Pillar Two Global Anti-Base Erosion Rules (GloBE Rules)

21 June 2023

1. Scope of OECD and EU tax reform

Action 1 of OECD’s BEPS Action Reports from 2015 outlined the difficulties generated by the digitalisation of the economy from a tax perspective.

The continued work of OECD led to the Two-Pillar approach or BEPS 2.0 which addresses new taxing principles in the current highly digitalised economy.

In October 2021, the international community, including more than 130 jurisdictions, reached a landmark agreement on the adoption of a Two-Pillar solution addressing the tax challenges arising from the digitalisation of the economy.

OECD’s post BEPS international tax reform aims to counter harmful tax competition and establish a global minimum level of taxation by means of Pillar 2.

Pillar 2 is designed to discourage base erosion and profit shifting by ensuring that multinational groups pay a minimum rate of corporate tax of 15% in every jurisdiction in which operations are performed.

2. Adoption of the EU Minimum Tax Directive

In an effort to curb tax avoidance and aggressive tax planning, Pillar 2 has been materialised into an EU directive which was adopted unanimously on 15 December 2022.

Directive (EU) 2022/2523 sets forth rules and a framework for the implementation of a global minimum level of taxation for large multinational groups and large-scale domestic groups operating in the EU.

In scope, taxpayers or constituent entities as referred to in the Directive are located in an EU Member State and are a member of a multinational group or a large-scale domestic group that registered an annual revenue exceeding €750m in the last two of the four fiscal years immediately preceding the reporting year.

The mechanism of the Directive is based on two interdependent model rules commonly referred to as the Global anti-Base Erosion (GloBE), according to which an additional amount of tax or top-up tax should be collected in instances in which the effective tax rate (ETR) of a multinational group in a specific jurisdiction is below the minimum tax rate (MTR) of 15%.

Member States will have to transpose the provisions of the Directive into domestic legislation by 31 December 2023 at the latest.

The set of two rules consists of:

  • Income Inclusion Rule (IIR)
  • Undertaxed Profit Rule (UTPR).

The purpose of the rules is to ensure that in scope groups are subject to an effective minimum rate of 15% in all EU jurisdictions.

2.1. Income Inclusion Rule (IIR)

Under the IIR, the Ultimate Parent Entity of a multinational group or a large-scale domestic group is obliged to compute and pay an allocable share of top-up tax for each low-taxed constituent entity of the group, meaning entities with an ETR below 15%.

Alternatively, if a Member State elects to apply the qualified domestic top-up tax (QDMTT), the top-up tax may be collected directly by jurisdictions of low-taxed constituent entities.

IIR will enter into effect on or after 31 December 2023.

2.2. Undertaxed Profit Rule (UTPR)

The UTPR is intended to serve as a support for IIR in instances where the top-up tax cannot be collected by Ultimate Parent entities via the application of the IIR. The UTPR will be computed based on a formula incorporating fixed asset and employee allocation keys.

UTPR will enter into effect on or after 31 December 2024.

2.3. Main computation rules

  • Constituent entities within the scope. Identify multinational groups in scope and each constituent entity subject to Pillar 2 obligations;
  • Determine the GloBE income of each constituent entity;
  • Establish the taxes attributable to the income of each constituent entity;
  • Calculation of the Effective Tax Rate of all constituent entities and determination of the Top-up tax;
  • Impose a Top-up tax under IIR or UTPR.

2.4. Possibility for the delayed application of the IIR and UTPR

Member States may decide to defer the application of IIR and UTPR for six consecutive years starting from 31 December 2023, thus up until 31 December 2029, provided that no more than 12 Ultimate Parent entities of in scope groups are located in the respective Member State. Member States must notify the European Commission by 31 December 2023 on whether a delayed application will be followed.

3. Implications for groups carrying out operations in Romania

Romania has not adopted at this point any public position on whether it will adopt a deferred application of the Pillar 2 rules or whether such rules will be enforceable starting with 2024.

Romanian lawmakers have to transpose the provisions of the Directive no later than 31 December 2023.

4. Next steps

Our recommendation is to assess together with the group the potential obligations at the level of Romanian constituent entities, considering that domestic legislation on Pillar 2 will be enacted in the near future. For further details, you can contact the Mazars Tax Team in Romania.