On 20 December, the OECD published model legislation for a new global minimum tax regime: the Global Anti-Base Erosion ("GloBE") rules. This publication (referred to as the "Model Rules") is the OECD's first attempt to transcribe the ideas articulated through the Pillar Two Blueprint (published October 2020) and subsequent July and October 2021 statements into black letter law. The regime aims to ensure that profits of large multinational groups earned in every jurisdiction where the groups have operations bear an effective tax rate of at least 15%.

The Model Rules have been developed with the agreement of 137 jurisdictions through the Inclusive Framework on BEPS (“Inclusive Framework”). They are designed to be a template that jurisdictions can translate into local law. Inclusive Framework members are not obliged to implement this new regime, but where they choose to do so, they have agreed that they must adhere to the Model Rules (referred to as a "common approach"). Therefore, whilst the Model Rules do not have immediate legal force, they may come to bind many jurisdictions and will therefore have important implications for taxpayers around the world.

The Model Rules are only one piece of the picture; the OECD are working with the Inclusive Framework to publish an accompanying commentary, which is expected to be released in "early 2022". That commentary will be instructive to local legislatures as it is expected to explain the rationale behind the components of the Model Rules, and will therefore likely inform drafting decisions when transposing them into domestic law. The Inclusive Framework will also develop an “Implementation Framework” for the GloBE rules during 2022 that is expected to include further guidance on the rules’ application.

Pillar Two is also more than just a global minimum tax regime. A treaty mechanism designed to protect developing jurisdictions (referred to as the "Subject to Tax Rule") will be implemented. This will be published in 2022 with a public consultation scheduled for March.

What do you need to know


The Model Rules are an attempt by the Inclusive Framework to ensure that large multinational companies pay an effective tax rate of 15% in each jurisdiction in which they operate. The Model Rules are broadly consistent with the overall architecture envisaged by the Pillar Two Blueprint: a single global tax base calculated on a jurisdiction by jurisdiction basis, with taxation below 15% dealt with through the Income Inclusion Rule (IIR) in the first instance, supported by the Undertaxed Payments Rule (UTPR) as a backstop if necessary. However, buried within the technical language of the Model Rules are quite fundamental changes on how certain aspects of the regime will operate in practice — which the OECD is revealing for the first time, just over a year from when it hopes for the rules to take effect in domestic law.


The scope of the regime is largely unchanged from the Pillar Two Blueprint, applying to all multinational groups with global revenues greater than EUR 750m (which the OECD believes will cover 90% of the global corporate income tax base). This will now need to be met in respect of at least two of the preceding four fiscal years. Potential for confusion arises in the fact that the related definitions of Multinational Group diverge slightly from those used for Country-by-Country Reporting purposes, on which they are based. Carve-outs exist for a number of "Excluded Entities" including governmental entities (covering also sovereign wealth funds), pension funds and investment funds. The new term "Investment Fund that is an Ultimate Parent Entity" recognizes that the accounting treatment will often be such that investment holding vehicles would not be recognized as the ultimate parent entities of consolidated multinational groups in any case. Many in the investment community will be pleased that the OECD has heeded calls to treat Real Estate Investment Vehicles as a specific Excluded Entity, and that the requirement for Excluded Entities "not [to] carry on a trade or business" has been dropped, thus not precluding special purpose vehicles that are part of the essential investment infrastructure for many funds.

GloBE Income

The calculation of the global tax base (referred to as "GloBE Income") is broadly consistent with the Pillar Two Blueprint. There are a number of additional adjustments required to accounting profits to ensure the tax base coheres with the policy intentions of the regime, with a number of anti-avoidance type provisions added to the calculation. Banking groups will be pleased to see that specific adjustment is provided to ensure that the deductibility of AT1 (Additional Tier One Capital) instruments is not undermined by the regime.

Covered Tax

The calculation of local tax burden (referred to as "Covered Tax") features more radical changes. The starting point of the calculation is essentially the total tax charge for accounting purposes. However, uncertain tax positions are not taken into account (whether current or deferred tax), so presumably only amounts that are reported within a taxpayer's local tax return are treated as Covered Tax. Likewise, current tax amounts provided for but not expected to be paid within three years are a reduction to Covered Taxes though it is somewhat unclear if and how these taxes are taken into account when paid (deferred taxes have a five year grace period, though there is a relatively broad list of timing differences not subject to this limitation).

Timing differences

The admission of deferred taxes is an evolution in the OECD's approach to dealing with timing differences. The Pillar Two Blueprint proposed bespoke mechanisms to smooth out cash tax liabilities over a time limited window. This received criticism from many large businesses who viewed it as unnecessarily complicating an issue that deferred tax had already been designed to deal with. Whilst the OECD have now agreed to adopt a deferred tax approach, their reservations continue. Deferred tax assets and liabilities are required to be written down to the 15% minimum rate. Therefore, taxpayers are only permitted to recognize part of the tax cost of a deferred tax liability up front, with the difference between the minimum rate and the local statutory rate recognized on realization of the liability. This could potentially lead to quite significant volatility in effective tax rates - something that deferred tax is supposed to prevent.

Substance carve-out

The calculation of Covered Taxes and GloBE Income for a jurisdiction allows its effective tax rate to be established. If this figure is below 15%, the last step before additional tax liabilities crystallize is the application of the substance carve-out. The calculation of the carve-out takes a relatively expansive approach to the cost of employees: the total costs of employee compensation packages appear to be included alongside associated costs for the employer, such as social security, employment and payroll taxes, etc.

The mechanics of the carve-out has been an area of policy debate; the Model Rules confirm that an 'excess profits' approach applies. That is, the carve-out does not alter the effective tax rate of the jurisdiction, which remains locked as the percentage difference below 15%, but it reduces the amount of profit to which that percentage is applied. As an example:

  • Covered Tax = 10
  • GloBE Income = 100
  • Substance carve-out = 20
  • ETR = 10% (10 / 100)
  • Top-up tax of 5% is applied to 80 (being the GloBE Income - the Substance carve-out)

Joint Ventures

The treatment of joint ventures under the rules was an unresolved issue at the time of the publication of the Pillar Two Blueprint. The Model Rules now have an answer: the same rules are applied, except the joint venture (and its subsidiaries to the extent it has any) are treated as a separate group, i.e., their jurisdictional ETRs are calculated in isolation.

Income Inclusion Rule

If there is top-up tax to be paid in respect of a jurisdiction, in the first instance, this is dealt with through the IIR. This generally assigns the tax liability to the highest entity within the chain of ownership that is resident in a jurisdiction that has implemented an IIR. Although, exceptions apply when a group has an 80% or less interest in an entity. Whilst the IIR has added layers of technical definitions and mechanical rules, to what had been a relatively intuitive provision (at least to those jurisdictions that have implemented CFC rules), on first blush these appear to simply operationalize the concepts that had been developed by the Pillar Two Blueprint with language that ensures they operate as intended in all circumstances.

Undertaxed Payments Rule

However, the same cannot be said for the UTPR (to the extent that its name is now arguably misleading). This rule supports the IIR, the most obvious scenario where it is needed is where the ultimate parent entity jurisdiction has an effective tax rate below 15%. Although, it will also be called upon if limited implementation of the Model Rules around the world provides less than comprehensive application of the IIR.

As originally proposed under the Pillar Two Blueprint, the UTPR applied in the first instance to payments made directly to group members in low-taxed jurisdictions (hence the name). The counteraction imposed was limited to the value of those payments at the local statutory rate of the payor jurisdiction. It was conceivable that the amount of top-up tax required would exceed the value of the deductions for those payments and so a second allocation key would divide the remaining under-taxed profits between group entities in a net intra-group deduction position, again subject to the limitation that top-up tax allocated could not exceed the value of the intragroup deduction being counteracted. The Blueprint added a further protection for ultimate parent entity jurisdictions which restricted the amount of top-up tax they could be subject to by reference to the amount of intra-group income the relevant parent receives.

The revised UTPR takes an almost formulary apportionment approach to dividing undertaxed profits amongst group entities. Undertaxed profits are divided using an allocation key based on a jurisdiction's share of employees and tangible assets, weighted on a 50:50 basis. With the allocation key no longer dependent on intra-group payments, the counteraction mechanism appears to envisage that all deductions, including for expenses paid to third parties, might be potentially subject to denial. The only limitation imposed under the UTPR is that a UTPR jurisdiction which received a top-up tax allocation in a prior year must have imposed a cash tax liability on a group under the UTPR regime before it can receive an allocation of top-up tax in future periods (although this is ignored when all jurisdictions are working through a top-up tax back log). The protections originally suggested for ultimate parent entity jurisdictions (i.e., limiting the top-up tax in respect of those jurisdictions by limiting the base to the UPE’s foreign intragroup revenue) seem to have been removed.

What happens next?

Commentary to accompany the rules has been promised for "early 2022". It is now incumbent on willing jurisdictions to begin the process of transposing these rules into their domestic law. The EU will be the first movers, with a draft directive having been issued on 22 December, largely mirroring the Model Rules, but with amendments necessary to ensure they are compatible with EU law (e.g., by extending the scope of the GloBE rules to domestic situations).

One very large question explicitly not addressed by the Model Rules is how they will co-exist with the US GILTI regime. Statements on the issue have generally been vague, though the comment made in the Model Rules arguably reads as less encouraging than the position articulated under the Pillar Two Blueprint. This is perhaps a reflection of the continuing challenges the current iteration of US tax reform faces in Congress, which in part intends to amend the GILTI regime in a way that converges with the Model Rules to a greater degree.

A consultation is also planned for February 2022 on an Implementation Framework, which the OECD hopes to finalize by the end of 2022. The Implementation Framework (which may take the form of a multilateral instrument) will cover the final design of any safe harbors, as well as administrative procedures (e.g., detailed filing obligations, multilateral review processes) to facilitate both compliance by multinational groups and administration by tax authorities. It is difficult to see how national legislatures could complete enactment of the GloBE rules before the final design of the Implementation Framework is agreed.

We therefore expect further significant developments in the coming months, but taxpayers now have a lot of detail to work with already based on this document and, for those active in the EU, the draft EU “Pillar 2” Directive. The New Year presents an opportunity to delve into that detail and ensure that groups understand the full extent to which the new global minimum tax may affect their operations in the years to come.

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