Global Anti-Base Erosion (GloBE) Rules (Pillar Two)
- a22162
- Jul 24
- 6 min read
GloBE Rules Explained: A Summary
Global Anti-Base Erosion (GloBE) Rules (Pillar Two)
The Global Anti-Base Erosion (GloBE) Rules, often referred to as Pillar Two of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, are a landmark international tax reform initiative designed to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on their profits, regardless of where they operate.
Here's a breakdown of the key aspects:
1. Objective: The primary goal of GloBE Rules is to address the tax challenges arising from the digitalization of the economy and prevent a "race to the bottom" in corporate tax rates. It aims to ensure that MNEs with consolidated annual revenues of €750 million or more pay an effective tax rate (ETR) of at least 15% on profits earned in each jurisdiction where they operate.
2. How it Works (Core Mechanisms): The GloBE Rules operate through a coordinated system of taxation, primarily using two interlocking rules:
Income Inclusion Rule (IIR): This is the primary rule. It imposes a "top-up tax" on a parent entity of an MNE group when its low-taxed constituent entities (LTCEs) in a particular jurisdiction have an ETR below 15%. The top-up tax is calculated to bring the effective rate up to the minimum 15%.
Undertaxed Profits Rule (UTPR): This serves as a backstop to the IIR. If the IIR does not apply (e.g., the parent entity's jurisdiction has not implemented an IIR), the UTPR allows other jurisdictions where the MNE operates to collect a portion of the top-up tax by denying deductions or imposing an equivalent adjustment.
Qualified Domestic Minimum Top-up Tax (QDMTT): Many jurisdictions are implementing their own domestic minimum top-up taxes. If a QDMTT is considered "qualified" under the GloBE rules, it effectively ensures that the top-up tax is collected domestically, reducing the amount that would otherwise be charged under the IIR or UTPR by other countries. This allows the source country to retain the taxing rights.
3. Key Features and Calculations:
Jurisdictional Blending: The ETR is determined on a jurisdictional basis, meaning profits and losses within the same jurisdiction are blended.
Financial Accounting Basis: The GloBE calculations generally start with the MNE group's consolidated financial statements (e.g., IFRS or US GAAP) and then apply specific adjustments to arrive at "GloBE income" and "Adjusted Covered Taxes."
Deferred Tax Accounting: The rules incorporate deferred tax accounting principles to address timing differences in taxation, with a five-year recapture rule for certain deferred tax liabilities.
Substance-Based Income Exclusion (SBIE): There's a carve-out that reduces the amount of profits subject to top-up tax based on the MNE's tangible assets and payroll costs in a jurisdiction. This aims to reward genuine economic activity.
4. Impact on Multinational Corporations:
Increased Tax Liabilities: MNEs that have historically leveraged low-tax jurisdictions or tax incentives may face higher overall tax burdens.
Rethinking Tax Strategies: Companies will need to reassess their global tax structures, transfer pricing policies, and intellectual property holding structures. Maintaining offshore structures purely for tax benefits will become less viable.
Enhanced Compliance Burden: The GloBE Rules are complex and require significant data collection and new reporting obligations. MNEs need robust systems and processes to identify, gather, and process the required data, which can involve over 230 data points per legal entity.
Operational Adjustments: Businesses may consider reshoring or nearshoring operations to optimize tax efficiency, supply chain resilience, and regulatory compliance, as the focus shifts to economic substance.
Increased Coordination: Greater collaboration between tax and finance functions will be crucial to ensure consistent country-by-country financial data for compliance.
5. Implementation Timeline:
The GloBE Model Rules were published in December 2021, and the Commentary followed in March 2022.
Many jurisdictions, including EU Member States, have adopted or are in the process of adopting domestic legislation to implement Pillar Two.
The Income Inclusion Rule (IIR) generally began applying from January 1, 2024, in many jurisdictions.
The Undertaxed Profits Rule (UTPR) is largely expected to take effect from January 1, 2025.
Some jurisdictions, like Singapore, have announced they will implement the IIR and a Domestic Minimum Top-up Tax (DTT) from financial years starting on or after January 1, 2025.
The GloBE Rules represent a significant shift in the international tax landscape, requiring MNEs to proactively assess their global tax strategies and prepare for increased compliance demands.
How Bestar can Help
The complexity and far-reaching implications of the GloBE Rules (Pillar Two) make professional assistance not just beneficial, but often essential for multinational enterprises (MNEs). Here's how Bestar can help:
Bestar offers a comprehensive suite of services to guide MNEs through every stage of Pillar Two compliance:
Impact Assessment and Scenario Modeling:
Initial Analysis: Determining whether an MNE falls within the scope of Pillar Two and identifying jurisdictions likely to trigger a top-up tax.
Quantitative Modeling: Using sophisticated models to estimate the financial impact of GloBE rules on the MNE's effective tax rate (ETR) and potential top-up tax liabilities across different jurisdictions. This involves simulating various scenarios (e.g., impact of Qualified Domestic Minimum Top-up Taxes (QDMTTs), substance-based income exclusion).
Cash Flow and Financial Statement Impact: Assessing the implications for financial statements, including deferred tax assets and liabilities, and cash flow planning.
Data and Technology Strategy:
Data Gap Analysis: Identifying what data is needed for Pillar Two calculations (which can be hundreds of data points, far more than for CbCR) and where existing systems have gaps. This often involves data that is not traditionally collected by tax departments.
System Assessment and Enhancement: Evaluating current ERP, accounting, and tax reporting systems to determine their capability to handle Pillar Two data and calculations. Recommending and assisting with enhancements or new system implementations.
Tax Technology Solution Selection and Implementation: Guiding MNEs in choosing and deploying specialized Pillar Two software solutions (e.g., from vendors like Wolters Kluwer, Deloitte, KPMG, Tax Systems, Corptax) that can automate calculations, data collection, and reporting.
Compliance and Reporting:
GloBE Information Return (GIR) Preparation: Assisting with the complex 28-page, multi-data point GloBE Information Return, ensuring accuracy and compliance with OECD standards.
Domestic Minimum Top-up Tax (QDMTT) Filings: Helping prepare and file local QDMTT returns where applicable, to ensure the MNE's jurisdiction retains the taxing rights.
Ongoing Compliance Support: Providing continuous support as rules evolve and new administrative guidance is released, helping MNEs stay up-to-date and adapt their processes.
Tax Planning and Restructuring:
Strategic Advisory: Reviewing existing global tax structures, supply chains, and business models to identify opportunities for optimization under the new rules. This might involve re-evaluating locations for income-producing activities and assets.
M&A Due Diligence: Integrating Pillar Two considerations into merger and acquisition due diligence to assess potential post-transaction tax liabilities.
Interpretation of Legislation: Advising on the precise professional interpretation of domestic Pillar Two legislation and how it interacts with international tax treaties.
Contractual Review: Reviewing and adjusting intercompany agreements and other contracts to align with the new tax realities and avoid unintended consequences.
Developing Pillar Two Software: Creating sophisticated platforms that can ingest vast amounts of financial data, perform the complex GloBE calculations (ETR, top-up tax, SBIE, DTL recapture, etc.), and generate the required GloBE Information Return (GIR) and other reports.
Data Integration and Automation: Providing tools and expertise to integrate data from various source systems (ERPs, accounting software) into a central Pillar Two solution, automating data transformation and calculation processes.
Cloud-Based Solutions: Offering secure, scalable cloud platforms that facilitate collaboration between internal tax teams and external advisors.
Financial Accounting for Tax: Ensuring that the financial accounting data is properly prepared and adjusted for GloBE purposes, as the starting point for Pillar Two calculations is the financial accounting net income.
Deferred Tax Implications: Understanding and correctly accounting for the complex deferred tax implications under GloBE rules, including the five-year recapture rule for certain deferred tax liabilities.
Audit and Assurance: Bestar will play a crucial role in validating the Pillar Two calculations and disclosures in financial statements. Internal accounting teams need to ensure their processes are robust enough to withstand audit scrutiny.
Why is Professional Help Crucial?
Complexity: The GloBE Rules are incredibly complex, with numerous definitions, adjustments, and interactions between different rules (IIR, UTPR, QDMTT, safe harbors, etc.).
Data Volume and Granularity: The sheer volume and granular nature of the data required are unprecedented for many tax departments.
Evolving Guidance: The OECD continues to issue administrative guidance, requiring constant monitoring and adaptation.
Jurisdictional Nuances: While a common framework, domestic implementation can vary, adding layers of complexity.
High Stakes: Non-compliance can lead to significant top-up tax liabilities, penalties, and reputational damage.
By engaging Bestar, MNEs can navigate the complexities of Pillar Two, mitigate risks, optimize their tax positions, and ensure long-term compliance in this new era of international taxation.
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