Tax & AccountingFebruary 02, 2022

Global minimum tax? A rundown of the Pillar Two model rules

On 20 December 2021, the OECD released the Pillar Two Model Rules for reforms to the international tax system, which will introduce a global minimum corporate tax rate of 15% for certain multinational enterprises.

This article gives an overview of the background, scope and operation of the model rules.


In October 2021, the majority of the OECD/G20 Inclusive Framework on BEPS countries and jurisdictions agreed to reform international tax rules under a Two-Pillar Solution to address digitalisation of the economy.1 The Two-Pillar Solution aims to address gaps in current rules that allow large corporations to earn significant revenue in foreign markets without paying income tax there. The new international rules are envisaged to come into effect by 2023.

Pillar One

Pillar One will reallocate some taxing rights for large multinational enterprises from their home countries to the market jurisdictions where their users and customers are located. The rules will apply to multinational enterprises with global sales above €20 billion and profitability above 10% to reallocate 25% of profits over 10% of revenue. Around 100 of the largest and most profitable companies are expected to be affected, with provisions to expand the scope of reallocation after 7 years.

Other key elements of Pillar One include the removal of digital services taxes, the introduction of mandatory and binding dispute resolution and a streamlined approach to the arm’s length principle to certain marketing and distribution activities.

Pillar One will be implemented through a multilateral convention to be finalised by February 2022, with a view for implementation from 2023. Model rules for domestic legislation will be developed by early 2022 for the reallocation of taxing rights and late 2022 for the streamlined application of the arm’s length principle.

Pillar Two

Pillar Two will introduce a global minimum corporate tax rate of 15% for companies with revenue above €750 million. The Pillar Two model rules2 set out the scope and mechanism for the Global Anti-Base Erosion (GloBE) rules, which will create a top-up tax for certain profits in jurisdictions below the minimum tax rate.

In addition, a treaty-based subject to tax rule (STTR) will protect the right of developing countries to tax certain base-eroding payments, such as interest and royalties, where they are not taxed up to a minimum rate. A multilateral instrument to facilitate the implementation of the STTR in bilateral treaties will be released by mid-2022.

Pillar Two model rules

The Pillar Two model rules set out the GloBE rules designed to ensure large multinational enterprises are subject to a minimum level of tax on income arising in each jurisdiction where they operate. The GloBE rules consist of 2 interlocking domestic rules, broadly — an Income Inclusion Rule, which imposes top-up tax on certain low-taxed income and an Undertaxed Payment Rule, which denies deductions or requires equivalent adjustments where low-taxed income is not taxed under an Income Inclusion Rule.

The GloBE rules will have the status of a “common approach”, ie while members of the Inclusive Framework are not required to adopt the GloBE rules, they must accept application of the GloBE rules by other Inclusive Framework members. Jurisdictions that choose to adopt the rules must administer them in a way that is consistent with the outcomes provided for under Pillar Two.

Who it covers

The GloBE rules apply (subject to exclusions) to constituent entities that are members of a multinational enterprise (MNE) group with annual revenue of €750 million or more in at least 2 of the 4 years immediately preceding the test year.3

An MNE group refers to a group that is generally consolidated for financial accounting purposes that includes at least one entity or a permanent establishment that is not located in the jurisdiction of the ultimate parent entity. An entity can be an MNE group if it has one or more permanent establishments in other jurisdictions and is not part of another MNE group.

A constituent entity refers to any entity within an MNE group or a permanent establishment of an entity within an MNE group. Permanent establishments are treated as separate entities for the purposes of the GloBE rules, such that a company with 2 permanent establishments would be treated as 3 separate constituent entities.

Since countries are free to apply an Income Inclusion Rule to MNEs headquartered in their country even if they do not meet the €750 million revenue threshold,4 a lower threshold could be implemented domestically in Australia. Notably the country-by-country reporting obligations in Subdiv 815-E of ITAA 1997 for significant global entities apply to entities with global annual income of A$1 billion or more (approximately €627 million).

Excluded entities and carve outs

Government entities, international organisations, non-profit organisations and pension funds are excluded from the GloBE rules. Ultimate parent entities of an MNE group that are an investment fund or a real estate investment vehicle are also excluded. Some holding vehicles used by these excluded entities will also be excluded from the GloBE rules.

A de minimis exclusion will apply where the amount of revenue and income for a jurisdiction is relatively small.

International shipping income will also be excluded from the calculation of the effective tax rate in a jurisdiction.6 A substance-based income exclusion, calculated as a percentage mark-up on tangible assets and payroll costs, will also reduce exposure to the minimum tax.7

MNE groups in the initial phase of an international activity will be exempt from the Undertaxed Payment Rule. Broadly, the exemption will apply to groups with constituent entities in no more than 6 jurisdictions that have tangible assets under €50 million for up to 5 years.

Applying the GloBE rules

Once an MNE group has determined that it is within the scope of the GloBE rules, the following steps apply in determining their top-up tax liability:

1. Determining the location of each constituent entity within the group.

An entity will generally be located in the jurisdiction of its tax residence or, if it is located in 2 jurisdictions that have an applicable tax treaty in force, its deemed residence under that tax treaty. The location of a permanent establishment is the source jurisdiction where it is treated as a permanent establishment and subject to tax.

Where a dual-located entity is not deemed a resident of one jurisdiction under a tax treaty, the model rules include tie-breaker provisions based on taxes paid or the substance-based income exclusion applicable in each jurisdiction. The model rules also set out circumstances in which an entity or permanent establishment, such as certain tax transparent entities, is considered “stateless”.9

In this context, the Australian government announced in its 2020 Federal Budget that companies incorporated offshore would be treated as Australian tax resident where there is a “significant economic connection to Australia”. The measure follows the Board of Taxation’s recommendation in its 2020 report on corporate tax residency.10 The Board noted that uncertainty associated with the current “central management and control test” meant that a finding of dual residence for foreign incorporated companies was more likely to arise. The measure is proposed to have effect from the first income year after assent, with optional application from 15 March 2017. At the time of writing, enabling legislation has not yet been introduced.

2. Determining the GloBE income of each constituent entity.

In this step, a constituent entity’s financial accounting net income or loss, before eliminating intra-group items, is adjusted to determine the entity’s GloBE income or loss. Adjustments to eliminate common book and tax differences under the model rules include excluded dividends and equity gain or loss, disallowed deductions for illegal payments, share-based compensation and asymmetric foreign currency gains and losses.

3. Determining taxes attributable to income of a constituent entity.

An entity’s current tax expense accrued is adjusted to reflect certain timing differences between financial and tax accounting. Non-income based taxes such as indirect, payroll and property taxes are excluded. Certain taxes are reallocated, such as those in relation to a controlled foreign company (CFC) regime or withholding taxes.

4. Calculating the effective tax rate and top-up tax rate of all constituent entities located in the same jurisdiction.

The amount of taxes calculated in Step 3 are divided by the GloBE income calculated in Step 2 to determine the effective tax rate for each jurisdiction. Each entity considered stateless is treated as a single constituent entity located in a separate jurisdiction.11

Where the effective tax rate is below the minimum 15% rate, the top-up tax percentage for the jurisdiction will be the difference between the effective tax rate and the minimum rate. The top-up tax percentage is applied to the GloBE income for the jurisdiction after accounting for the substance-based income exclusion. This amount of top-up tax is then reduced by any qualifying domestic minimum tax.

A de minimis exclusion will apply to deem top-up tax as nil where average revenue and profit for a jurisdiction for the current and 2 preceding years is less than €10 million and €1 million respectively.12

5. Determining top-up tax.

Under the Income Inclusion Rule, top-up tax is paid at the parent entity level based on its proportion of ownership interests in entities with low-taxed income. Where the minimum tax paid is not fully brought to charge after the Income Inclusion Rule, an adjustment is made under the Undertaxed Payments Rule to require an adjustment increasing the level of tax at the constituent entity level.

MNE groups will be required to file a standardised information return in each jurisdiction that has introduced the GloBE rules. The information return, to be developed in accordance with the GloBE Implementation Framework, will be used to provide tax authorities with the data necessary to the application of the GloBE rules. This may result in increased data collection requirements because the GloBE rules require consideration of historical and non-tax information on a jurisdictional basis.

Next steps

The OECD intends to release commentary to the GloBE rules in early 2022 to provide guidance on the interpretation of the global minimum tax rules. Development of the implementation framework regarding administrative, compliance and coordination issues is expected to be finalised by the end of 2022, with a public consultation event to be held in February 2022.13

In this regard, Treasury is working closely with the ATO, and has highlighted the importance for the OECD to consult tax administrations and businesses to facilitate easy implementation.14 Members of the ATO National Tax Liaison Group have previously expressed that compliance costs for Pillar Two would likely be significant.15

In media releases issued in October 2021, the Treasurer has welcomed progress through Two-Pillar Solution and acknowledged the OECD’s implementation timeline for a 2023 start date. Given a federal election is due in Australia by 21 May 2022, the timeframe in which the GloBE rules may be legislated domestically remains unclear.

Last reviewed on 11 February 2022

  1. OECD, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, 8 October 2021
  2. OECD, Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), 20 December 2021
  3. Pillar Two Model Rules, Art 1.1
  4. Statement on Two Pillar Solution, p 4
  5. Pillar Two Model Rules, Art 5.5
  6. Pillar Two Model Rules, Art 3.3
  7. Pillar Two Model Rules, Art 2.6
  8. Pillar Two Model Rules, Art 9.3
  9. Pillar Two Model Rules, Art 10.3
  10. Board of Taxation, Corporate Tax Residency Review — Final Report, 6 October 2020
  11. Pillar Two Model Rules, Art 5.1.1
  12. Pillar Two Model Rules, Art 5.5
  13. OECD, OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax, [media release], 20 December 2021
  14. ATO, Large Business Stewardship Group key messages, 14 October 2021
  15. ATO, National Tax Liaison Group key messages, 7 June 2021
Renee Leung
Content Management Analyst, Wolters Kluwer
Renee is a writer and content specialist for CCH iKnowConnect’s tax and superannuation practice areas. She also contributes to Australian Tax Week and the Australian Master Tax Guide.
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