Pillar 2 Model Rules are out: more clarity on the future global minimum tax

Rolf Röllin
Director - Corporate Tax, PwC Switzerland

On 20 December 2021, the OECD/G20 Inclusive Framework (“IF”) finally published the long-awaited GloBE Model Rules (“MR”) governing the future of the most important aspects of Pillar 2. The rules shall serve as a template that jurisdictions can translate into domestic law. They provide a number of confirmations on several key parameters while the commentary on the MR is still required to answer certain detailed questions. Such Commentary shall be completed by the end of January 2022 and published thereafter. The complexity of the MR calls for coverage throughout a multitude of blogs: this blog marks the beginning of a series and sheds light on the overall architecture of the MR and certain selected key take-aways.

A. Overview

  • To understand the overall context, it is important noting that the MR only deal with the GloBE rules, i.e. the Income Inclusion Rule (“IIR”) and the Undertaxed Payment Rule (“UTPR”). In other words: the MR do not address Pillar 1 or the other two remaining rules of Pillar 2, namely the Subject to Tax Rule and the Switch-Over Rule;
  • The MR consist of ten Chapters, each of which comes with 3-6 articles. Overall, there are 49 articles and numerous sub-provisions, which make the MR quite extensive (45 pages of rules with another 15 pages of definitions);
  • Due to the multitude of issues to be addressed by the MR, these get complex quite fast and many articles can only be read in conjunction with the detailed definitions listed in Chapter 10 of the MR;
  • The overall aim of the MR is to provide for a coordinated implementation of the GloBE rules. The MR themselves will be accompanied by a Commentary (expected to be published beginning of February 2022 – the Commentary should also address the co-existence with the U.S. GILTI rules) and so-called Agreed Administrative Guidance, i.e. an implementation framework focused on administrative, compliance and coordination issues relating to Pillar 2 to be published not before mid-2022. Further work is also ongoing with respect to the development of the model provision for the Subject to Tax Rule and a corresponding multilateral instrument for its implementation (to be released early 2022).
  • Beside the actual MR, the OECD also published a summary and a fact sheet to facilitate the understanding of the complex provisions. The documents can be accessed here.

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B. Highlights of selected chapters

Chapter 1: scope of the GloBE rules
  • An important clarification to previous statements is that the GloBE rules only apply to groups, which reported annual revenues of at least EUR 750m in at least two of the four fiscal years immediately preceding a particular year. As such, considering that the IIR should become effective on 1 January 2023, a group’s annual revenues for the years 2019-2022 will be relevant to analyze whether a group will be in scope of Pillar 2 from 2023 onwards;
  • The GloBE rules only apply to groups that have an international presence. “Group” in this sense means a collection of entities either through ownership or control with the result that the relevant group entity is or would need to be included in the consolidated financial statements of the Ultimate Parent Entity;
  • The above-mentioned revenue-test must be based on an Acceptable Financial Accounting Standard. According to the MR, Swiss GAAP FER should also qualify as an Acceptable Financial Accounting Standard along with IFRS, US GAAP etc. This is certainly good news for Swiss companies given the wide use of Swiss GAAP FER as accounting standard. However, it will need to be seen whether there could be discussions with respect to areas where Swiss GAAP FER (significantly) deviates from e.g. IFRS;
  • The GloBE rules will be applied to permanent establishments as well, i.e. these will essentially be treated as separate entity. Accordingly, if a group only consists of a head-office in a jurisdiction with one or more permanent establishments located in another jurisdiction, such a group will be considered a multinational group in the sense of the GloBE rules.
Chapter 2: allocation of the Top-up Tax
  • The MR confirm the previous understanding of the ordering of the IIR and the UTPR, namely that the IIR needs to be applied first before the UTPR (as backstop solution) could apply;
  • Further, the MR also confirm the top-down approach for the IIR, i.e. the latter is to be applied at the level of the Ultimate Parent Entity (“UPE”) first and only if the UPE jurisdiction would not have introduced an IIR, the jurisdiction of the next directly owned intermediate holding company would be entitled to apply the IIR to the sub-group owned by it in its jurisdiction;
  • It is important to note that only a “Qualified IIR” would be respected in the GloBE context. This requires that the rules implemented in the domestic law of a jurisdiction must be in line with the overall GloBE framework (incl. upcoming additional guidance) and such jurisdiction must not provide any benefits that are related to such rules;
  • In the absence of an IIR (respectively Qualified IIR) in any of the parent jurisdictions, the subsidiary jurisdictions will be entitled to apply the UTPR (if implemented in local law);
  • According to the MR, the UTPR shall result in a denial of a deduction or require a taxpayer to make an equivalent adjustment under domestic law, resulting in an additional cash tax expense;
  • The MR include an important update in terms of allocating the UTPR Top-up Tax amount if different jurisdictions are involved. In such cases, the total UTPR Top-up Tax amount is determined by referring to the employees and tangible assets that are allocated to each jurisdiction with UTPR taxation rights based on the following formula:
Chapter 5: computation of ETR / Top-up Tax (incl. de minimis exclusion and UTPR exclusion)
  • Chapter 5 is one of the key Chapters of the MR. Given that it provides the overall framework on how the Effective Tax Rate (“ETR”) and Top-up Tax are computed, we address this Chapter prior to looking into Chapters 3 and 4 where the ETR and Top-up Tax are outlined;
  • The ETR of a group for a particular jurisdiction is computed by dividing the sum of the Adjusted Covered Taxes for each group entity by the Net GloBE Income. These calculations are done on a jurisdiction-by-jurisdiction basis. In order to illustrate this mechanism, the following formula should be helpful:
  • The Net GloBE Income in a jurisdiction must be a positive amount. If the aggregate Net GloBE Income would be negative, then no Top-up Tax would be computed for this jurisdiction;
  • The Top-up Tax per jurisdiction (applying a jurisdictional aggregation or sub-consolidation of all entities in a jurisdiction) is to be computed in five steps. In summary, these could be described as follows:

    1. The so-called Top-up Tax Percentage per jurisdiction needs to be calculated, which is the positive difference (in percentage points) between the Minimum Rate (15%) and the ETR;
    2. The Substance-based Income Exclusion can be determined (see further comments below);
    3. The Excess Profit needs to be determined by deducting the Substance-based Income Exclusion from the Net GloBE income;
    4. The Top-up Tax Percentage will be multiplied by the Excess Profit;
    5. A group would need to consider whether adjustments to the Top-up Tax calculations are required from previous tax periods and whether a jurisdiction levies a so-called Domestic Top-up Tax;
  • The MR provide some useful clarifications on the important topic of the Substance-based Income Exclusion:

    - Generally speaking, the Substance-based Income Exclusion is to be computed per jurisdiction and consists of two components: a payroll and a tangible asset component with the aim to exclude a certain routine return on such components from being subject to the Top-up Tax;
    - For the payroll component, a certain percentage (initially 10% but declining to 5% within a period of 10 years– see table listed in the MR in Section 9.2.1 for an overview of the applicable values per year) of the Eligible Payroll Costs of Eligible Employees (including ordinary employees but also independent contractors participating in the ordinary operating activities of the group) who perform activities for the group in the relevant jurisdiction can be deducted. To avoid double-counting, payroll costs that have been capitalized and included in tangible assets are non-qualifying payroll costs;
    - For the tangible asset component, a certain percentage (initially 8% but declining to 5% within a period of 10 years – see table listed in the MR in Section 9.2.2 for an overview of the applicable values per year) of the carrying value of Eligible Tangible Assets can be deducted. This deduction is limited in scope since the relevant tangible asset categories are quite narrow and the tangible assets must be located in the same jurisdiction as the group entity applying for the Substance based Income Exclusion;
  • De minimis exclusion: the Top-up Tax for group entities in a jurisdiction shall be deemed to be zero for a fiscal year if the Average GloBE Revenue in this jurisdiction is less than EUR 10m and the Average GloBE Income in the jurisdiction is less than EUR 1m. For this calculation, the average values are computed by measuring the current and two preceding fiscal years.
  • UTPR exclusion in initial phase of international activity: while not mentioned in Chapter 5 (but rather in the transitional rules laid out in Chapter 9), the Top-Up Tax for a group shall be reduced to zero in the group’s initial phase of international activity, which is defined via the following criteria (to be fulfilled cumulatively):

    - Group entities in max. six jurisdictions;
    - Sum of the Net Book Values of Tangible Assets of all group entities located in five of the above-mentioned jurisdictions is max. EUR 50m.

    This UTPR exclusion will be limited to max. five years after the introduction of the UTPR rules.
Chapter 3: computation of GloBE Income or Loss
  • The GloBE income or Loss for each group entity is defined as being the respective net income based on financial accounting rules, which is adjusted for certain defined items;
  • The financial accounting net income is based on the accounting standard used in preparing the consolidated financial statements of the Ultimate Parent Entity. Importantly, the decisive financial accounting net income of a particular group entity is the income before any adjustments that would be done for intra-group transactions upon consolidation;
  • Adjustments required for GloBE purposes include items such as net tax expenses, excluded dividends, gains or losses from certain assets or liabilities, asymmetric FX effects, etc.;
  • Another important item to be mindful of is that any transactions between group entities must be at arm’s length. If they are not, the financial accounting net income of the involved group entities is to be adjusted accordingly;
  • In case of permanent establishments, their financial accounting net income is also to be established based on the respective (actual or deemed) separate financial accounts. If a permanent establishment records financial accounting net income, this will not impact the GloBE income / loss of its head office. In contrast, if the permanent establishment records a financial accounting net loss, such loss shall be treated as an expense of the head office if losses of permanent establishments are actually treated as an expense in the computation of the domestic taxable income of the head office. Vice versa, if the permanent establishment would record financial accounting net income in future periods, this would need to be taken into account at the level of the head office up to the loss that impacted previous GloBE calculations. This rule is consistent with the temporary loss absorption rules that are in place in Switzerland on Federal level and in many cantons.
Chapter 4: computation of adjusted covered taxes
  • The Adjusted Covered Taxes of a group entity are equal to the current tax expense as recorded in its financial accounts adjusted by certain corrections, which can both increase and decrease the overall Covered Tax amount;
  • Additions to Covered Taxes would e.g. be any covered tax accrued as an expense outside of the income tax expense line (e.g., taxes on a company’s equity such as the annual capital tax in Switzerland that is booked as operating expenses).
  • In contrast, the amount of Covered Taxes needs to be decreased by

    - Current tax expense on GloBE income items that are to be excluded (e.g., dividends)
    - Amounts associated with refundable tax credits
    - The current tax expense, which relates to an uncertain tax position;
  • Chapter 4 foresees special rules for allocating Covered Taxes from one group entity to another one. In particular:

    - Covered Taxes, which are linked to GloBE Income attributable to a Permanent Establishment will be allocated to the latter rather than to its head office;
    - Covered Taxes attributed to a parent company based on a CFC regime are to be allocated to the jurisdiction of the CFC;
    - Covered Taxes associated with a distribution by a group entity that are accrued in the financial accounts of the group entity’s parent company are to be allocated to the distributing group entity;
  • The tax effect from timing differences is addressed by adding the deferred tax expense accrued in the financial statements to the Covered Taxes. However, there are also certain adjustments to be considered similar to what is discussed above with regard to current taxes (e.g., deferred tax relating to income excluded when determining the GloBE Income, deferred tax relating to uncertain tax positions, etc.);
  • In addition, any valuation adjustment or accounting recognition adjustments related to a deferred tax asset as well as re-measurement expenses with respect to a change in the applicable domestic tax rate need to be eliminated;
  • There is one particularly important limitation included in the MR relating to deferred taxes: a deferred tax liability (that does not qualify for one of the exemptions provided) that is not reversing and therefore leading to an actual tax payment within 5 years must be recaptured, i.e. cannot be considered in the GloBE ETR calculations. This will require groups to monitor the development of their deferred taxes going forward to determine whether such a recapture applies or not and whether a recalculation of the ETR will be required in any later period;
  • The same is by the way true for current tax accruals (above EUR 1m) made where an actual settlement (i.e. tax payment) is needed within three years of the last day of the financial year in which the accrual was made).
Chapters 6 and 7: M&A / tax neutrality and distribution regimes
  • Chapter 6 amongst others provides special rules if an entity enters or leaves a group during a relevant fiscal year. In other words: this Chapter is relevant for companies that have engaged in M&A activity during a particular year. Furthermore, Chapter 6 brings certain Joint Ventures within the scope of the GloBE rules;
  • Chapter 7 deals with various special topics such as if an Ultimate Parent Entity is a flow-through vehicle or specific rules if an entity is taxed on its earnings upon (deemed) distribution.
Chapter 8: filing obligations / safe harbours
  • Chapter 8 contains the rules around some important practical aspects, namely how the filing obligations shall be tackled;
  • Generally speaking, each group that is subject to the GloBE rules must file a so-called GloBE Information Return on an annual basis;
  • The GloBE Information Return needs to include information about the group such as the identification of the group entities and their status, their tax identification numbers, the jurisdiction in which the entities are located, the overall corporate structure (incl. ownership interests), information required to compute the ETR for each jurisdiction and the Top-up Tax of each group entity and also the allocation of the Top-up Tax under the IIR / UTPR;
  • In terms of timing, the GloBE Information Return shall be filed within 15 months after the last day of the reporting fiscal year. According to the transitional rules (Chapter 9), however, the first GloBE Information Return will be due only 18 months after the last day of the reporting fiscal year. In other words: if the GloBE rules are effective from 1 January 2023 and if a group closes its books on 31 December 2023, we understand that such group would need to file its first GloBE Information Return by 30 June 2025 at the latest;
  • Generally speaking, the GloBE Information Return is to be filed in each GloBE jurisdiction either by a local group entity or a designated other entity. An exemption from this general rule is foreseen in case the Ultimate Parent Entity or a designated other entity would have filed the GloBE Information Return and if there would be a Qualifying Competent Authority Agreement in place between the relevant jurisdictions, which would allow for an automatic information exchange and therefore make multiple filings of the GloBE Information Return obsolete;
  • From a formatting perspective, the GloBE Information Return shall be based on a standard form / template that is being developed by the OECD;
  • Importantly, Chapter 8 also mentions the possibility of safe harbors. Namely, the Top-up Tax for a particular jurisdiction is deemed to be zero if the group entities located in a jurisdiction are eligible for the GloBE Safe Harbor. Unfortunately, the latter is not defined yet. Rather, the conditions under which entities can benefit from such a safe harbor are still to be established.
Chapter 9
  • This Chapter sets out various transitional rules, which are essential and which need to be read in conjunction with the remaining Chapters;
  • While most of the relevant transitional rules have already been addressed throughout this blog article under a different header, Chapter 9 mentions certain important aspects to be considered regarding tax attributes;
  • The MR require a group that becomes subject to the GloBE ETR calculations for the first time to revalue its deferred tax assets and liabilities reflected or disclosed in the financial accounts at the lower of either 15% or the applicable domestic tax rate. In practice, this will have the following particular impacts:

    - A separate valuation of deferred tax assets and liabilities needs to be performed for this purpose (separate from the one already performed for financial accounts purposes);
    - Companies might want to reconsider the deferred tax positions reflected or disclosed in their financial accounts particularly when it comes to deferred tax assets, where a release of such deferred tax assets in future periods would have an increasing effect on the Covered Taxes and therefore the GloBE ETR to be calculated.
Chapter 10: definitions
  • This Chapter is key to understand many of the terms used in the MR. It is worthwhile nothing that certain Articles define particular aspects directly in the relevant Article (i.e., not in Chapter 10) but the importance of this generic Chapter cannot be overstated;
  • Besides listing the general definitions, Chapter 10 also sets out certain additional parameters for flow-through entities and rules to determine the location of an entity for GloBE purposes.

C. Key Takeaways and What’s Next

The MR provide helpful guidance on a variety of previously open technical aspects of the GloBE rules. Companies should analyze these new rules but also be cognizant of the fact that this will not be the end of the “story”. MNEs will need to closely follow further discussions/developments to continuously refine their approach towards BEPS 2.0 implementation and maintenance over the next months and years.

Given the quite ambitious time plan for implementation as outlined above, companies should start looking into addressing the incoming operational challenges (e.g. data collection, segmentation, tax accounting determinations and decisions, ERP system readiness) sooner rather than later. Specific attention points in this regard can ideally be properly identified in the coming months and then addressed throughout 2022. This will then also allow for audit readiness when it comes to the tax positions including GloBE in (early) 2023 and it will ensure a good basis for the development of a proper long-term strategy for a target approach to ongoing maintenance of BEPS 2.0 obligations and compliance.


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Dominik Birrer

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Rolf Röllin

Partner, Corporate Tax, PwC Switzerland

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Director - Transfer Pricing & Value Chain Transformation, Zurich, PwC Switzerland

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Director, Corporate Tax, Zurich, PwC Switzerland

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Partner, Tax & Legal Services, PwC Switzerland

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