Global Minimum Tax on Corporations: OECD GloBE Model Rules and their implementation in the UK

22 February 2022

This article is a follow-up to our two previous articles of 20 August 2021 and 7 December 2021.

On 8 October 2021, the OECD/G20 published a statement confirming that 136 jurisdictions1 had agreed to a two-pillar solution to address the tax challenges that arise from the digitalisation of the economy and setting out an implementation plan.

Regarding the “Pillar Two” component, a 15% global minimum tax on corporations was agreed upon, and model rules to give effect to the Global Anti-Base Erosion rules (the “GloBE rules”) were published on 20 December 2021. Shortly after, on 11 January 2022, the UK government launched a consultation on the UK’s implementation of the GloBE rules by 4 April 2022.

As mentioned in our last article, the Pillar Two component imposes a top-up tax on parent companies regarding the low-taxed income of subsidiaries (thereby decreasing the leverage of low-tax jurisdictions). It also incorporates a rule which denies deductions or requires an equivalent adjustment as an alternative to the first rule.

The recently published model rules define the scope and set out the mechanics of the GloBE rules. Their implementation is envisaged to be completed by 2023.

The GloBE Rules

  • Chapter 1 defines the scope of the GloBE rules, which apply to members of an MNE Group with annual revenues of €750m or more. Tax authorities will use the Consolidated Financial Statements of the Ultimate Parent Entity (the “UPE”) to determine if the €750m threshold has been exceeded in at least two of the last four Fiscal Years. Certain entities, including pension funds, real estate investment vehicles, international organisations and NGOs fall outside the scope of the GloBE Rules.
  • Chapter 2 sets out the methodology to determine the amount of the UPE’s Top-Up Tax liability. Very broadly:
    • The Income Inclusion Rule (“IIR”) provides that the UPE shall pay a tax in an amount equal to its allocable share of the Top-Up Tax of the corresponding low-taxed entity. The Top-Up Tax is allocated through a formula including the number of employees and the value of tangible assets in each jurisdiction.
    • The Undertaxed Payment Rule (“UTPR”) means that an entity shall be denied a deduction in an amount equal to the additional cash expense that an undertaxed entity should have. In other words, instead of paying extra tax, the relevant group entity is denied a deduction (thereby producing the same effect, in economic terms).
  • Chapter 3 deals with the computation of GloBE Income or Loss. Transactions between entities located in different jurisdictions that are not consistent with the Arm’s Length Principle need to be adjusted. The income attribution rules in Article 7 of the OECD Model Convention are recognised for permanent establishments.
  • Chapter 5 deals with the computation of the Effective Tax Rate and Top-Up Tax:
    • The Effective Tax Rate is the sum of the adjusted covered taxes (broadly, taxes on income or profits) of the MNE Group in a jurisdiction, divided by the “Net GloBE Income”2 of the jurisdiction.
    • The Top-up Tax Percentage is the difference between the Minimum Rate (15%) and the Effective Tax Rate.
    • The formula also includes two carve-outs: one relating to the payroll costs of employees and another to the carrying value of qualified tangible assets.
    • There is also a de minimis exclusion: the Top-Up Tax for an entity shall be deemed zero if: (a) the average GloBE Revenue of that jurisdiction is less than €10m, and (b) the average GloBE Income is less than €1m.
  • Chapter 8 addresses the administration of the GloBE Rules. Most notably, there is an obligation on MNE Groups to file a standardised information return in each jurisdiction that has introduced the GloBE Rules. There is also provision for certain safe harbours if the conditions provided under the GloBE Implementation Framework, which the Inclusive Framework on BEPS will develop, are met for the relevant fiscal year.

Implementation of the GloBE Rules in the UK

On 11 January 2022, HMRC launched a consultation on the implementation of the GloBE Rules into UK law. The key points are:

  • An IIR will be included in the Finance Bill 2022-23 and will have effect from 1 April 2023, and a UTPR will follow on 1 April 2024 (at the earliest).
  • The IIR and the UTPR will only apply to MNEs whose consolidated annual revenues are greater than €750m. The government says that a lower threshold could damage the UK’s attractiveness as a parent location for limited gains.
  • The UK will only apply the IIR to UPEs of an MNE Group or intermediate parent entities of foreign headquartered groups when more than 20% is owned by investors in a jurisdiction that has not introduced Pillar Two.
  • Another pending issue is the interaction between the GloBE Rules and the US’s Global Intangible Low-Taxed Income (“GILTI”) Regime. Whereas the UE’s relevant rules are incompatible with the GILTI Regime, the UK appears to have adopted the OECD’s position to engage with “international partners to reach solutions (…) as soon as possible”.
  • The Research and Development Expenditure Credit Regime will be a Qualified Refundable Tax Credit. It will be treated as an addition to an MNE Group’s GloBE Income rather than a reduction in tax in the Effective Tax Rate calculation. HMRC says that this will “ensure RDEC continues to be an effective instrument for promoting R&D activity in the UK”.
  • Finally, the UK is exploring the idea of introducing a Domestic Minimum Tax (“DMT”) to protect domestic taxing rights. The DMT would be closely based on the GloBE Rules, but instead of allowing a foreign country to charge top-up taxes in relation to low-taxed profits of an MNE Group’s entities in the UK, the UK would instead impose that top-up tax.
  • One advantage would be to reduce compliance costs of UK headquartered groups by preventing them from being subject to the UTPR in multiple countries for their UK operations.
  • The DMT would be implemented on 1 April 2024 or later. In this regard, we should note that the UK corporation tax will increase to 25% from 1 April 2023.


137 now with the inclusion of Mauritania on 4 November 2021.
The GloBE Rules also define what is understood by Net GloBE Income.

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