Summary of the new global minimum tax (Pillar 2)

Key Mechanisms

The aim of the Pillar Two proposals is to ensure that MNEs pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in. It seeks to achieve this, broadly by the operation of two mechanisms:

• the Global Anti-Base Erosion (GloBE) rules; and
• a separate Subject to Tax Rule (STTR).

The operation of the rules at a high level is relatively straightforward:

GloBE – This computes the effective tax rate (ETR) of an MNE in the countries it operates in based on the tax base and taxes suffered on a jurisdictional basis. This ETR is then compared to an agreed global minimum ETR which will be set at a minimum of 15%.

If an MNEs jurisdictional ETR is below the global minimum ETR, the MNE will be liable for an additional amount of tax in its parent company’s residence jurisdiction to bring the total amount of tax on the excess profits up to the global minimum ETR (referred to as “top up tax”).

The top up tax is collected by applying an “Income Inclusion Rule” (IIR) or where no IIR applies by the application of an “Under Taxed Payments Rule” (UTPR). Both the IIR and the UTPR use a common tax base and a common definition of taxes.

STTR - This is separate from the above GloBE rules and is not based on the ETR calculation but adopts a payments-based approach. It is a treaty based rule that applies to certain related party payments that take advantage of low nominal rates of taxation in the jurisdiction of the payee and allows the source jurisdiction to impose additional taxation on the difference between the tax paid on these payments and an agreed minimum rate of between 7.5% to 9%.

The STTR has priority over the GloBE rules.