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March 21, 2022

OECD releases Commentary and illustrative examples on Pillar Two Model Rules

Executive summary

On 14 March 2022, the Organisation for Economic Co-operation and Development (OECD) released the Commentary to the Pillar Two Model Rules (the Commentary) as agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Pillar Two Model Rules,1 released on 20 December 2021, define the scope and key mechanics for the Pillar Two system of global minimum tax rules, which includes the Income Inclusion Rule (IIR) and the Under Taxed Payments Rule (UTPR), referred to collectively as the “GloBE rules.”

The Commentary references the role of the Model Rules and the Commentary in the context of the GloBE rules’ status as a Common Approach, noting the need for consistency in the implementation and administration of the rules to avoid the risk of double or over-taxation. The Commentary provides detailed technical guidance on the operation and intended outcomes of the Model Rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to various fact patterns. Together with the Commentary, the OECD also published a separate document with illustrative examples of the application of the Model Rules (the Examples document). In addition, the Commentary identifies various matters throughout the Model Rules where consideration is being given to developing further guidance that would become part of the GloBE Implementation Framework.

On the same date, the OECD also announced a public consultation in connection with the work to be done next to develop the GloBE Implementation Framework addressing administration, compliance and coordination matters related to Pillar Two (the public consultation). The Inclusive Framework members are seeking public input on the issues that should be addressed as part of this work.

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 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 activity and tax rate competition among countries.2 The project is being conducted through the OECD/G20 Inclusive Framework. The OECD issued a consultation document3 on the project in February 2019 and hosted an initial public consultation4 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.5 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.6

In October 2021, the OECD published a statement7 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. Most recently, on 20 December 2021, the OECD released the Model Rules,8 which are intended to provide guidance to countries for use in incorporating Pillar Two global minimum tax rules into their domestic tax legislation.

On 22 December 2021, the European Commission published a proposal for a European Union (EU) Directive to require implementation of the GloBE rules across all EU Member States.9 The proposed Directive closely follows the Model Rules with some modifications in light of EU law requirements. Negotiations among the 27 Member States are ongoing, with a unanimous decision required for adoption of the Directive. Recently, a new compromise text was released that includes a proposed one-year extension of the deadlines for transposition and entry into effect of the rules; however, agreement has not yet been reached.10

Commentary to Pillar Two Model Rules

On 14 March 2022, the OECD released the Commentary to the Pillar Two Model Rules. The Commentary provides additional technical guidance on the interpretation and operation of the rules. The OECD describes the Commentary as intended to promote consistent interpretation of the rules. Following a brief introduction, the Commentary follows the chapter structure of the Model Rules.

The introductory section of the Commentary includes a summary of the chapters and also covers coordination and consistency requirements. Because Pillar Two is structured as a common approach, Inclusive Framework jurisdictions are not required to adopt the Model Rules, but they have agreed that if they choose to adopt them they will implement and administer them in a way that is consistent with the outcomes provided under the Model Rules and the Commentary. The Commentary addresses scope and currency conversion matters in the context of the need for consistency.

On scope, the Commentary states that the setting of a lower revenue threshold for the application of the UTPR than is provided in the Model Rules would be contrary to the basic design of the rules and would undermine expected outcomes for multinational enterprises (MNEs) headquartered in jurisdictions adopting a Qualified IIR. On the other hand, the Commentary indicates that the setting of a lower revenue threshold for the application of the IIR would not be contrary to the design of the Model Rules or undermine the rule order agreed as part of the common approach.

On currency conversions, the Commentary notes that the use of Euro-denominated monetary thresholds in the Model Rules can give rise to coordination issues when a currency other than Euros is used by a jurisdiction in its domestic law. The Commentary recommends that jurisdictions set the thresholds in Euros where possible and indicates that if the jurisdiction must set the thresholds in its own domestic currency, it should re-base the threshold every year using a consistent approach in order to minimize any difference.

Chapter 1 - Scope

This chapter provides the rules for determining the multinational groups that are in scope of the GloBE rules. It introduces some of the most important terms used throughout the Model Rules (i.e., MNE Group, Constituent Entity, Ultimate Parent Entity (UPE) and Excluded Entity). It also provides scope exclusions for specified investment-type entities and organizations with special status in their residence jurisdiction.

The Commentary specifies that the revenues taken into account in the determination of the MNE Group's total revenue under the consolidated revenue threshold are those reflected in the Consolidated Financial Statements and are not reduced by any amount attributable to minority interest holders. It further specifies that revenues from transactions with other Group Entities that are eliminated in the consolidation process are excluded from the revenue threshold test.

The Commentary indicates that the Fiscal Year of the MNE Group is determined by reference to the annual accounting period of the UPE and confirms that the definition of Fiscal Year aligns with the test used for Country-by-Country (CbC) reporting purposes. The Commentary also clarifies that for Fiscal Years having a period other than 12 months, the group's consolidated revenue could be adjusted on a pro-rata basis to reflect the consolidated group revenue corresponding to a 12-month Fiscal Year. This approach will lead to the same result as recalculating the revenue threshold on a proportional basis. The Commentary indicates that the Inclusive Framework will further consider and provide guidance on the treatment of Fiscal Years that exceed 12 months.

With respect to Constituent Entities, the Commentary clarifies that Entities reported under the pro-rata or proportional consolidation method are also Constituent Entities of the Group. Entities that are joint ventures and associates for accounting purposes are not Constituent Entities under the definition in Article 1.3 of the Model Rules because the MNE Group does not control them. Moreover, the Commentary clarifies the definition of a group composed of a Main Entity and a Permanent Establishment (PE), indicating that a Main Entity having only a "stateless PE" is not considered a Group.

Regarding excluded entities, the Commentary confirms the practical effects of qualifying as an excluded entity (namely, the IIR and UTPR do not apply to Excluded Entities, the GloBE attributes of Excluded Entities are removed from the computations other than the application of the revenue threshold and Excluded Entities do not have any administrative obligations under the Model Rules). Moreover, the Commentary explains that the phrase "value of the Entity" in Article 1.5.2 of the Model Rules (related to the treatment of Entities owned by an Excluded Entity refers to the total value of the Ownership Interests issued by the Entity, noting that this is different from a direct measurement of the amount of Ownership Interests held by the Excluded Entity which refers to the underlying rights to profits, capital or reserves of such Entity.

Chapter 2 – Charging provisions

This chapter provides rules for determining which entity of the MNE Group is liable to any Top-up Tax and the portion of such Top-up Tax that is charged to such entity. Specifically, it sets out the mechanics of the IIR and the UTPR.

The Commentary notes the potential use of a switch-over rule in tax treaties to safeguard the application of the IIR to a PE, in particular for those cases where the relevant tax treaty adopts the exemption method to eliminate double taxation of income.

With respect to the IIR, the Commentary recognizes that some jurisdictions may wish to extend the application of the IIR to domestic situations to avoid discriminating between domestic and foreign Constituent Entities in the same MNE Group. In these cases, jurisdictions may introduce rules that require a Parent Entity to bring into account its share of Top-up Tax attributable to its Ownership Interest in domestic Low-Taxed Constituent Entities together with any Top-up Tax attributable to that Parent Entity itself. If the IIR is applied domestically, it shall be treated as a Qualified IIR provided it meets the other requirements under the Model Rules. The domestic application of the IIR is subject to the operation of the agreed rule order.

With respect to the UTPR, the Commentary provides a priority rule in which any provisions of domestic law affecting the deductibility of expenses incurred by Constituent Entities takes precedence over the application of the UTPR. In relation to the denial of a deduction, the Commentary explains that the denial of a deduction does not necessarily need to be attributable to a transaction with another Constituent Entity. It could include the denial of an allowance for depreciation or amortization or a denial of a deduction for a purely notional expense (e.g., deemed interest expense). Further, the Commentary clarifies that a denial of a deduction does not include an item to the extent it is already subject to separate limitation under another rule (e.g., an interest limitation rule).

Where the UTPR operates through an equivalent adjustment, the Commentary explains that the design of this adjustment is a matter of domestic law and it is left to the UTPR Jurisdictions to prescribe the mechanism by which the adjustment should be made. The adjustment should be coordinated with other domestic law provisions and international obligations, including tax treaties.

When the UTPR adjustment takes the form of a denial of a deduction, jurisdictions may require the Constituent Entities to file an amended tax return with respect to the relevant taxable year, in order to affect the relevant deductions for that year. In this case, the Commentary provides that Constituent Entities located in the UTPR Jurisdiction should not be subject to any penalties for late filing or payment that results from any increase in tax payable due solely to the application of the UTPR.

The Commentary provides further details on the application of the UTPR to low-taxed profits in the UPE Jurisdiction. In particular, the Commentary explains that the fact that the UPE is required to apply a Qualified IIR does not mean the operation of the UTPR is not applicable with respect to Constituent Entities located in the UPE jurisdiction. If the Top-up Tax arising in the UPE Jurisdiction is not reduced to zero (because of a Qualified Domestic Top-up Tax or the domestic application of a Qualified IIR in such jurisdiction), it will be included in the UTPR Top-up Tax Amount and allocated to each UTPR Jurisdiction.

Regarding the components of the UTPR Percentage, the Commentary notes that the quantitative factors (i.e., Number of Employees and the Net Book Value of Tangible Assets) to determine the UTPR Percentage are based on information required in the MNE Group’s CbC reports.

Chapter 3 - Computation of GloBE Income or Loss

This chapter provides the rules for computing the GloBE Income or Loss of each Constituent Entity. GloBE Income or Loss is a central element of the GloBE rules and plays an important role in the calculation of the Effective Tax Rate (ETR). Financial accounting net income or loss (determined under an acceptable accounting standard) is the starting point for the computation, subject to the adjustments specified in the chapter.

The Commentary notes that the adjustments to determine GloBE Income or Loss required in Article 3.2 are generally related to permanent differences between the treatment required under financial accounting rules and local tax rules, with temporary differences addressed in Chapter 4 through the computation of adjusted covered taxes.

The nine adjustments that are required under Article 3.2.1 are discussed in detail in the Commentary. The Examples document includes illustrations of the adjustments to financial net income or loss of Constituent Entities in order to derive the GloBE Income or Loss with respect to excluded dividends and short-term portfolio shareholdings and asymmetric foreign currency gains or losses.

The Commentary states that, regardless of whether an election under Article 3.2.2 is made, the entire amount of the stock-based compensation expense is subject to the condition that the item of expense must be susceptible to being reliably and consistently traced to the Constituent Entity that incurred the expense and received the property or services for which the stock-based compensation was provided. Only one Constituent Entity is allowed to deduct stock-based compensation in excess of the amount allowed in the financial accounts and only if that Constituent Entity is allowed a deduction for such stock-based compensation for local tax purposes. 

The Commentary provides clarifications with respect to the means of establishing whether an adjustment is required at the level of the financial results of a Constituent Entity under Article 3.2.3. According to the Commentary, where the MNE Group has used the transfer price reflected in its financial accounts to compute local taxable income and the relevant tax authorities do not require a transfer pricing adjustment, this price should be used in the computation of GloBE Income or Loss. In these circumstances, the MNE Group should not make an adjustment under Article 3.2.3. When transfer prices of the counterparties differ due to unilateral measures (e.g., domestic legislation, unilateral advanced pricing agreements, tax audits), the GloBE Income or Loss should be adjusted where necessary to prevent double taxation or double non-taxation. Further consideration will be given in the GloBE Implementation Framework to the appropriate adjustments to GloBE Income in situations where the tax authorities do not agree on whether or to what extent a transfer pricing adjustment is needed.

The Commentary notes the connection between the international shipping income concepts reflected in the Model Rules and concepts reflected in Article 8 of the OECD Model Tax Convention and identifies particular areas where there are differences.

The Commentary provides that the allocation of GloBE Income or Loss between a Main Entity and its PE should follow the accounting treatment as far as possible, subject to the income and expense allocation rules under a tax treaty or domestic tax law.

Chapter 4 - Computation of Adjusted Covered Taxes

This chapter identifies the taxes attributable to the GloBE Income or Loss of each Constituent Entity, which are the Covered Taxes that represent the second component of the ETR calculation. It includes a definition of Covered Taxes that applies solely for GloBE purposes. It also provides specific rules for the allocation of covered taxes among the Constituent Entities and mechanisms to address temporary differences.

Regarding Article 4.1.1 and the computation of Covered Taxes, the Commentary clarifies that to the extent that current tax expense accrued for Financial Accounting Net Income or Loss includes amounts that are not accrued in respect of Covered Taxes, such as property or excise taxes, those amounts are excluded from the taxes that are taken into account in the ETR calculation for GloBE purposes without the need for a specified adjustment.

Article 4.1.3 requires subtraction of several types of Covered Taxes, including the amount of Covered Taxes with respect to income excluded from the computation of GloBE Income or Loss under Chapter 3. The Commentary clarifies that although dividends received from other Constituent Entities are excluded from the GloBE Income or Loss, taxes on those dividends represent new or additional taxes on the income of the distributing Constituent Entity that has been included in the GloBE Income or Loss. Therefore, taxes paid on such distributed income are included in the distributing Constituent Entity’s Adjusted Covered Taxes and in the numerator of the ETR computation.

The Commentary also specifies that the definition of Covered Taxes is developed solely for the purposes of the GloBE Rules and has no direct interaction with Article 2 (Taxes Covered) of the OECD Model Tax Convention, which defines the taxes that are within the scope of the Convention.

The Commentary notes that it is intended that the GloBE Rules apply after application of the Subject to Tax Rule and domestic tax regimes (including regimes for taxation of PEs or controlled foreign companies). It further states that to preserve the intended rule order and avoid circularity, domestic tax regimes should not provide a foreign tax credit for any tax imposed under a Qualified IIR or UTPR implemented in a foreign jurisdiction.

Regarding the Total Deferred Tax Adjustment Amount of Article 4.4 and the treatment of valuation adjustments and accounting recognition adjustments, the Commentary explains that it is necessary to ensure that a deferred tax asset relating to a domestic tax loss is recorded in the same year as such loss for GloBE purposes. Accordingly, the exclusion of valuation adjustments or accounting recognition adjustments ensures that the deferred tax asset is recorded for GloBE purposes in the same year as the economic loss which gave rise to such asset. The Commentary also provides a basic example to illustrate this.

Regarding the recapture rule of Article 4.4.4, the Commentary notes that this rule ensures that deferred tax liabilities recorded with respect to categories that do not relate to specific policy allowed categories are actually settled within the required period of time. Each such item of deferred tax expense should be tested in each Fiscal Year for recapture as necessary.

The Commentary also provides clarifications regarding the GloBE Loss Election (i.e., the elective rule to effectively carry GloBE losses forward with a deemed deferred tax asset). When elected, the GloBE Loss Election applies in lieu of the Article 4.4 modified deferred tax accounting rules. According to the Commentary, the GloBE Loss Election is generally expected to be of greatest utility as a simplification in jurisdictions that do not impose a corporate income tax or impose one at a very low rate, given that when the election is made Article 4.4 no longer applies and temporary differences may result in Top-up Tax. However, the election may be made for any jurisdiction. The Commentary also clarifies that if the GloBE Loss Election is subsequently revoked, any remaining GloBE Loss Deferred Tax Asset must be reduced to zero upon transition, because when a jurisdiction is transitioned to the modified deferred tax accounting method, the historic deferred tax assets and liabilities will be taken into account as if they had been calculated under Articles 4.1 and 9.1 for the prior Fiscal Years.

Chapter 5 - Computation of Effective Tax Rate and Top-up Tax

This chapter provides rules for the computation of ETR and Top-up Tax. In cases where the ETR of a jurisdiction is below the agreed minimum rate of 15%, the difference results in a Top-Up Tax percentage which is applied to the jurisdictional income to determine the total amount of Top-up Tax. The Top-up Tax is pro-rated among the Constituent Entities located in that jurisdiction and then charged to the Constituent Entities liable for any Top-up Tax. This chapter also includes an elective substance-based income exclusion that may reduce the amount of income subject to any Top-up Tax.

For purposes of the computation of the jurisdictional ETR under Article 5.1.1 of the Model Rules, the Commentary specifies that the ETR so computed is to be expressed as a percentage rounded to the fourth decimal place. The Commentary further notes three exceptions to the jurisdictional ETR requirement: Investment Entities and Insurance Investment Entities (unless they are Tax Transparent Entities), Minority-Owned Constituent Entities, and Stateless Constituent Entities are not included in the MNE Group’s regular jurisdictional ETR computations and instead are subject to special ETR rules.

The Commentary makes clear that any tax under a Qualified Domestic Top-up Tax is taken into account as a credit in the computation of the GloBE Top-up Tax, offsetting any GloBE Top-up Tax and any Additional Current Top-up Tax calculated for the Fiscal Year. While a jurisdiction is a not required to adopt such a tax, if it is adopted, it would need to be implemented and administered in a manner that is consistent with the outcomes of the GloBE rules and their Commentary (including the prohibition against the implementing jurisdiction providing any collateral or other benefits relating to this tax). The Qualified Domestic Top-up Tax may however be based on a local Authorized Financial Accounting Standard that is different than the standard used in the Consolidated Financial Statements. This could result in a Qualified Domestic Top-up Tax that is lower than the GloBE Top-up Tax (and thus would not provide a full offset) or higher (but the excess would not result in a refund or a credit against future Top-up Taxes).

With respect to the Substance-based Income Exclusion, the Commentary specifies that the jurisdictional blending approach also extends to the Excess Profit formula, so that the exclusions for all Constituent Entities in a jurisdiction are aggregated. The Commentary confirms that there is no carryforward or carryback of excess Substance-based Income Exclusion for a jurisdiction. The Commentary also indicates that no specific election will be required if the MNE Group intends to not claim the exclusion for any jurisdiction for any year – it would merely not subtract the exclusion from the Net GloBE Income for any such jurisdiction in the GloBE return for the particular year.

The Commentary provides further specification on how to calculate the Payroll and Tangible Asset components of the Substance-based Income Exclusion, detailing which employees (and which payroll costs with respect to such employees) are to be taken into account and indicating that consideration is being given to providing further guidance on how to address employees working in another jurisdiction or in multiple jurisdictions. The Commentary also refers to the potential for further guidance on how to treat assets not located in any jurisdiction or located in multiple jurisdictions during the year (e.g., an aircraft of an international airline). With respect to items held for sale, which are not taken into account in computing the Substance-based Income Exclusion, the Commentary provides that to be considered held for sale, an asset must be available for immediate sale in its present form, subject only to terms that are usual and customary for sales of such assets and its sale must be highly probable. For purposes of the exclusion, assets are taken into account based on the carrying value as recorded for purposes of preparing the Consolidated Financial Statements (i.e., after taking into account purchase accounting adjustments and elimination of adjustments attributable to inter-company sales), based on the average of the beginning and end of year values. In addition, when an asset is acquired (or sold) during the Fiscal Year, its value will be zero at the beginning (or end) of the year, which will have the effect of halving the carrying value for purposes of the exclusion. In this regard, any increase in the value of an asset due to revaluation increases are disregarded for purposes of the exclusion.

For purposes of the Additional Current Top-up Tax under Article 5.4, the Commentary identifies the rules for recalculating the ETR under the different ETR Adjustment Articles (Articles 3.2.6, 4.4.4., 4.6.1., 4.6.4. and 7.3) and the rule for allocating the Top-up Taxes that arise under Article 4.1.5 (Article 5.4.3).

With respect to the de minimis exclusion under Article 5.5, the Commentary provides that the GloBE Revenue and GloBE Income or Loss of Minority-Owned Entities are taken into account when assessing whether the threshold for this exclusion has been met in a jurisdiction. The Commentary makes clear that only the financial results of the Transition Year will be taken into account when assessing whether this threshold has been met in the first year. A similar approach applies for Constituent Entities that are brought into an MNE Group (e.g., through a merger); the results from previous years are not considered when assessing the thresholds. The Commentary also identifies the adjustments that are likely to affect the GloBE Revenue (and the adjustments that are not required). The Commentary further notes that post-filing GloBE Income or Loss adjustments need to be reflected in the GloBE Revenue. While a jurisdiction of an MNE Group that previously was not in scope of the rule could fall within scope (i.e., the jurisdiction previously met the de minimis threshold but no longer meets it because of increase of income and/or revenue), the opposite is not true (i.e., an adjustment would not cause a jurisdiction to fall below the de minimis threshold). Finally, this de minimis exclusion does not apply to Stateless Constituent Entities or Investment Entities.

Chapter 6 - Mergers and Acquisitions

This chapter contains rules for reorganizations. It also provides special rules for the application of the GloBE rules when assets or liabilities are transferred and when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year. This chapter brings certain Joint Ventures within the scope of the GloBE rules and sets out how the rules apply in the case of multi-parented MNE Groups.

With respect to the application of the revenue threshold for being in scope of the GloBE rules in a merger context where the merging entities or groups use different fiscal years, the Commentary does not require retrospective restatement of financial results to different accounting periods. Instead, the fiscal year used by the merged group following the merger is used, and the revenue for each of the merging entities or groups in fiscal years ending during each of the four years preceding the merged group’s first fiscal year is taken into account. The Commentary also provides a clarification regarding the determination of whether a demerged group is in scope of the GloBE rules for the second to fourth years following a demerger, indicating that the tested year is taken into account for this purpose. Thus, for that second year, the demerged group will be in scope of the GloBE rules if it exceeded the €750 million threshold for both that year and the year of the demerger.

In addition, the Commentary confirms that, because no step-up or step-down in inside basis of assets and liabilities is allowed by the GloBE rules in the context of the acquisition of a Constituent Entity, companies will need to maintain two ledgers: one with historical carrying amounts (used for GloBE purposes) and one with consolidation pushdown adjustments (for group accounting purposes).

The Commentary provides a basic example on the determination of the aggregated revenue of merging groups for purposes of determining whether the merged group is in scope of the GloBE rules. The Examples document also provides an example relating to Constituent Entities joining and leaving an MNE Group and the computation of carrying value of Tangible Assets in the year of change for purposes of the Substance-based Income Exclusion in Article 5.3.

Chapter 7 - Tax neutrality and distribution regimes

This chapter covers the application of the GloBE rules to certain tax neutrality and other distribution regimes. More specifically, it provides special rules in relation to UPEs that are subject to a tax neutrality regime (such as a tax transparency regime or a deductible dividend regime). It also provides special rules for certain tax regimes that subject an Entity to tax on its earnings when those earnings are distributed or deemed distributed. In addition, it provides special rules for controlled Investment Entities that seek to preserve the tax neutrality of these Entities without giving rise to any leakage under the GloBE rules.

The Commentary clarifies the overall policy intent of the provisions in Chapter 7 and also provides some additional details. With respect to Article 7.1 on UPEs that are Flow-through Entities, the Commentary clarifies what being “subject to tax” and “subject to tax on the full amount” means in the context of taxation of the holder of an Ownership Interest. It also specifies that temporary differences, such as accelerated depreciation, will not cause the holder to be considered not to be taxed on the full amount of the UPE’s GloBE Income. It further specifies that a holder is considered subject to tax on the full amount of the GloBE Income even if its taxable income includes expenses or losses related to other investments, businesses or other profit seeking activities. An example illustrating this rule is also included in the Examples document.

The Commentary makes clear that no ETR calculation is required to apply either of the minimum tax tests with respect to Ownership Interests (i.e., that the holder of the Ownership Interest is subject to tax on the full amount of income or that the aggregate taxes of the UPE and the holder of the Ownership Interest meets the minimum rate). It also describes how a nominal rate is calculated in progressive taxation systems and how to determine the residency of a Governmental Entity.

Some of the rules with respect to UPEs that are Flow-through Entities also apply to UPEs that are subject to deductible dividend regimes and the Commentary highlights the similarities and differences between the treatment of Flow-through UPEs and UPEs subject to deductible dividend regimes.

The Commentary provides further background regarding the rules applicable to Investment Entities that are also Constituent Entities of an MNE Group and includes technical clarifications with respect to the required computations. The Commentary also states that in developing the GloBE Implementation Framework, further consideration will be given to the treatment of Insurance Investment Entities whose Constituent Entity-owners are not subject to mark-to-market or similar tax regime on their investments in such entities.

Chapter 8 – Administration

This chapter addresses certain administrative aspects of the GloBE rules. It sets out an MNE Group’s obligation to file a standardized information return in each jurisdiction that has introduced the GloBE rules in order to provide information on the tax calculations made by the MNE Group under the GloBE rules.

In general, the Commentary clarifies that the operation of tax filing and payment obligation rules is left to the determination of each implementing jurisdiction based on the design of that jurisdiction’s existing tax filing and payment procedures. It also indicates that there are a number of places in the GloBE rules where determinations by one tax administration are likely to have consequences for the application of the GloBE rules in other jurisdictions. In these cases, tax administrations can collaborate with each other through the Inclusive Framework to determine whether a coordinated solution to these issues can be agreed. If the discussions in the Inclusive Framework result in the development of agreed administrative guidance, tax administrations should interpret and apply the GloBE rules in accordance with it, subject to any other requirements under domestic law. In this regard, tax administrations could adopt the agreed guidance by incorporating it into their own administrative guidance or jurisdictions could obtain parliamentary acceptance of the agreed guidance if necessary.

With respect to the GloBE information return, the Commentary indicates that the information required could be specified, expanded or restricted as agreed as part of the GloBE Implementation Framework. It also indicates that local tax administrations can request further necessary supporting information to verify compliance with the GloBE rules in accordance with their own domestic law. The Commentary further notes that it is left to jurisdictions to decide whether their current domestic rules regarding amendments to tax or information returns will apply to the GloBE Information Return, or to introduce new provisions that apply only to the GloBE Information Return.

The Commentary provides information on the filing obligations and the information to be included in the Globe Information Return. In particular, the Commentary addresses the filing obligations with respect to Stateless Entities, PEs, Entities treated as Joint Ventures and Excluded Entities. It also addresses the IIR and UTPR information to be included in the GloBE Information Return.

The Commentary indicates that the GloBE Implementation Framework that is to be developed could explore whether a GloBE Safe Harbor could cover situations where no Top-up Tax would be due (for instance, in respect of a jurisdiction where MNE Groups are subject to a Qualified Domestic Minimum Top-up Tax). It also states that an election to apply a GloBE Safe Harbor would be made on an annual basis. It indicates that an MNE Group should not be required to compute the ETR for Constituent Entities in a safe harbor jurisdiction, but should provide a record of the election to use the GloBE Safe Harbor, identify all the Constituent Entities in the safe harbor jurisdiction and provide any other relevant information, as part of the GloBE Information Return.

Chapter 9 - Transition rules

This chapter sets out transitional rules that apply where an MNE Group enters within the scope of the GloBE rules in a jurisdiction for the first time. It also provides specific rules that modify the percentages to be applied in the calculation of the substance-based income exclusion during the transitional period, an exclusion from the UTPR for MNE Groups that are in the initial phase of their international activity and transitional relief rules for filing obligations.

Article 9.1.1 of the Model Rules addresses the use of deferred tax accounting attributes in determination of Covered Taxes pursuant to Article 4.4. The Commentary indicates that when a pre-existing deferred tax attribute is used for financial reporting purposes in a Fiscal Year in which the GloBE rules apply, such attribute is available for use in the application of Article 4.4, subject to the limitations of Article 9.1. A basic example is provided in the Commentary to illustrate this. The Commentary also provides that attributes established under Article 9.1.1 of the Model Rules are eliminated when a GloBE Loss Election is made because the rules on mechanisms to address temporary differences (Article 4.4.) do not apply when the GloBE Loss is elected.

Regarding Article 9.3.2 of the Model Rules and the criteria for determining whether an MNE Group is in the initial phase of its international activity, the Commentary clarifies that the exclusion from the UTPR only applies to MNE Groups that have Constituent Entities in up to five jurisdictions outside the Reference Jurisdiction (i.e., the jurisdiction where the MNE Group has the highest total value of Tangible Assets for the Fiscal Year in which the MNE Group originally comes within the scope of the GloBE rules). For this purpose, there is no requirement that the five other jurisdictions are the same five jurisdictions over the five-year period during which the MNE Group can benefit from the exclusion. The Reference Jurisdiction, however, remains unchanged over the five-year period during which the MNE Group benefits from the exclusion.

For purposes of Articles 9.3.2 and 9.3.3 of the Model Rules, all Tangible Assets are taken into account, provided they are held by the Constituent Entities of the MNE Group that are located in the jurisdictions other than the Reference Jurisdiction over the relevant period. The Commentary also provides some further specification regarding Tangible Assets.

The exclusion from UTPR for MNE Groups in the initial phase of their international activity only applies for a period of five years after the MNE Group has come within the scope of the GloBE rules. The Commentary provides that the five-year period runs from when the MNE Group first meets the requirements of Article 1.1 of the Model Rules and includes the first Fiscal Year for which the MNE Group is subject to the GloBE rules. A simple example is provided to illustrate this. For MNE Groups that are in scope of the GloBE rules when they come into effect, the period of five years will start at the time the UTPR rules come into effect. Inclusive Framework Members have agreed that the earliest the UTPR will come into effect is in 2024. Accordingly, an MNE Group that meets the requirements provided in Article 1.1 for a Fiscal Year that begins before 1 January 2024 would not qualify for the exclusion in any Fiscal Year that begins after 31 December 2028.

The Commentary also clarifies that the five-year period shall not be suspended by any circumstance (for example, even if the revenues of an MNE Group decline in subsequent years).

Chapter 10 – Definitions

This chapter provides the defined terms used throughout the Model Rules. It also includes rules for determining the location of an Entity and a PE for purposes of applying the GloBE rules.

Many of the defined terms in Article 10.1 are discussed in the Commentary to the articles that use those terms. The Commentary provides further clarifications on some defined terms, including PE and various categories of Excluded Entities. Regarding the financial accounting terms and concepts that are used in the GloBE Rules, the Commentary indicates that any such terms and concepts that are not defined in Article 10.1 should be interpreted consistent with the meaning given to them in financial accounting standards and guidance.

The GloBE Rules provide for various elections. Some elections cannot be revoked for five Fiscal Years, including the year in which such elections are made (so-called “Five-Year Election”). According to the Commentary, a Five-Year Election remains in force indefinitely unless a revocation is made. When the election is revoked, a new election cannot be made for the next four Fiscal Years.

PE is a defined term for purposes of the GloBE Rules, and it exists under one of four specified scenarios. The phrase “deemed place of business” covers activities that are deemed to be a permanent establishment under the terms of the tax treaties. While a permanent establishment may exist based on the treaty provisions, it is disregarded for GloBE purposes if there is no source jurisdiction taxation on the income attributable to the permanent establishment (for example, the income is exempted from tax under Article 8 Profits from International Shipping and Air Transport of the tax treaty). Where a jurisdiction exempts income generated through foreign operations and no other jurisdiction considers a permanent establishment to be in existence for such operations, a stateless PE is deemed to exist for GloBE purposes.

Examples document

Together with the Commentary, the OECD released a separate document prepared by the OECD Secretariat containing a series of examples illustrating the application of specific provisions in Chapters 2 through 7 of the Model Rules. The document indicates that the examples are intended to be used for illustrative purposes only and do not form part of the Commentary. It further indicates that additional examples may be developed and published in the future to illustrate the application of the same or other aspects of the Model Rules and the explanations given in the Commentary.

Public consultation on the GloBE Implementation Framework

On the same date as the release of the Commentary, the OECD announced a public consultation related to the next step in the Pillar Two work that will focus on the development of the GloBE Implementation Framework. The GloBE Implementation Framework will facilitate the coordinated implementation and administration of the Model Rules and will include agreed administrative procedures, such as filing obligations, and multilateral review processes. It also will consider the development of safe harbors to facilitate both compliance by MNEs and administration by tax authorities.

With the public consultation, the Inclusive Framework members are seeking input on the issues that should be addressed as part of the development of the GloBE Implementation Framework, with an emphasis on matters of administration, operation, compliance and rule-coordination. The OECD includes four broad questions that could be addressed by stakeholders, covering the need for further administrative guidance, the design of information collection, filing and record-keeping requirements, ideas for simplifications and safe harbors, and mechanisms for rule coordination. The OECD specifically notes that the consultation does not solicit further comment on the policy choices that are reflected in the Model Rules and Commentary.

The deadline for written submissions is 11 April 2022, and a public consultation meeting will be held virtually at the end of April 2022. The OECD has indicated that the GloBE Implementation Framework will be released by the end of 2022 at the latest.

Next steps

In the coming weeks the OECD plans to release a model treaty provision for the Subject to Tax Rule (STTR), supplemented by Commentary that explains the purpose and the operation of the rule, and a Multilateral Instrument for STTR implementation. The OECD also has indicated the intention to hold a public consultation on the STTR.


The Commentary provides additional information relevant to the interpretation and operation of the Model Rules, making it an essential component of the global minimum tax package. The Commentary thus requires close attention. Moreover, the Commentary identifies numerous areas that are being given additional consideration and indicates that further substantive guidance may be provided in connection with the planned GloBE Implementation Framework.

The Model Rules and lengthy Commentary underscore the complexity of the global minimum tax rules and the significant resource investment that companies that are in scope of the new rules will need to make in order to be ready to comply with the new rules when they take effect. In this regard, the Inclusive Framework is working to develop the GloBE Implementation Framework to provide guidance on coordination, administration and compliance matters with respect to the Pillar Two global minimum tax. However, the GloBE Implementation Framework may not be released until late in 2022. The public consultation meeting that the OECD will hold in April 2022 may provide some information regarding the administration and compliance mechanisms being considered. This consultation provides a valuable opportunity for businesses to share practical perspectives on compliance matters with the OECD and the Inclusive Framework jurisdictions early in the development of the GloBE Implementation Framework. However, given the current timeline, businesses may need to start preparing for compliance with the new global minimum tax rules before the final implementation framework is released.

The Model Rules and Commentary are intended to be used by governments in incorporating the global minimum tax rules into their domestic tax legislation. Because there may well be variation – potentially substantial – in how different jurisdictions reflect the rules, it will be important for companies to pay attention to differences in the rules that are implemented across all relevant jurisdictions.

The first major legislative proposal with respect to implementation of the new Pillar Two rules was released on 22 December 2021, with the European Commission’s publication of a draft Pillar Two Directive for the EU. During the ongoing negotiations among Member States, a proposal has been made for a one-year delay of the implementation timeline. This proposed delay has received broad support from Member States and could be part of the final text if agreement on the Directive is ultimately reached. However, negotiations are still ongoing and could further impact the timeline. Moreover, if no agreement is reached, EU Member States that strongly support Pillar Two could decide to move forward individually. EU negotiations will continue in the coming weeks, and the draft Directive will be discussed again by the EU Member States during the ECOFIN meeting on 5 April 2022.

It is important for businesses to evaluate the potential impact of the global tax changes both on their tax positions and on their data and compliance processes and systems. Businesses should also monitor activity in relevant jurisdictions related to the implementation of the global minimum tax rules through changes in domestic tax legislation. Businesses should consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications of these proposals, including participation in the public consultation that the OECD has launched on the GloBE Implementation Framework to be developed.


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 (Australia), Melbourne

Ernst & Young (Australia), Perth

Ernst & Young Tax Co. (Japan), Hibiya Mitsui Tower

Ernst & Young SA (Portugal), Porto

Ernst & Young LPP, Singapore

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 releases Model Rules on the Pillar Two Global Minimum Tax: First impressions, dated 20 December 2021 and OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.

  2. 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.

  3. 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.

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

  5. 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.

  6. See EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 1 July 2021.

  7. See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021.

  8. See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: First impressions, dated 20 December 2021 and OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.

  9. See EY Global Tax Alert, European Commission proposes tax Directive for implementing BEPS 2.0 Pillar Two Model Rules in the EU, dated 22 December 2021.

  10. See EY Global Tax Alert, EU Finance Ministers express broad support for compromise text for Pillar Two Directive which includes a one-year delay of the implementation timeline, but no unanimous agreement yet, dated 16 March 2022.


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