The introduction of a global minimum tax, built upon the Global Anti-Base Erosion (GloBE) Model Rules, aims to establish a standard of taxation for large multinational enterprises (MNEs). This initiative seeks to ensure that these companies contribute a minimum tax on their profits in every jurisdiction they operate in. By doing so, it reduces motivations for profit shifting and curtails unhealthy tax competition, effectively halting the downward spiral in corporate tax rates.
The GloBE framework is designed for collaborative implementation among jurisdictions, creating a cohesive and comprehensive system of minimum taxation. It mandates the application of a top-up tax on profits generated in regions where the effective tax rate falls below a predetermined threshold, thereby ensuring adherence to a minimum tax rate. Under the GloBE rules, applicable MNE groups must compute their income and tax obligations on a per-jurisdiction basis. If this leads to an effective tax rate (ETR) below the established 15% minimum, these enterprises are required to pay a top-up tax. This tax is intended to elevate the tax amount on their excess profits “specifically, the income derived from global operations minus any legitimate income exclusions” to meet the minimum rate.
The GloBE rules promote a unified approach. Members of the Inclusive Framework have concurred that while it is not mandatory for all jurisdictions to adopt these rules, any jurisdiction that opts to implement them must do so consistently with the stipulated outcomes, including the sequence of agreed-upon rules. This agreement facilitates mutual recognition, allowing jurisdictions to accept the GloBE regulations applied by others concerning their MNEs.
By ensuring parallel rules are adopted consistently across jurisdictions, the GloBE framework is expected to yield transparent and predictable outcomes that benefit both taxpayers and tax administrations. As countries progress with implementation, they will coordinate their domestic regulations according to the common approach and provide support through mutual assistance and evaluation of each other’s application of the GloBE rules. The GloBE Model Rules detail the global minimum tax framework and are supplemented by ongoing Commentary and Administrative Guidance.
These rules serve as a legislative template that can be incorporated into the domestic legislation of implementing countries, clearly delineating which MNE groups are subject to these regulations, as well as outlining the required methodology for calculating jurisdictional ETRs and any applicable top-up taxes. Designed to accommodate a wide array of MNEs and diverse tax systems, these rules address various tax consolidation, income allocation, and entity classification practices that may not be uniformly applicable across all jurisdictions. The fundamental provisions of the rules are supported by more nuanced regulations that pertain to specific structures, transactions, and tax regimes, their relevance varying according to the individual circumstances of implementing jurisdictions.
Since the Inclusive Framework’s approval and public release of the GloBE Model Rules, numerous jurisdictions have initiated steps towards incorporating these guidelines into their domestic tax laws. The implementation of the global minimum tax is set to commence in early 2024, starting with the Income Inclusion Rule (IIR). Many jurisdictions also plan to adopt the Qualified Domestic Minimum Top-up Tax (QDMTT), while the Undertaxed Payment Rule (UTPR) is anticipated to be effective no earlier than 2025.
Computation of the ETR and Calculation of the Top-up Tax To assess the jurisdictional effective tax rate (ETR), the Globe Income or Loss alongside Covered Taxes of each Constituent Entity within the same area must be aggregated. The required top-up tax is calculated by determining the difference between the 15% minimum tax rate and the ETR in that jurisdiction. This percentage is subsequently applied to the Globe Income or Loss, following a subtraction of a substance-based income exclusion that is derived from a proportion of tangible assets and payroll expenses.
Agreed Rule Order Liability for the top-up tax within MNE Groups falls under three primary provisions: the QDMTT, the IIR, and the UTPR. The low-tax jurisdiction retains the first right to impose the top-up tax under the QDMTT. Should this jurisdiction lack a QDMTT, the jurisdiction where the Ultimate Parent Entity (UPE) resides may invoke the IIR concerning the income of the low-tax Constituent Entity. In cases where the UPE is situated in a jurisdiction without a Qualified IIR, the next entity in the ownership hierarchy located in a jurisdiction with an IIR will incur the top-up tax, following a top-down methodology involving the Intermediate Parent Entity (IPE).
Finally, when a Qualified IIR is not enforced, jurisdictions that have adopted a UTPR will be responsible for collecting the top-up tax, with the tax amount distributed according to a substance-based allocation key. This comprehensive framework is designed to ensure that multinational enterprises contribute fairly to the economies they operate in, leveling the playing field and fostering a more equitable global tax landscape.
