Meaning
International tax reforms establish a global minimum tax rate of fifteen percent for large multinational enterprises regardless of where they operate. The pillar two globe rules are designed to prevent a race to the bottom in corporate taxation by ensuring that profits are taxed at a minimum level. These rules apply to groups with annual consolidated revenues exceeding seven hundred and fifty million euros.
If a subsidiary’s effective tax rate in a specific country falls below the minimum, a top-up tax is collected elsewhere.
Effective Rate
Calculations for the minimum tax are based on financial accounting profits rather than local taxable income, with certain adjustments for timing differences. Under the pillar two globe rules, the effective tax rate is determined for each jurisdiction by dividing the covered taxes by the adjusted globe income. Covered taxes include corporate income tax and certain withholding taxes but exclude consumption taxes like value added tax.
This standardized approach ensures that different national tax systems can be compared on a consistent basis.
Income Inclusion
The primary mechanism for collecting the top-up tax is the income inclusion rule, which typically applies at the level of the ultimate parent entity. Through the application of the pillar two globe rules, the parent company pays the difference between the actual tax paid by its subsidiaries and the fifteen percent minimum. This removes the incentive for multinational groups to shift profits to low-tax jurisdictions or tax havens.
If the parent’s country has not implemented these rules, a secondary backstop rule may apply to other entities in the group.
Coordination Mechanism
Implementation of these standards requires a high degree of cooperation between tax authorities to avoid triple taxation or unintended loopholes. The pillar two globe rules include a substance-based income exclusion that allows companies to reduce the amount of profit subject to the top-up tax based on their local payroll and tangible assets. This acknowledges that some low-tax outcomes result from real economic activity rather than artificial profit shifting.
China has been actively involved in the development of these standards through the inclusive framework of the OECD.
