OECD published model Pillar Two GloBE rules

20 December 2021

The OECD has today published model provisions for the Pillar Two GloBE rules, which seek to ensure multinationals pay a minimum effective tax rate of 15% in each jurisdiction.

Several aspects of the rules have evolved significantly since the original Pillar Two Blueprint was published in October 2020 including:

  • the precise scope of the exclusion for investment funds has been defined;
  • the back-up undertaxed payment rule (UTPR) now shares out the right to collect top-up tax between countries in proportion to a group’s tangible assets and payroll costs, rather than by reference to intra-group payments; and
  • the rules now smooth out differences in when a group pays tax by including deferred tax expenses in the effective tax rate (ETR) calculation, rather than by allowing excess tax to be carried forward.

Read our detailed Q&A guide to explain the application of the model rules. You can also find other useful information on our BEPS 2.0 hubpage

What is missing and what is next?

Although the model rules are a major milestone there are some notable omissions and plenty to keep the OECD secretariat busy in the coming months.

  • The rules don’t include further detail about the subject to tax rule (STTR), which will give developing countries greater source taxing rights over certain low-taxed connected-party payments. It is unclear whether this reflects continued disagreement among countries about which payments the STTR should apply to, however the OECD has reiterated the commitment made in October to publish a model treaty provision.
  • It also says nothing about global intangible low-taxed income (GILTI) co-existence, which will be considered in the new year as US tax reform legislation progresses through Congress.
  • The OECD is also still drafting commentary to support the model rules, which don’t contain narrative explanation. They intend to release this in early 2022.
  • Perhaps in response to pressure from business stakeholders, the OECD has announced it will hold public consultations on the implementation of Pillar Two and on the STTR, in February and March 2022 respectively.

With the model rules now available as a template to work from countries will be able to start the process of implementing the proposals, which the rules say is “envisaged” to happen by 2023 – a slightly softening from the more definite language in the October IF agreement. The EU Commission has stated it intends to publish a draft directive on Pillar Two implementation before the end of the year. Given the UK Government’s track record in implementing the original BEPS actions promptly it will likewise be looking at what it needs to do to bring Pillar Two rules into effect.

Today’s publication doesn’t include further information on Pillar One, which will re-allocate taxing rights over the largest groups’ residual profits to the countries in which their customers are located. The overall framework for Pillar One was described in the October agreement but its detailed design is less advanced than that of Pillar Two with several important features – including the mechanism for identifying which countries will surrender the profits that are to be reallocated – still being negotiated. The OECD’s stated intention is to finalise text for a Pillar One multilateral convention (MLC) in early 2022, with a view to countries signing it in mid-2022. While that’s an ambitious timetable, countries will be keen to make progress so that Pillar One can proceed as closely to Pillar Two as possible.

In October 2021, over 135 jurisdictions joined a ground breaking plan to update key elements of the international tax system which is no longer fit for purpose in a globalised and digitalised economy. The Global Anti-Base Erosion Rules (GloBE) are a key component of this plan and ensure large multinational enterprise pay a minimum level of tax on the income arising in each of the jurisdictions where they operate.

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