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December 21, 2021

First Impressions | OECD releases Model Rules on the Pillar Two Global Minimum Tax

Executive summary

On 20 December 2021, the Organisation for Economic Co-operation and Development (OECD) released the Model Rules on the Pillar Two Global Minimum Tax, as approved by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Model Rules cover the scope and mechanics of the Income Inclusion Rule and the Undertaxed Payments Rule, collectively referred to as the Global Anti-Base Erosion (GloBE) rules.

Together with the Model Rules, the OECD also released a summary of the rules (The Pillar Two Model Rules in a Nutshell), an overview of the key operating provisions of the GloBE rules (Fact Sheets) and a Frequently Asked Questions document.

The OECD press release indicates that it expects to release the Commentary relating to the Model Rules and to address the interaction with the United States (US) Global Intangible Low-Taxed Income (GILTI) rules in early 2022. In addition, the Inclusive Framework is developing the model treaty provision for the Subject to Tax Rule, which is the third element of the Pillar Two global minimum tax framework, and a multilateral instrument for its implementation, which the OECD expects to release in the early part of 2022 with a public consultation event on it to be held in March 2022. Finally, the OECD notes the work to be done on development of an implementation framework addressing administration, compliance and coordination matters related to Pillar Two and announces that a public consultation event on the implementation framework will be held in February 2022.

This EY Global Tax Alert provides an overview of the Model Rules. A more detailed EY Global Tax Alert on the Model Rules will be issued shortly.

Detailed discussion


In January 2019, the OECD began the current project with the release of a Policy Note describing two pillars of work: Pillar One addressing the broader challenges of the digitalization of the economy and the allocation of taxing rights to market jurisdictions, and Pillar Two addressing remaining concerns about potential BEPS and tax rate competition among countries.1 The project is being conducted through the OECD/G20 Inclusive Framework, which currently has 141 member jurisdictions. The OECD issued a consultation document2 on the new project in February 2019 and hosted a public consultation3 in March 2019.

Since then, the OECD has released a series of documents on the development of the two pillars, culminating with the release in October 2020 of detailed Blueprints on both Pillar One and Pillar Two.4 This was followed in July 2021 with the release of a high-level statement reflecting agreement of members of the OECD/G20 Inclusive Framework on key parameters with respect to the two pillars.5

Most recently, on 8 October 2021, the OECD published a statement6 on the final political agreement on the two pillars, which includes an implementation timeline that contemplates implementation of the new rules largely with effect from 2023. The Model Rules, which is the first substantive release by the OECD since the October Statement, are intended to provide guidance to countries for use in incorporating Pillar Two global minimum tax rules into their domestic tax legislation.

Structure of the Model Rules

On 20 December 2021, the OECD released the GloBE Model Rules under Pillar Two, which cover both the Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR).

The Model Rules contain 10 chapters, running to just under 70 pages. The chapters are as follows: Scope, Charging Provisions, Computation of GloBE Income or Loss, Computation of Adjusted Covered Taxes, Computation of Effective Tax Rate and Top-up Tax, Corporate Restructurings and Holding Structures, Tax neutrality and distribution regimes, Administration, Transition rules and Definitions.

Highlights of the Model Rules


Generally, a multinational enterprise (MNE) Group and its Constituent Entities are in scope of the GloBE rules if the annual revenue in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) is €750 million or more in two out of the four Fiscal Years immediately preceding the tested Fiscal Year. Although not specified in the Model Rules, the October Statement provides that jurisdictions are free to apply the IIR to groups headquartered in their jurisdictions without regard to the threshold.

The Model Rules provide exclusions from the GloBE rules for specified categories of Entities. However, such entities are not excluded for purposes of determining whether the MNE Group meets the revenue threshold for being in scope of the Globe rules.

The Excluded Entities are as follows:

  • Governmental Entities
  • International Organizations
  • Non-Profit Organizations
  • Pension Funds
  • Investments Funds that are the UPE of the MNE Group
  • Real Estate Investment Vehicles that are the UPE of the MNE Group

Entities that are owned by one or more of the Excluded Entities listed above also are excluded if specified ownership thresholds and activity conditions are satisfied.

Effective Tax Rate calculation and Top-up Tax

The Model Rules provide complex rules for calculating the Effective Tax Rate and the Top-Up Tax, which are contained in Chapter 3 (Computation of Globe Income or Loss), Chapter 4 (Computation of Adjusted Covered Taxes) and Chapter 5 (Computation of Effective Tax Rate and Top-up Tax).

Chapter 3 provides detailed rules on how to calculate the GloBE Income or Loss. The starting point is the Financial Accounting Net Income or Loss as determined under the accounting standard used in preparing the Consolidated Financial Statements of the UPE, before any consolidation adjustments for intragroup transactions. The Model Rules provide for limited adjustments to financial accounting income or loss, such as for excluded dividends and equity gains or losses. The Model Rules also provide that transactions between group entities in different jurisdictions that have not been recorded at arm's length for accounting purposes will need to be adjusted when calculating GloBE Income or Loss. In addition, detailed rules are provided regarding the exclusion of international shipping income that meets the specified qualification requirements.

For the computation of Adjusted Covered Taxes, the starting point is the current tax expense accrued in the financial accounts, with some limited adjustments. An important development in the Model Rules is the inclusion of detailed rules for including certain deferred taxes in Adjusted Covered Taxes in order to address temporary book-tax timing differences.

Once these two amounts have been determined, the Effective Tax Rate (ETR) of the MNE Group for a jurisdiction is calculated by dividing the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction by the Net GloBE Income of the jurisdiction (i.e., the positive amount equal to the GloBE income of all Constituent Entities in that jurisdiction reduced by the GloBE losses of all Constituent Entities in that jurisdiction). The Net GloBE Income is reduced by the Substance-based Income Exclusion for the jurisdiction (which is based on payroll costs and carrying value of eligible tangible assets) to get to the Excess Profit for the jurisdiction.

The Top-up Tax Percentage is broadly the difference between the 15% minimum rate and the ETR. The Jurisdictional Top-up Tax for a jurisdiction is the Top-up Tax Percentage multiplied by the Excess Profit for the jurisdiction (with adjustments for additional current top-up tax and qualifying domestic top-up tax for the jurisdiction). Finally, the Top-up Tax of a Constituent Entity reflects the Jurisdictional Top-up Tax multiplied by the ratio of the Globe Income of the Constituent Entity for the jurisdiction to the Aggregate GloBE Income of all Constituent Entities for the jurisdiction.

Mechanics of the Top-up Tax

The Model Rules describe the process for determining the amount of Top-Up Tax to be charged to a Parent Entity or to the Constituent Entities located in a UTPR Jurisdiction by attributing the Top-Up Tax of each Low-Taxed Constituent Entity to the Parent Entity under the IIR, and then by allocating the residual Top-Up Tax, if any, to UTPR Jurisdictions.

Income Inclusion Rule

The UPE located in an implementing jurisdiction that owns (directly or indirectly) an Ownership lnterest in a Low­Taxed Constituent Entity at any time during the Fiscal Year is subject to tax in an amount equal to its Allocable Share of the Top-Up Tax of that Low-Taxed Constituent Entity for the Fiscal Year.

The Model Rules address the application of the IIR to Intermediate Parent Entities of an MNE Group and to Partially-owned Parent Entities that own an Ownership Interest in a Low-Taxed Constituent Entity.

For the application of these rules, a Low-Taxed Constituent Entity is an entity located in a Low-Tax Jurisdiction or a Stateless Constituent Entity that, in respect of a Fiscal Year, has GloBE Income and is subject to an Effective Tax Rate that is lower than the 15% minimum rate.

Undertaxed Payments Rule

The mechanics for the application of the UTPR in the Model Rules reflect significant changes from the Pillar Two Blueprint. The Model Rules provide that, under the UTPR, Constituent Entities of an MNE Group located in an implementing jurisdiction will be denied a deduction (or required to make an equivalent adjustment under domestic law) in an amount resulting in those Constituent Entities having an additional cash tax expense equal to the UTPR Top-up Tax Amount for the Fiscal Year allocated to that jurisdiction.

The Total UTPR Top-up Tax Amount for a Fiscal Year is equal to the sum of the Top-up Tax calculated for each Low-Taxed Constituent Entity of an MNE Group for that Fiscal Year, subject to specified adjustments.

The UTPR Top-up Tax Amount that is allocated to an implementing jurisdiction is determined by multiplying the Total UTPR Top-up Tax Amount by the jurisdiction's UTPR Percentage determined each year as follows:



Number of employees in the jurisdiction




Tangible assets in the jurisdiction

Number of employees in all UTPR jurisdictions

Tangible assets in all UTPR jurisdictions


The Model Rules also include some administrative provisions. First, they provide an obligation to file a standardized information return (the GloBE Information Return) that will provide tax authorities with the information required to assess the tax liability under the Model Rules. The Model Rules also provide for the development of optional safe harbors in order to reduce the compliance and administrative burden and agreed administrative guidance. In this regard, the OECD has announced plans to host a public consultation event in February 2022 on the implementation framework that is to be developed to facilitate the coordinated implementation of the Model Rules.

Other items of note

The Model Rules also include specific rules for the treatment of corporate restructurings and holding structures and tax neutrality and distribution regimes. They also include specific transition rules.

The rules relating to mergers and acquisitions describe how to apply the consolidated revenue threshold to group mergers and demergers, how to treat situations involving Constituent Entities joining or leaving an MNE Group, how to account for transfers of assets and liabilities, and how to apply the Model Rules to joint ventures and dual-listed MNE Groups.

The rules relating to tax neutrality regimes address the treatment of situations where the UPE of a MNE Group is subject to a tax neutrality regime (such as a tax transparency regime or a Deductible Dividend Regime), provide special rules in relation to certain distribution tax regimes, and provide special rules for controlled Investment Entities.

The transition rules address the treatment of tax attributes upon transition into the new minimum tax regime (including on how to transition existing losses into the new regime), provide the transitional relief for the substance-based income carve-out specified in the October Statement, provide an exclusion from the UTPR for MNE Groups in the initial phase of their international activity, and provide for transitional relief in the timing of the filing obligation in the transition year.

Finally, the Model Rules include a series of definitions used throughout the rules, as well as specific rules on how to determine the location of an entity and of a permanent establishment.


The Model Rules provide a substantial update to the Pillar Two Blueprint. Implementation of the Model Rules will lead to significant changes to the overall international tax rules under which businesses operate and will introduce new filing obligation that will require gathering additional data and adaption of companies' internal processes and systems.

It is important for companies to evaluate the potential impact of the proposed global tax changes and monitor activity in relevant countries related to the implementation of new rules through changes in domestic tax rules and bilateral and multilateral agreements, especially given the very ambitious implementation timeline. In particular, companies should monitor developments in the US with respect to the GILTI rules as well as the announced plans for implementation of Pillar Two in the European Union (EU) through an EU Directive.

As noted, a more detailed EY Global Tax Alert on the Model Rules will be issued shortly.

The Model Rules will be the focus of the upcoming EY Global Thought Center Webcast BEPS 2.0: Focus on Pillar Two on 12 January 2022. Click here to register for the webcast.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Limited (New Zealand), Auckland

Ernst & Young LLP (United States), Detroit

Ernst & Young LLP (United States), Global Tax Desk Network, New York

Ernst & Young LLP (United States), Washington, DC



1 See EY Global Tax Alert, OECD's new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019.

2 See EY Global Tax Alert, OECD opens public consultation on addressing tax challenges arising from digitalization of the economy: time-sensitive issue impacting all multinational enterprises, dated 14 February 2019.

3 See EY Global Tax Alert, OECD hosts public consultation on document proposing significant changes to the international tax system, dated 18 March 2019.

4 See EY Global Tax Alert, OECD's Inclusive Framework releases BEPS 2.0 documents and agrees to continue work with target of conclusion by mid-2021, dated 13 October 2020, and OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.

5 See EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 2 July 2021.

6 See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021. Together with the statement, the OECD also released a set of Frequently Asked Questions and a brochure providing additional background and information on this development.