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On 20 December 2021, the OECD published the model rules on
global minimum taxation (“Pillar Two”), on which around
140 countries have agreed as part of the work of the OECD’s
Inclusive Framework. By the so-called GloBE rules (Global Anti-Base
Erosion), the Inclusive Framework countries want to ensure that the
profits of large MNE Groups are effectively taxed at a rate of at
The EU has closely followed the development of Pillar Two and
issued a draft directive already on 22 December 2021. As soon as
the directive is unanimously approved by the EU member states, all
of them will in principle be obliged to transpose the directive
into domestic law.
Overview of the regulations
Theoretically, all MNE Groups with a consolidated turnover of at
least €750 million in at least two of the last four
consecutive financial years fall within the scope of the Pillar Two
In a first step, the constituent entities need to be determined.
Generally speaking, these are all fully consolidated entities as
well as permanent establishments. Once the constituent entities
have been determined, their respective GloBE income needs to be
calculated on a stand-alone basis. The starting point is the
financial result for group reporting purposes, but before any
consolidation amendments. The entity’s income is subsequently
adjusted by numerous items and results in the qualifying income or
loss for GloBE purposes.
The next step is to determine the adjusted covered taxes for
each constituent entity. In principle, these are all taxes incurred
on profit or income. Deferred taxes must also be taken into
account, in particular as part of the total deferred tax adjustment
The qualifying income or loss and the adjusted covered taxes of
all constituent entities located in a jurisdiction are aggregated
on a country-by-country basis to calculate the effective tax rate
of this jurisdiction (jurisdictional blending).
If the effective tax rate in a country amounts to less than 15%,
a top-up tax will be assessed to reach the 15% minimum taxation
which is due by the Ultimate Parent Entity of the MNE group.
Need for action
The OECD has published an extensive commentary to facilitate the
application of the complex GloBE rules. Nevertheless, there is
still a long way to go before the rules will be implemented and
become applicable. For example, there are still discussions on the
administrative framework and potential safe harbour rules to reduce
complexity for the taxpayers.
We expect that the Pillar Two directive will be agreed on by the
EU Member States during the next months. Then, all member states
including Germany will have to implement the directive into
domestic law. For the taxpayers who have their Ultimate Parent
Entity located in Germany, the German implementation law will be
decisive to determine the top-up tax.
However, in principle, within the EU, differences in the local
implementation should rather be limited. This might be different
outside the EU. Moreover, it needs to be seen whether domestic
top-up taxes will be implemented in some states.
According to our experience from ongoing Pillar Two projects,
the key issue is to identify the required data to conduct the
Pillar Two compliance, the sources for the relevant data and a
process to collect such data. As this process including the
implementation in the local IT systems could take months, taxpayers
should start the preparation in time as the entry-in to-force of
Pillar Two is envisaged for the year 2024.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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