect of those facts and circumstances on the eligibility for that safe harbor. If the entity fails to demonstrate within the response period that those facts and circumstances did not materially affect its eligibility for the safe harbor, the GloBE safe harbor will not be applicable.

Chapter 9 - Transition rules

Chapter 9 sets out transitional rules that apply where an MNE Group enters within the scope of the GloBE rules in a jurisdiction for the first time. It also provides specific rules that modify the percentages to be applied in the calculation of the Substance-based Income Exclusion during the transitional period, an exclusion from the UTPR for MNE Groups that are in the initial phase of their international activity and transitional relief rules for filling obligations.

Tax attributes upon transition

Special rules apply to the tax attributes of a Constituent Entity in the transition period to the GloBE rules.

When determining the ETR for a jurisdiction in a Transition Year (i.e., first Fiscal Year that the MNE Group comes within the scope of the GloBE Rules in respect of that jurisdiction), and for each subsequent year, the MNE Group takes into account all the deferred tax assets and liabilities reflected or disclosed in the financial accounts of all the Constituent Entities in a jurisdiction for the Transition Year. Such deferred tax assets and liabilities must be taken into account at the lower of the 15% minimum rate or the applicable domestic tax rate. Deferred tax assets can be recast at the 15% minimum rate if recorded at a lower rate, provided that the taxpayer demonstrates that the assets are attributable to a GloBE Loss.

Chapter 9 also provides an exclusion from the ETR determination for a jurisdiction in a Transition Year for deferred tax assets arising from items that were excluded from the computation of GloBE Income or Loss when generated in a transaction after 30 November 2021.

In the case of a transfer of assets between Constituent Entities that takes place after 30 November 2021, but before the start of the Transition Year, the basis in the acquired assets (other than inventory) should be the disposing entity's carrying value of the transferred assets upon disposition with the deferred tax assets and liabilities brought into the GloBE rules determined on that basis.

Transition relief for the Substance-based Income Exclusion

When determining the Substance-based Income Exclusion for a jurisdiction, a transition period of 10 years (between 2023 and 2032) is provided, during which the amount excluded will be 8% of the carrying value of tangible assets and 10% of payroll, declining annually for the first six years by 0.2 percentage points, and for the last four years by 0.4 percentage points for tangible assets and by 0.8 percentage points for payroll. After the transition period, the amount excluded will be 5% of the carrying value of payroll and tangible assets.

Exclusion from the UTPR for MNE Groups in the initial phase of international activity

For MNE Groups in the initial phase of their international activity, the Top-Up Tax is reduced to zero. Two criteria must be met for an MNE Group to qualify under this exception:
 

• The MNE group has Constituent Entities in six jurisdictions or fewer

• The sum of the Net Book Values of Tangible Assets of all Constituent Entities located in all jurisdictions other than the Reference Jurisdiction does not exceed €50 million

For this purpose, the Reference Jurisdiction of an MNE Group is the jurisdiction where the MNE Group has the highest total value of Tangible Assets for the Fiscal Year in which the MNE Group originally comes within the scope of the GloBE Rules and the total value of Tangible Assets in a jurisdiction is the sum of the Net Book Values of all Tangible Assets of all the Constituent Entities of the MNE Group that are located in that jurisdiction.

This exclusion is available for up to five years, starting the first day of the first Fiscal Year when the MNE Group originally came within the scope of the GloBE Rules. For MNE Groups that are in scope when the GloBE rules come into effect, such starting date is when the UTPR rules come into effect.

There also is an optional provision under which the Reference Jurisdiction of the MNE Group can apply specified rules to the initial phase of the MNE Group's international activity.

Transitional relief for filing obligations

The GloBE Information Return is required to be filed with the tax administration within 18 months after the last day of the Reporting Fiscal Year that is the Transitional Year, instead of the standard deadline of 15 months established in Chapter 8.

Chapter 10 - Definitions

Chapter 10 provides the defined terms used throughout the Model Rules. It also includes rules for determining the location of an Entity and a Permanent Establishment for the purposes of applying the GloBE rules.

Location of an Entity and a Permanent Establishment

The location of an Entity that is not a Flow-through Entity is generally the jurisdiction where it is tax resident. In the case of a dual resident Entity, where there is no resolution after applying the tie-breaker rules under an applicable tax treaty, its location is to be determined as follows:
 

• It is considered to be located in the jurisdiction where it paid the greater amount of Covered Taxes (excluding taxes paid under a CFC regime) for the fiscal year

• If the amount of Covered Taxes is the same or zero in both jurisdictions, the Entity is considered to be located in the jurisdiction where it has the greater amount of Substance-based Income Exclusion computed on an entity basis

• If the amount of the Substance-based Income Exclusion in both jurisdictions is the same or zero, the Entity is considered a Stateless Constituent Entity, unless it is the UPE of the MNE Group in which case it is considered to be located in the jurisdiction where it was created

A Flow-through Entity is treated as a Stateless Entity unless it is the UPE of the MNE Group or it is required to apply an IIR, in which case it is considered to be located in the jurisdiction where it was created.

The location of a Permanent Establishment generally is the jurisdiction where either:
 

• There is a right to tax the income attributable to it in accordance to the business profit article under the applicable tax treaty

• In the absence of an applicable tax treaty, it is subject to net basis taxation based on its business presence

In the absence of such a location, a place of business (including a deemed place of business) is treated as a stateless Permanent Establishment if the jurisdiction where the Main Entity is located exempts the income attributable to operations conducted outside that jurisdiction.

Where an Entity changes its location during the Fiscal Year, its location is considered to be the jurisdiction where it was located at the beginning of that year.

Next steps

According to the implementation plan included in the October Statement, Pillar Two should be brought into law in 2022 and be effective in 2023, with the exception of the UTPR which is scheduled to enter into effect in 2024.

An implementation framework covering administrative matters (e.g., filing obligations, review processes) and safe harbors to facilitate coordinated implementation of the GloBE rules is expected to be released by the end of 2022 at the latest. The OECD plans to host a public consultation event on the implementation matters in February 2022.

A model treaty provision for the STTR supplemented by commentary that explains the purpose and the operation of the rule is expected to be released in early 2022. The OECD plans to host a public consultation event on the STTR in March 2022.

Implications

The Model Rules provide a substantial update to the Pillar Two Blueprint that was released in October 2020. There are some significant changes in the Model Rules relative to the concepts described in the Blueprint so it will be important for companies to review the Model Rules carefully with this in mind. In addition, the Commentary that the OECD expects to release in early 2022 will provide additional information relevant to the interpretation and operation of the Model Rules, making it an essential component of the global minimum tax package. The Commentary will require close attention when released as well.

The Model Rules reveal the complexity of the global minimum tax and the significant investment that will be required by companies that are in scope of the new rules in order to be ready to comply when the rules take effect. In this regard, the Inclusive Framework is working to develop an implementation framework to provide guidance on coordination, administration and compliance matters with respect to the Pillar Two global minimum tax. However, the timeline laid out in the October Statement contemplates that the implementation framework may not be released until the end of 2022, which would be immediately before the anticipated entry into effect in January 2023. The public consultation event that the OECD plans to host in February 2022 may provide some information regarding the administration and compliance mechanisms being considered and will be a valuable opportunity for businesses to share practical perspectives on compliance matters with the OECD and the Inclusive Framework as the framework is being developed. In addition, given the potential timing for release of the implementation framework, businesses may need to start preparing for compliance with the new global minimum tax before the final implementation framework is available.

The Model Rules and the coming Commentary are intended to be used by governments in incorporating the global minimum tax into their domestic tax legislation. Because there may well be variation – potentially substantial – in how different jurisdictions reflect the Model Rules, it will be important for companies to monitor the legislative activity in all relevant jurisdictions. Moreover, the Model Rules and Commentary likely will also be considered by jurisdictions that are evaluating potential changes to their domestic tax architecture in response to the adoption of global minimum tax rules by other jurisdictions. This may include, for example, modifications to their incentives regimes and the possible introduction of domestic Top-up Taxes. Companies should monitor this activity in relevant jurisdictions as well.

The first major legislative proposal with respect to implementation of the new Pillar Two rules is expected be released on 22 December 2021, with the European Commission’s planned publication of a draft Pillar Two Directive for the EU. In addition, there is pending legislative activity in the US involving changes to the existing GILTI rules to bring them more in line with the agreed Pillar Two approach. Legislative activity on Pillar Two is expected to begin shortly in other jurisdictions as well.

The Model Rules reflect consideration of some key points that have been made by business representatives during the public consultations hosted by the OECD in the earlier stages of development of the Pillar Two rules. In particular, the Model Rules include specific provisions allowing deferred tax accounting concepts to be taken into account to address certain book-tax timing difference. This aspect of the Model Rules, and the related elements of the coming Commentary, should be reviewed carefully. The need for predictability and importance of simplification have also been stressed by business stakeholders in Pillar Two discussions, and the OECD has indicated that these matters will be addressed in the implementation framework that is being developed.

Key aspects of the Model Rules that bear continued monitoring as implementation activity in jurisdictions around the world begins include:
 

• Jurisdictions are free to apply the IIR to MNEs headquartered in their jurisdiction even if they do not meet the €750 million revenue threshold in the Model Rules. If jurisdictions follow this approach, companies that have not been subject to country-by-country reporting obligations will be subject to elaborate new reporting obligations with significant tax consequences under such an IIIR. It is therefore important for MNEs that do not meet the revenue threshold in the Model Rules to monitor implementation of the IIR in their home country.

• Computation of the GloBE tax base and covered taxes is based on financial accounting rather than tax accounting, but will require multiple adjustments resulting in a new measurement that is not used for any other purpose. For the calculation of adjusted covered taxes, the use of deferred tax accounting in the Model Rules is based on deferred tax expense recorded in the financial accounts, but also requires adjustments, recalculation based on the 15% minimum rate, and potential future recapture. Thus, in order to be able to do the computations required to apply the IIR and the UTPR, companies will need to maintain additional data – including historical data and non-tax data.

• In addition to these complexities with the calculation of ETR under the Model Rules, the calculation of the top-up tax also is complex and will require a clear understanding of all the key concepts in the GloBE rules.

• Businesses considering mergers and acquisitions will need to analyze the historical consolidated revenue of target entities for prior years to determine the impact on the current year application of the GloBE rules. Note that historical profits in target entities relating to businesses disposed of before the acquisition could cause the merged group to exceed the revenue threshold and be within scope of the GloBE rules.

• The Model Rules include a provision that treats transferred deferred tax assets and liabilities as if the acquiring MNE Group controlled the relevant entity when the deferred tax assets and liabilities arose. This may create some issues in situations where the relevant groups apply different accounting standards for the recognition or measurement of deferred tax balances.

• The Model Rules reference a new information reporting reform to be used to provide tax authorities with all the data required for the GloBE rules. Businesses will need to collect significant information on an entity and jurisdictional basis in order to prepare the GloBE Information Return. Further reporting requirements may be laid out in the implementation framework that is under development. Some of the necessary data may not be relevant for any other purpose and would be required to be collected and maintained specifically for purposes of the new global minimum tax rules.

It is important for businesses to evaluate the potential impact of the global tax changes both on their tax positions and on their data and compliance processes and systems. Businesses should also monitor activity in relevant jurisdictions related to the implementation of the global minimum tax rules through changes in domestic tax legislation. Businesses should consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications of these proposals, including considering participating in the public consultations that the OECD will host in the coming months.

Finally, it is important for businesses to recognize that the ETR calculation will likely have to be provided not only to governments, but also publicly. The European Commission has announced the intention of developing an EU Directive in 2022 requiring in-scope MNEs to publish their ETRs calculated on the basis of the Pillar Two methodology.

The Model Rules and the other developments with respect to Pillar Two will be discussed on the upcoming EY Global Thought Center webcast BEPS 2.0: Focus on Pillar Two on 12 January 2022. To register for the webcast, click here.

Endnotes

1. See EY Global Tax Alert, OECD’s new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019.

    

2. See EY Global Tax Alert, OECD opens public consultation on addressing tax challenges arising from digitalization of the economy: time-sensitive issue impacting all multinational enterprises, dated 14 February 2019.
    

3. See EY Global Tax Alert, OECD hosts public consultation on document proposing significant changes to the international tax system, dated 18 March 2019.

    

4. See EY Global Tax Alert, OECD workplan envisions global agreement on new rules for taxing multinational enterprises, dated 3 June 2019.
    

5. See EY Global Tax Alert, OECD issues consultation document on technical design aspects of Pillar Two, dated 14 November 2019.
    

6. See EY Global Tax Alert, OECD hosts public consultation on global anti-base erosion (GloBE) proposal under Pillar Two of BEPS 2.0 project, dated 13 December 2019.
    

7. See EY Global Tax Alert, OECD documents on BEPS 2.0 include new details and identify issues under consideration on Pillar One and Pillar Two, dated 7 February 2020.
    

8. See EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.
    

9. See EY Global Tax Alert, OECD Inclusive Framework political leaders promote global consensus following OECD's public consultation on Pillar One and Two Blueprints, dated 1 February 2021.
    

10. See EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 1 July 2021.
     

11. See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021.
     

12. Entities owned by and accountable to the government aiming to realize a government purpose or manage the government’s assets. In case of dissolution or distribution, assets or earnings are attributed to the government.
     

13. Intergovernmental organizations or their wholly owned agencies/instrumentalities that mainly consist of governments and have an agreement with the government of the jurisdiction in which they are established. In addition, no benefit is attributed to private persons.
     

14. An entity established in its jurisdiction of residence that functions for a specific purpose or operates exclusively to promote social welfare. The income of such an entity is exempt from income tax. Its shareholders or members have no interest in such income, and the latter may not be distributed to private persons. In case of the Entity’s termination, the assets may be distributed to a non-profit organization or the government.
     

15. An entity that either administers or provides retirement benefits and alike, and the latter are in some way protected, for instance, through national regulations, in case of insolvency. This Entity is regulated by the government or a political subdivision. Also, A Pension Services Entity, which is an entity that operates mainly to invest funds for the benefits of the entities mentioned under (i) or carries out ancillary activities of those entities mentioned under (i) and together are members of the same group.
     

16. The main aim of an investment fund is to pool assets from several investors and generate a specific income or gain or protection against a specific outcome. An investment fund follows a defined investment policy, is subject to a regulatory regime and is managed by fund management professionals. It allows investors to reduce or spread specific kinds of risk and provides them with a right to return on the assets or income of the fund.

     

17. A Real Estate Investment Vehicle is an entity that holds predominantly immovable property and is taxed at a single level, either in its hands or those of its interest holders.
     

18. Tax expenses relates to an uncertain tax positions will be reduced in the calculation of Adjusted Covered Tax, as described in “Reduction to Covered Taxes” but will be added to this item when actually realized (paid).
     

19. Qualified Refundable Tax Credit, if it is credited against the current tax expense in the financial accounts, will be added to this item, as they are treated as income in the computation of GloBE Income or Loss as subsidy equivalents.
     

20. Non-Qualified Refundable Tax Credit is treated as ordinary tax credits. If the credits are not deducted from the current tax expense, they are deducted at this item.
     

21. Disallowed Accruals means any movement in deferred tax expense accrued in the financial accounts of a Constituent Entity 1) which relates to an uncertain tax position and 2) which relates to distributions from a Constituent Entity.
    
    Unclaimed Accruals means any increase in a deferred tax liability recorded in the financial accounts of a Constituent Entity for a Fiscal Year that is not expected to be paid within the time five subsequent Fiscal Years and for which the Filing Constituent Entity makes an Annual Election not to include in Total Deferred Tax Adjustment Amount for such Fiscal Year. By making this election, taxpayers can avoid the application of the " Treatment to deferred tax liability not paid within five Fiscal Years" described below.
    
    

22. An Ownership Interest is defined as any equity interest that carries rights to profits, capital or reserves of an entity.
     

23. A Deductible Dividend includes distribution of profits that is deductible in the jurisdiction of the distributing entity and a patronage dividend to a member of a Cooperative.