F.2 Background

The GloBE rules apply to CEs, which are members of an MNE group that has annual revenue of 750 million euros or more in the consolidated financial statements of the ultimate parent entity (UPE) in at least two of the four fiscal years immediately preceding the tested fiscal year. The objective of the rules is to ensure that large MNEs pay a minimum level of tax on the income arising in each jurisdiction in which they operate. To achieve this goal, the rules impose a top-up tax on excess profits arising in a jurisdiction whenever the GloBE ETR, determined on a jurisdictional basis, is below the 15 percent minimum rate.

Whether a top-up tax is due under the rules is assessed on the basis of a jurisdictional GloBE ETR calculation in which the numerator is the sum of adjusted covered taxes for each CE located in the jurisdiction. The denominator is the net GloBE income of the jurisdiction. If the jurisdictional GloBE ETR is less than the 15 percent minimum rate, the difference is the top-up tax percentage, which an entity applies to the excess profits in determining the jurisdictional top-up tax. Adjusted covered taxes are generally equal to the current tax expense and deferred tax expense of each CE accrued in the UPE’s financial statements, adjusted for certain items described in the GloBE rules. GloBE income is the financial accounting net income or loss determined for the CE, adjusted for certain items described in the GloBE rules. Financial accounting net income or loss is the net income or loss determined for the CE (before any consolidation adjustments eliminating intragroup transactions) in the preparation of consolidated financial statements of the UPE.

The rules also provide additions to, reductions to, and exclusions from the jurisdictional top-up tax such as:

• Additional current top-up tax, which includes but is not limited to amounts due as a result of the DTL recapture rule (see further discussion in Topic 6 in Section F.3.6).
• A reduction for a domestic minimum top-up tax under a QDMTT.3
• Safe harbors (e.g., the QDMTT safe harbor4), which, at the election of the filing CE,5 deem the top-up tax for a jurisdiction to be zero for a fiscal year when the CEs located in the jurisdiction are eligible for the safe harbor.

The GloBE rules include:

• An IIR, which imposes top-up tax on a parent entity that owns an ownership interest in a low-taxed CE (LTCE) with respect to the CE’s low-taxed income.
• A UTPR, which denies deductions (or requires an equivalent adjustment to be made under domestic law) in an amount resulting in a cash tax expense equal to the top-up tax amount on the low-taxed income of any CE in the MNE group to the extent that such low-taxed income is not subject to tax under an IIR.

The IIR is applied by a parent entity in an MNE group by using an ordering rule that generally gives priority of the rule’s application to the entity or entities closest to the top in the chain of ownership. The UTPR is applied by other entities in the MNE group when the income of low-tax entities is not subject to tax under an IIR and serves as a backstop to the IIR. Finally, the QDMTT is applied in the jurisdiction in which the income is generated. Taxes paid under the GloBE rules do not affect the jurisdictional GloBE ETR calculations described above nor do they create a tax credit carryforward to be applied against taxes due under the regular tax system in future years.