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BEPS Pillar Two GloBE Rules


The two-pillar corporate tax reform plan forms part of the OECD's project tackling base erosion and profit shifting (BEPS). Whilst Pillar One – which aims to align taxing rights more closely with the location of customers – will only apply initially to MNEs with annual global turnover above €20bn, Pillar Two is expected to have a wider impact on businesses.

Pillar Two seeks to establish a global minimum corporate tax rate through a set of interlinked rules. Global anti-base erosion rules (GloBE rules) will impose top-up taxes where the effective rate of tax of a MNE in a jurisdiction is below the global minimum corporate tax rate (15%). There will also be a subject to tax rule (STTR) which will allow source taxation (for example, withholding taxes) on certain cross-border related party payments that are subject to tax below a minimum rate (9%). For more information on the GloBE rules, please read below.


In this podcast, Senior Associates, Sarah Roman and Michelle Carnegie, from the Travers Smith Tax team provide an introduction to base erosion and profit shifting (BEPS) and the measures being taken to reform international taxation rules, with a particular focus on the new Global Anti-Base Erosion (GloBE) rules.

Video explainers

These 4 videos provide an overview of the BEPS Pillar Two GloBE Rules, and cover topics such as calculating top-up tax, charging mechanisms, timing differences and refundable tax credits. 

Use the arrows below to move between the videos. 


The GloBE rules apply to MNE groups with revenue of at least €750m (the same threshold as country-by-country reporting). In addition, the group must operate in two or more jurisdictions – this could be through two entities or through a main entity with a permanent establishment in another jurisdiction. The only excluded activity is international shipping.

Two entities will be in the same group if they are included in the consolidated financial statements of the ultimate parent entity (broadly, the entity at the top of the group structure). An entity that is a member of a group is called a "Constituent Entity".

Certain entities are excluded from the ambit of the rules and will not be required to carry out an effective rate of tax calculation nor be charged a top-up tax arising as a result of a low taxed entity elsewhere in the group.

The types of Excluded Entities are:

  • Governmental Entities
  • International Organisations
  • Non-profit Organisations
  • Pension Funds
  • Investment Funds
  • Real Estate Investment Vehicles
  • and certain holding entities.

There are some complexities to the definitions of Investment Funds, Real Estate Investment Vehicles and holding entities which will need to be carefully  considered by groups that are large enough to be within scope.

Calculating top-up tax

Broadly, top-up tax will be payable if an entity's in-scope income and profits are subject to an effective tax rate of less than 15%.

De minimis exemption

A de minimis exemption can be elected into for jurisdictions with average GloBE Revenue of less than €10m and average GloBE Income / Loss of less than €1m. If the exemption applies to a jurisdiction, there is no requirement to calculate the effective tax rate for jurisdiction and the top-up tax for Constituent Entities in jurisdiction deemed to be zero.

In-scope income and taxes must be calculated for each Constituent Entity. The starting point for the calculation is the income and taxes allocated to the Constituent Entity in the financial accounts. These figures are then adjusted by a complex set of rules to arrive at "GloBE Income" and "Adjusted Covered Taxes".  Only taxes on income and profits (including withholding taxes and taxes levied under a CFC regime) are taken into account for the purposes of the top-up tax calculation – sales taxes (e.g. VAT), payroll taxes and transfer taxes must all be stripped out. 

The effective tax rate (ETR) is calculated on a jurisdictional basis, meaning that income and taxes for entities in a jurisdiction are pooled together.  Special rules apply to certain types of entities (investment entities and minority owned entities) which require their tax rate to be calculated on a standalone basis, rather than aggregating their figures with those of other entities in the same jurisdiction. The aggregate Adjusted Covered Taxes figure is divided by the net GloBE Income to give the effective tax rate for the jurisdiction.

The minimum tax rate is 15%. If the effective tax rate is lower than 15%, the difference between the minimum top-up tax and the effective tax rate is the "jurisdictional top-up tax percentage". For example, a jurisdiction with an effective tax rate of 12% would have a jurisdictional top-up tax percentage of 3%. The jurisdictional top-up tax percentage is applied to "excess profit" for the jurisdiction. This enables a fixed return on substantive activities to be carved out of the scope of the GloBE Rules. The carve-out is 5% of eligible payroll costs plus 5% of the carrying value of eligible tangible assets – higher percentages will apply in the first ten years that the GloBE rules are in force.

The top-up tax for a jurisdiction is the jurisdictional top-up tax multiplied by excess profit (Net GloBE Income less the substance based carve-out). Any adjustments required in relation to top-up tax for a prior year are added to this figure. Any qualifying domestic top-up taxes are then deducted.

A domestic top-up tax is an extra tax, levied under domestic tax rules to top-up the effective tax rate on excess profits of entities in a jurisdiction to the minimum tax rate of 15%. Introducing a domestic top-up tax ensures that any top-up tax for that jurisdiction goes to the jurisdiction's tax authority, rather than a tax authority elsewhere.

The UK is considering introducing a domestic top-up tax so that any top-up taxes arising as a result of UK activities go to the UK Exchequer.

The resulting figure is then apportioned between group entities in the jurisdiction in proportion to their share of the aggregate GloBE Income for the jurisdiction. An entity to whom top-up tax has been allocated is a "Low Taxed Constituent Entity" (LTCE).

Paying top-up tax

The GloBE rules provide for two mechanisms to collect top-up tax. The primary mechanism is the Income Inclusion Rule (IIR) which charges top-up tax to parent entities. A parent entity is a Constituent Entity that owns an interest in another Constituent Entity. A parent entity pays the top-up tax allocated to a LTCE in proportion to its ownership interest in the LTCE. For example, if the parent entity only owns an 80% interest in a LTCE (and there is no entity further down the corporate chain that holds a larger interest), only 80% of top-up tax of LTCE is charged under the IIR.

The IIR is a top-down rule. Broadly, one starts with the ultimate parent entity (the entity at the top of the MNE Group) and works down the corporate chain until one finds a parent entity in a jurisdiction that has implemented an income inclusion rule.  There are special rules to deal with situations where there are minority interests in the LTCE.

The secondary mechanism is the undertaxed payments rule (UTPR). The UTPR only comes into play if it has not been possible to recover all of the MNE's share of the top-up tax allocated to a LTCE under the IIR. For example, this would be the case if the parent entity of the LTCE was located in jurisdiction that had not implemented an IIR.

If it has not been possible to collect all the top-up tax of a LTCE under the IIR, the secondary mechanism kicks in: the Under-taxed Payments Rule (UTPR).

Did you know?

The name of the undertaxed payments rules is somewhat misleading; there does not need to be a payment from a MNE group entity to the LTCE, nor does any such payment need to be under-taxed.

The UTPR operates by allocating remaining top-up tax to jurisdictions which have implemented a UTPR and have Constituent Entities with tangible assets and / or employees located in that jurisdiction. Note that this could be a low tax jurisdiction, provided that jurisdiction has implemented a UTPR and has employees and / or tangible assets. The top-up tax is allocated to these jurisdictions in proportion to their share of total employees and tangible assets in UTPR jurisdictions. It is up to the jurisdiction to determine how to allocate it between Constituent Entities in their jurisdiction. The rules around allocation of top-up tax under the UTPR are expected to be administratively burdensome for businesses; it is hoped that jurisdictions will choose to implement the IIR and / or domestic top-up taxes and thereby minimise the amount of top-up tax left to be allocated under the UTPR.

When will the GloBE rules come into force?

The OECD Statement published in October 2021 provided for a set of ambitious deadlines: GloBE rules were to be implemented in 2022 and come into force in 2023 (except the UTPR, which is to come into force in 2024). However, the OECD was not able to meet the October statement deadlines for the publication of model rules and commentary and the detailed implementation framework is not expected to be published until late 2022. The UK government consultation document published in January 2022 suggested that the UK intended to adhere to the original deadlines with a proposed April 2023 effective date for the main tranche of the rules. The UK government has subsequently announced that the UK's implementation will be delayed until 31 December 2023.  At this point, it is not clear when the UTPR will come into force in the UK, but more details are expected on L Day later this summer.

Although a draft directive was published by the European Commission in December 2021, EU Member States are yet to agree on the timing and details of implementation of Pillar Two. 

In the US, in late 2021 the Biden Administration introduced legislation (the Build Back Better Act) to amend existing US GILTI rules to make it compatible with GloBE (increased tax rate and switch from current global basis to a jurisdictional calculation). However, this legislation is currently blocked in the US Senate, and it is not clear whether the US will be able to meet its commitment to implement Pillar Two in 2022.

  • OECD Statement on Pillar 1 and Pillar 2

    July 2021

  • OECD Statement on Pillar 1 and Pillar 2

    October 2021

  • OECD model rules published

    December 2021

  • EU draft directive

    December 2021

  • UK consultation

    Early 2022

  • UK draft legislation?

    Summer 2022

  • OECD Implementation Framework published?

    December 2022

  • UK IIR comes into force?

    December 2023

  • EU IIR comes into force?

    December 2023

  • UK UTPR comes into force?

    December 2024

  • EU UTPR comes into force?

    December 2024


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