GloBE Rules explained

The big picture

The GloBE rules are a set of interlocking mechanisms designed to ensure that large multinational groups pay an effective tax rate of at least 15% on their income in every jurisdiction where they operate. If the effective rate in a jurisdiction falls below 15%, a top-up tax is imposed to close the gap.

While the underlying concept is simple, the mechanics are detailed. This chapter provides a high-level map of the entire GloBE computation (the five-step workflow that every in-scope group must follow) and introduces the three mechanisms through which top-up tax is collected. Each step is covered in much greater detail in the subsequent chapters of this guide.

The five-step GloBE workflow

The GloBE computation can be broken down into five sequential steps. Each step builds on the output of the previous one.

Step 1: Identify in-scope entities and group them by jurisdiction

The first step is determining the population of constituent entities that are subject to the GloBE rules and organising them by the jurisdiction in which they are located. This involves:

• Confirming that the MNE group meets the EUR 750 million revenue threshold
• Listing all constituent entities (including permanent establishments)
• Removing excluded entities (governmental entities, non-profits, pension funds, etc.)
• Separating JVs and minority-owned constituent entities for independent calculation
• Grouping the remaining entities by jurisdiction, since the ETR is computed at the jurisdictional level, not per entity

This scoping exercise was covered in detail in the previous chapter. The output is a jurisdictional map of all constituent entities.

Step 2: Calculate the jurisdictional effective tax rate (ETR)

For each jurisdiction, the ETR is calculated as:

ETR = Adjusted Covered Taxes / Net GloBE Income

This requires two computations for each jurisdiction:

• Net GloBE Income: Start with the financial accounting net income or loss for each constituent entity in the jurisdiction, as reported in the consolidated financial statements. Then apply a series of prescribed adjustments: removing excluded dividends and equity gains, adjusting for stock-based compensation, reversing policy disallowed expenses, and handling other specific items. Sum the adjusted income of all entities in the jurisdiction to arrive at Net GloBE Income. (Covered in detail in Chapter 5.)
• Adjusted Covered Taxes: Start with the current tax expense recognised in the financial statements. Then apply adjustments for uncertain tax positions, deferred tax items (subject to recasting at the 15% rate), and other specified items. Sum for all entities in the jurisdiction to arrive at Adjusted Covered Taxes. (Covered in detail in Chapter 6.)

The ratio of these two figures gives the jurisdictional ETR. If the ETR is 15% or above, no top-up tax arises in that jurisdiction. If it is below 15%, the process continues to Step 3.

Step 3: Calculate the top-up tax

Where the jurisdictional ETR is below 15%, the top-up tax percentage is:

Top-up Tax Percentage = 15% - Jurisdictional ETR

The top-up tax is then applied to the jurisdiction's "excess profit," which is the Net GloBE Income minus the Substance-Based Income Exclusion (SBIE). The SBIE removes a return on tangible assets and payroll from the tax base, reflecting the principle that a portion of income attributable to real economic substance should be exempt from the top-up tax charge.

Top-up Tax = Top-up Tax Percentage x (Net GloBE Income - SBIE)

There is also a de minimis exclusion: if a jurisdiction's average revenue is less than EUR 10 million and its average GloBE income is less than EUR 1 million (measured over the current year and two preceding years), no top-up tax arises even if the ETR is below 15%. This exclusion is designed to relieve the compliance burden for jurisdictions with trivial operations.

(The top-up tax and SBIE computation is covered in detail in Chapter 8.)

Step 4: Allocate the top-up tax to the appropriate entity

Once the jurisdictional top-up tax has been calculated, it must be allocated to specific entities for collection. The allocation depends on which collection mechanism applies:

• Under a QDMTT, the top-up tax is collected directly by the low-taxed jurisdiction itself.
• Under the IIR, the top-up tax is allocated to the parent entity (starting with the UPE and working down through intermediate parent entities) in proportion to its ownership share of the low-taxed entity.
• Under the UTPR, the top-up tax is allocated to constituent entities in other jurisdictions based on a formula that considers the number of employees and the net book value of tangible assets in each jurisdiction.

(The collection mechanisms are explained in detail later in this chapter and in Chapter 9.)

Step 5: File the GloBE Information Return (GIR)

The final step is the disclosure obligation. The MNE group must file a standardised GloBE Information Return that sets out the group structure, the ETR computations for each jurisdiction, the top-up tax calculations, and the allocation of top-up tax. The GIR is typically filed in the UPE's jurisdiction (or by a designated filing entity in another jurisdiction) and is then exchanged with other relevant tax authorities.

(The GIR is covered in detail in Chapter 11.)

The three collection mechanisms

A critical feature of the GloBE framework is that top-up tax can be collected by different jurisdictions, depending on which mechanism applies. There is a defined order of priority:

1. Qualified Domestic Minimum Top-up Tax (QDMTT)

A QDMTT allows a jurisdiction to impose a domestic top-up tax on constituent entities located within its borders, calculated under the GloBE rules (or rules that produce equivalent outcomes). When a jurisdiction applies a qualifying QDMTT, the top-up tax is collected locally and is then credited against any IIR or UTPR liability, effectively reducing it to zero for that jurisdiction.

The QDMTT has first priority in the charging order. Many countries, including those with low headline tax rates, are implementing QDMTTs precisely because they allow the jurisdiction to retain the top-up tax revenue, rather than seeing it flow to a parent entity's jurisdiction under the IIR.

Key features of a QDMTT:

• It must be designed to produce outcomes consistent with the GloBE rules.
• It must be implemented through domestic legislation.
• The OECD has published guidance on what constitutes a "qualified" DMT; not all domestic minimum taxes will qualify.
• A QDMTT safe harbour allows groups to use the QDMTT computation itself as the basis for the GloBE ETR in that jurisdiction, avoiding the need to run two parallel calculations.

2. Income Inclusion Rule (IIR)

The IIR is the primary rule of the GloBE framework. It operates top-down through the ownership chain. The parent entity that applies the IIR must include its proportionate share of the top-up tax for any low-taxed constituent entity in its own tax liability.

The IIR is applied in the following order:

1. UPE level: If the UPE is in a jurisdiction that has implemented the IIR, the UPE applies it to all low-taxed entities it owns (directly or indirectly).
2. IPE level: If the UPE is not in an IIR jurisdiction, or if there is a Partially-Owned Parent Entity (POPE) in the chain, the IIR may be applied at the level of an intermediate parent entity that is in an IIR jurisdiction.

The IIR only applies to the extent the top-up tax has not already been collected under a QDMTT. It applies to the parent's share of the top-up tax based on its ownership interest in the low-taxed entity.

3. Undertaxed Profits Rule (UTPR)

The UTPR is the backstop. It applies where the top-up tax has not been fully collected under a QDMTT or the IIR, for example because the UPE is in a jurisdiction that has not adopted the GloBE rules and there is no intermediate parent entity in an IIR jurisdiction.

Under the UTPR, the residual top-up tax is allocated to constituent entities in jurisdictions that have adopted the UTPR, based on a formula that considers:

• The number of employees in the jurisdiction (weighted 50%)
• The net book value of tangible assets in the jurisdiction (weighted 50%)

The UTPR operates by either denying a deduction or imposing an equivalent charge in the UTPR jurisdiction. It is designed to ensure that, even if the parent jurisdiction does not participate, the top-up tax is still collected somewhere.

How the mechanisms interact

In practice, multiple mechanisms can apply simultaneously across different jurisdictions within the same MNE group. Consider a simplified example:

• A group has its UPE in Country A (which has adopted the IIR).
• It has a subsidiary in Country B (which has a low ETR and has enacted a QDMTT).
• It has another subsidiary in Country C (which has a low ETR and has not enacted a QDMTT).

In this scenario:

• Country B collects the top-up tax on its own low-taxed income through its QDMTT. The IIR in Country A gives credit for this, so no further tax is charged by Country A on Country B's income.
• Country C has no QDMTT, so the IIR in Country A applies. The UPE in Country A includes its share of Country C's top-up tax in its own tax liability.

If Country A had not adopted the IIR, the UTPR would become relevant for Country C's top-up tax, allocated to group entities in jurisdictions that have adopted the UTPR.

Safe harbours: a simplification for the transition period

Recognising the substantial compliance burden that full GloBE computations impose, the OECD introduced transitional safe harbour rules. These allow groups to use data from existing Country-by-Country Reports (CbCR) to demonstrate that a jurisdiction is likely compliant, thereby avoiding the need for a full GloBE computation in that jurisdiction during the transition period.

The safe harbour tests are the subject of the next chapter. They represent one of the most important practical simplifications available to groups in the early years of Pillar 2 compliance.

Summary of the GloBE workflow

Each of the following chapters unpacks one or more of these steps in detail, starting with the transitional safe harbours that can significantly reduce the scope of the full computation.