The global minimum tax rate: Are we nearly there yet?

On 20 December 2021, the OECD published keenly awaited model rules designed to implement Pillar Two of its ambitious plans to reform international taxation.

Two days later, the European Commission followed suit with a proposal for a Directive to implement these rules in all Member States. Pillar Two, also referred to as the Global Anti-Base Erosion (“GloBE”) proposal, seeks to ensure that multinationals pay a minimum effective tax rate of 15% in the jurisdictions in which they operate; the model rules set out a framework to allow the co-ordinated domestic implementation of these principles.

While the model rules represent an important landmark, there is still much work to be done by both the OECD, the EU and their individual members. Political developments over the coming months will be crucial, particularly if the OECD is to meet its implementation deadline of 2023. To date, and in particular given the scale of the proposals, the political will to implement change in this context has been considerable. However, current features of the tax landscape may make the previous political momentum more difficult to maintain.

The story so far

The model rules published in December 2021 implement Pillar Two of the OECD’s two-pillar plans to reform international taxation. Together, Pillars One and Two constitute the OECD’s longer-term response to Action 1 of the OECD/G20’s BEPS project, which began in 2013 and sought to respond to international tax challenges arising as a result of the increasing digitalisation of the global economy. Broadly, Pillar One seeks to reallocate taxing rights to market jurisdictions, while Pillar Two seeks to ensure that multinationals pay a minimum effective tax rate of 15% in the jurisdictions in which they operate. 

Unsurprisingly, given the project’s ambitious scale, it has been a long and difficult political process. Historically, individual jurisdictions have jealously guarded their sovereignty over domestic tax affairs. However, a very significant global political consensus was reached in October 2021, and 137 jurisdictions, including all EU Member States (other than Cyprus, which is not an OECD Inclusive Framework member, but is expected to support the proposed Directive), the UK, Australia and the US, have now committed to the reforms. 

The anticipated timetable for introduction of the proposals is similarly ambitious. The OECD has stated that domestic legislation introducing the minimum tax rules should be enacted during 2022 and that the proposals should become effective during 2023. This is also the timeframe for the implementation of the EU Directive. The French presidency of the EU aims to have an agreement on the Directive before the French presidential elections in April. 

2022 overview of the Pillar Two model rules

The GloBE model rules retain the overall architecture of the Pillar Two proposals set out in the October 2021 announcement. Specifically, there is a series of interrelated rules intended to ensure that a minimum tax rate of 15%, calculated on a jurisdictional basis, is paid by multinational groups. Although there is now additional clarity on certain aspects (in particular in relation to scope and particular business models), there are still some areas of uncertainty pending additional work scheduled to take place during the course of 2022. 


  • Pillar Two and the GloBE rules are not mandatory, - OECD Inclusive Framework members are not obliged to implement them. However, if they do, they agree to do so on the basis of the common approach set out in the model rules. For EU Member States there is no leeway; once the Directive is adopted, they will have to implement the rules.
  • The model rules will only apply to multinational groups within scope, broadly, those with annual consolidated revenues exceeding EUR 750 million over two of the previous four fiscal years. Income (or loss) is based on financial accounts, subject to certain adjustments. In the EU, the rules will also apply to purely domestic groups that meet the criteria. 
  • Both subsidiaries and permanent establishments are considered to be “constituent entities” of a multinational group.
  • Certain types of entities will be “excluded entities”, including governments, international organisations, not-for-profit organisations, pension funds, and investment funds where those funds are also the ultimate parent entity. In some cases, excluded entities will include other holding companies further down the chain, where those entities carry out mostly ancillary activities, or where their profit in large part consists of excluded income. There is also an optional de minimis provision, so that constituent entities may elect not to apply GloBE rules to entities located in a specific jurisdiction with revenues of under EUR 10 million and profits of under EUR 1 million. 
  • Application of the rules will require a calculation of the “effective tax rate” in each jurisdiction in which the multinational operates. This will require a determination of the entity’s net income or loss and a computation of adjusted taxes (in each case based on financial accounts). For these purposes, “covered taxes” will include taxes on income and profits (or retained and distributed profits), but will not include VAT or turnover tax. The effective tax rate is calculated by dividing the aggregate income by the tax rate for the relevant jurisdiction. 
  • Where the effective tax rate is below the minimum rate, a “top-up tax” is calculated so as to ensure the minimum level of taxation.
    The primary mechanism for imposing the top-up-tax is through an income inclusion rule (“IIR”) imposed on the constituent entities of the multinational. By default, this will apply to the ultimate parent entity of the group, but where this is not possible, can also apply to intermediate holding entities in the chain. 
  • Where the minimum tax rate is not achieved through the IIR, an undertaxed payments rule (“UTPR”) will apply to allocate any residual top-up tax by way of attribution of a deemed additional cash tax expense. If necessary, the additional cash tax expense can be allocated to future fiscal years. The proposed implementation date of the UTPR is 1 January 2024, rather than 2023. 
  • Administration will be standardised, with implementation to be by way of a framework to be developed during 2022. It is anticipated that the framework will provide for certain safe harbours, although the scope and terms of these are not yet agreed. 
  • Fluctuations that occur as a result of timing differences between income recognised for financial accounting purposes and those recognised for tax purposes will be countered by provisions based on principles of deferred tax, subject to certain conditions and limitations.

What are we waiting for?

Certainly, the GloBE model rules constitute a landmark document and set out a template from which jurisdictions can undertake a co-ordinated implementation of the rules. They also offer detail significant development and clarity on certain aspects of the proposal, in particular in relation to scope and certain business models.

Nonetheless, the model rules are only one piece of the picture and there is much work still to do. In particular, explanatory commentary on the model rules is expected to be published shortly, and a further public consultation on the implementation framework is expected later in 2022. The commentary, in particular, is expected to provide important additional and practical guidance in relation to many of the model rules.

It is also intended that a further, subject to tax rule (“STTR”) will be developed, although this concept is not further expanded in the model rules published in December 2021. It is understood that the STTR will be a treaty-based rule, and is intended to permit low income and lower-middle income countries to retain their taxing rights on certain streams of income, despite existing provisions of bilateral tax treaties. The OECD has stated that a draft model provision and commentary for the STTR will be published in March 2022. 

Particular areas of sensitivity

In the interim, it is worth noting certain, specific, areas of tension. 

Diversity of implementation and parallel developments

First, the model rules have been drafted to permit the co-ordinated implementation of a minimum tax rate across a very wide range of diverse tax systems, in both developing and developed countries. If the aphorism is that the devil is in the detail, then multinationals must brace themselves for what might appear when the detail is multiplied by 137 (the number of countries committed to Pillar Two). Even within the EU, where implementation is to be harmonised through a Directive, the current lack of specific guidance may lead to differences in interpretation.

Given the plethora of tax systems to which they must apply, there is deliberate flexibility in the principles, parameters and scope of the model rules. For example, it is expressly anticipated that jurisdictions will be entitled to apply the GloBE proposals rules to multinationals outside the scope of the model rules as drafted. The EU, for example, has included purely domestic groups within the rules in order to comply with fundamental freedoms. Particularly during this period between conception and implementation of the model rules, this makes it difficult for multinational groups to anticipate and plan.

Some low income and lower-middle income countries also have doubts on the fairness of the reforms to their jurisdictions. In particular, they regard the proposals as unfairly curtailing their tools to attract legitimate investment and pursue economic growth. Four jurisdictions have not committed to the OECD’s proposals: Nigeria, Kenya (Africa’s largest and fifth largest economies, respectively), Pakistan and Sri Lanka.

Further, there is more than one set of model rules. The European Commission proposal for a Directive is intended to transpose the OECD model rules into the EU, and is expressed in similar, but not identical, terms. In its press release, the European Commission expressly states that its tax agenda is “complementary to, but broader than,” the principles addressed by the OECD Pillars.

On the one hand, it is helpful to the OECD that the European Commission has so vigorously and swiftly taken forward its proposals. On the other hand, some commentators are concerned that this duality may add to the complexity of implementation for Member States, rather than reduce it. Arguably, there is also a risk that committing to such a firm position at this relatively early stage of Pillar Two’s development might harm the EU’s relative competitive position. It is worth noting that as the proposed Directive relates to tax, the rules on qualified majority voting will not apply and the proposal must be unanimously agreed by Member States in Council to become law. However, given the commitment of all EU Member States, it is expected that the Directive will be adopted.

Controlled foreign company rules and GILTI

Many developed jurisdictions impose some form of controlled foreign company regime, under which a proportion of profits arising in a foreign subsidiary or branch may be imputed to a parent company that is tax resident in that jurisdiction. These include all EU Member States (based on the Anti-Tax Avoidance Directive (ATAD)), the UK, Australia and the US, although the form and scope of the regimes may vary significantly. These regimes are anticipated by the model rules, which include provisions allowing full credit for the imposition of domestic income inclusion rules.

In the case of the US, there are complex controlled foreign corporation rules, including relatively recent legislation enacting Global Intangible Low-Taxed Income rules (GILTI), which impose tax on the US shareholders of controlled foreign corporations in relation to certain income of those corporations.

The Biden administration has proposed changes to the GILTI regime that are expected to provide a reasonable substitute for the Pillar Two rules. However, at the time of writing it is less clear that the reforms will be enacted as anticipated. As a result, the co-existence (and interplay) of Pillar Two and GILTI is currently particularly sensitive and the accompanying wording to the model rules expressly states that the commentary to be published shortly will address their interrelationship.

How should multinational groups prepare?

Whilst there is clearly much work still to be done by both the OECD, the EU and Inclusive Framework members, there is plenty to consider meanwhile, particularly given previous statements that the rules will become effective in 2023.

In particular, multinational groups may wish to commence work on a jurisdiction-by-jurisdiction analysis of their constituent entities in order to determine whether further action might be necessary. The analysis should include the level of turnover, the effective tax rate for each jurisdiction and whether any entities might be excluded from the scope of the model rules. It will be important to follow developments in potentially relevant jurisdictions carefully as decisions relating to interpretation, exclusions and safe harbours are made.

The Allen & Overy global tax team will continue to monitor developments and consider their significance for multinational structures going forward, as well as the implications for existing cross-border structures. Please do not hesitate to get in touch with your usual Allen & Overy contact to discuss these developments and their impact on your business.

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This content was originally published by Allen & Overy before the A&O Shearman merger

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