How top-up tax is collected

Why multiple collection mechanisms?

The GloBE rules are designed to be comprehensive: if a jurisdiction's ETR falls below 15%, top-up tax should be collected regardless of which countries have adopted the rules, where the parent entity is located, or how the group is structured. To achieve this, the framework provides three distinct collection mechanisms, each with its own scope and priority.

This layered design ensures that the system works even if adoption is uneven. A jurisdiction that has not adopted the rules cannot block the collection of top-up tax; other mechanisms step in to fill the gap. The result is a framework that is resilient to partial adoption while rewarding countries that implement the rules domestically.

The order of priority

The three mechanisms are applied in a strict order of priority:

1. QDMTT (Qualified Domestic Minimum Top-up Tax): the local jurisdiction collects first
2. IIR (Income Inclusion Rule): the parent jurisdiction collects on any remainder
3. UTPR (Undertaxed Profits Rule): a backstop that allocates any residual to other jurisdictions

Each mechanism only applies to the extent that the top-up tax has not already been collected by a higher-priority mechanism. This prevents double taxation: the same top-up tax amount is never collected twice.

Mechanism 1: Qualified Domestic Minimum Top-up Tax (QDMTT)

How it works

A QDMTT is a domestic law enacted by the jurisdiction where the low-taxed income arises. It allows that jurisdiction to impose and collect the top-up tax itself, before the IIR or UTPR have a chance to apply. The logic is straightforward: if a jurisdiction knows that its constituent entities are going to face a top-up tax charge anyway, it can collect that tax domestically and retain the revenue.

Qualification requirements

Not every domestic minimum tax qualifies as a QDMTT. To be "qualified," the tax must meet specific criteria designed to ensure consistency with the GloBE rules:

• The computation must determine the excess profit of constituent entities in the jurisdiction using an acceptable financial accounting standard and in a manner consistent with the GloBE rules.
• The top-up tax percentage must be calculated as the difference between 15% and the jurisdiction's ETR, computed consistently with GloBE principles.
• The QDMTT must not provide any benefits that are not available under the GloBE rules (for example, additional deductions or exclusions that would reduce the top-up tax below the GloBE amount).
• The jurisdiction must have a process for peer review or certification by the Inclusive Framework.

QDMTT safe harbour

Where a jurisdiction has a qualified QDMTT, the GloBE rules allow a QDMTT safe harbour. Under this safe harbour, the top-up tax computed under the QDMTT is accepted as the definitive amount for that jurisdiction, and the group does not need to run a separate parallel GloBE computation. This reduces duplication and compliance cost.

The QDMTT safe harbour is available on a permanent basis (unlike the transitional CbCR safe harbour, which expires). It requires the QDMTT to meet additional quality criteria, including use of the UPE's accounting standard or a locally authorised accounting standard with limited adjustments.

Strategic implications

Many low-tax jurisdictions have introduced or are introducing QDMTTs as a direct response to Pillar 2. By collecting the top-up tax domestically, these jurisdictions retain revenue that would otherwise flow to the parent's jurisdiction under the IIR. From the MNE group's perspective, the total tax burden may be the same, but the identity of the collecting jurisdiction changes, which can have implications for foreign tax credit planning and overall effective rates.

Mechanism 2: Income Inclusion Rule (IIR)

How it works

The IIR requires a parent entity to include in its own tax computation its proportionate share of the top-up tax for any low-taxed constituent entity it owns (directly or indirectly). The IIR operates top-down: it applies first at the UPE level, then cascades down to intermediate parent entities as needed.

The top-down approach

The IIR applies in the following order:

1. UPE first: If the UPE is in a jurisdiction that has enacted the IIR, the UPE picks up its share of the top-up tax for all low-taxed constituent entities (after crediting any QDMTT amounts).
2. Intermediate parent entities (IPEs): If the UPE is not in an IIR jurisdiction (or if it is but an intermediate entity is a Partially-Owned Parent Entity), the IIR may apply at the IPE level. The IPE picks up the top-up tax for the low-taxed entities it owns.
3. Split ownership: Where the IIR applies at multiple levels in the chain (for example, a POPE and the UPE both apply the IIR), the rules include an offset mechanism to prevent double taxation. The UPE reduces its IIR charge by the amount already collected at the IPE level.

Ownership share

The IIR applies based on the parent entity's ownership interest in the low-taxed constituent entity. If the UPE owns 80% of an entity, it picks up 80% of that entity's top-up tax. The remaining 20% is not collected under the IIR (it may fall to the UTPR if another entity in the group holds the remaining interest and is in a UTPR jurisdiction, or it may go uncollected if no other mechanism applies).

Key features

• The IIR is designed to be the primary collection mechanism in the GloBE framework.
• It applies only to the extent the top-up tax has not been collected by a QDMTT.
• It requires the parent jurisdiction to have enacted IIR legislation.
• The parent includes the top-up tax as an addition to its own tax liability; it is not a separate assessment but is incorporated into the parent's domestic tax return.

Mechanism 3: Undertaxed Profits Rule (UTPR)

How it works

The UTPR is the backstop mechanism. It applies where the top-up tax has not been fully collected through either a QDMTT or the IIR. This situation arises when:

• The UPE is in a jurisdiction that has not adopted the IIR (e.g., the United States as of early 2026), and there is no intermediate parent entity in an IIR jurisdiction.
• The IIR does not cover the full top-up tax because of minority ownership; the IIR only applies to the parent's share, and the remaining portion may fall to the UTPR.

Allocation formula

Unlike the IIR (which follows the ownership chain), the UTPR allocates the residual top-up tax across UTPR jurisdictions based on a formula. The allocation is weighted 50/50 between:

• Number of employees: The number of employees of constituent entities in the UTPR jurisdiction, as a proportion of total employees in all UTPR jurisdictions.
• Net book value of tangible assets: The net book value of tangible assets held by constituent entities in the UTPR jurisdiction, as a proportion of total tangible assets in all UTPR jurisdictions.

This formula is designed to allocate the top-up tax to jurisdictions where the group has genuine economic substance, preventing it from being concentrated in a single jurisdiction.

How the UTPR is implemented domestically

The UTPR operates differently from the IIR. Rather than adding a tax to the parent's liability, the UTPR is typically implemented by:

• Denying a deduction that would otherwise be available to the constituent entity in the UTPR jurisdiction, or
• Imposing an equivalent charge that increases the entity's tax liability by the allocated UTPR amount.

The specific mechanism varies by jurisdiction, but the effect is the same: the constituent entity in the UTPR jurisdiction bears an additional tax charge equal to its allocated share of the UTPR top-up tax.

How the mechanisms interact: worked example

Consider an MNE group with the following structure:

• UPE in Country A (has enacted IIR, has not enacted UTPR)
• Subsidiary 1 in Country B (low-taxed, ETR of 8%, has enacted a QDMTT)
• Subsidiary 2 in Country C (low-taxed, ETR of 10%, has not enacted a QDMTT)
• Subsidiary 3 in Country D (normal-taxed, ETR of 22%, has enacted UTPR)

Assume the following top-up tax amounts (after SBIE):

• Country B top-up tax: EUR 2 million
• Country C top-up tax: EUR 3 million

Collection flows:

Now suppose the UPE were in a country that had not adopted the IIR. The EUR 3 million from Country C would not be collected under the IIR. Instead, it would be allocated to UTPR jurisdictions (including Country D) based on the employee/tangible asset formula.

Common complexities

In practice, several factors can complicate the application of the collection mechanisms:

• Partial ownership: Where the UPE does not own 100% of a low-taxed entity, the IIR only covers the UPE's share. The remainder may fall to the UTPR or go uncollected.
• Multiple IIR levels: In groups with POPEs, the IIR may apply at multiple levels simultaneously. The offset rules prevent double counting but add complexity to the computation.
• Evolving QDMTT landscape: As more jurisdictions enact QDMTTs, the flow of top-up tax changes year to year. Groups need to monitor legislative developments continuously.
• Currency effects: The top-up tax is computed in the reporting currency of the consolidated accounts, but collection occurs in local currencies. Exchange rate differences between the computation date and the payment date can create mismatches.
• Tax treaty implications: The interaction between top-up tax charges and bilateral tax treaties is still evolving. Questions about whether QDMTT or UTPR charges qualify for treaty benefits or foreign tax credits are being resolved jurisdiction by jurisdiction.