Pillar Two Global Minimum Tax: GloBE Rules and Top-Up Tax

The Pillar Two global minimum tax sets a 15% floor on the effective tax rate that large multinational groups pay in each country where they operate. Developed through the OECD/G20 Inclusive Framework and backed by more than 145 jurisdictions, it applies to groups with at least €750 million in consolidated annual revenue and works by charging a “top-up tax” wherever a group’s effective rate in a given country falls below 15%.¹ Dozens of countries began enacting the rules in 2024, and the framework now shapes tax planning across the world’s largest corporate groups.

Which Groups Are In Scope

The rules cover multinational enterprise groups whose consolidated financial statements report annual revenue of at least €750 million. A group meets the test when its revenue hits that mark in at least two of the four fiscal years immediately before the year being tested.² The €750 million threshold mirrors the one already used for country-by-country reporting, so most groups already know where they stand. Smaller companies and purely domestic businesses fall outside the framework entirely.

Several categories of entities are excluded even when they belong to an in-scope group. Government entities, sovereign wealth funds, international organizations, and nonprofits are carved out. So are pension funds and investment funds that serve as a group’s ultimate parent entity.³ Entities at least 95% owned by an excluded entity can also qualify for exclusion if they exist solely to hold assets or carry out activities that support the excluded parent.

How the Top-Up Tax Gets Collected: The Rule Hierarchy

When a jurisdiction’s effective tax rate falls below 15%, three rules determine which country collects the top-up tax. They operate in a strict priority order so that no shortfall is taxed twice.¹

The Qualified Domestic Minimum Top-Up Tax (QDMTT) comes first. The country where the low-taxed income arises gets the first opportunity to collect the shortfall. If that country has enacted its own domestic minimum top-up tax meeting the OECD’s qualifying standards, it keeps the revenue at home. That incentive has driven rapid adoption of QDMTTs worldwide.

If no qualifying domestic minimum tax applies, the Income Inclusion Rule (IIR) takes over. The ultimate parent entity’s home country charges the top-up tax on its subsidiaries’ undertaxed income. When the ultimate parent sits in a country that has not adopted the IIR, the obligation drops to the next parent entity down the ownership chain.

The Undertaxed Profits Rule (UTPR) is the backstop. If neither the domestic minimum tax nor the IIR fully covers the shortfall, other jurisdictions where the group operates can collect what remains. The UTPR typically works through mechanisms like denied deductions, ensuring no undertaxed income escapes even when the parent is headquartered in a non-adopting country.

The priority matters because it determines where the revenue lands. Countries that enact a QDMTT keep the tax at home rather than ceding it to a parent’s jurisdiction through the IIR or to other operating jurisdictions through the UTPR.

Calculating the Effective Tax Rate

The effective tax rate (ETR) is calculated country by country, not entity by entity. All of a group’s constituent entities within a single jurisdiction are blended together. The formula divides adjusted covered taxes by net GloBE income for that jurisdiction.⁴ If the result is below 15%, the top-up mechanics kick in.

What Counts as Covered Taxes

Covered taxes go beyond standard corporate income taxes. The definition includes taxes recorded in the entity’s financial accounts on income or profits, taxes on distributed profits under eligible distribution tax systems, taxes imposed in place of a general corporate income tax, and taxes based on retained earnings or corporate equity. Withholding taxes borne by the entity on income it receives can also factor in. The key constraint: covered taxes come from financial accounting records, not local tax returns.⁵

Financial Accounting Sets the Baseline

A critical design choice is that both income and taxes are measured using financial accounting standards (typically IFRS or the local GAAP used in the consolidated financial statements) rather than each country’s domestic tax rules. A dollar of income recognized under financial accounting in Germany is measured the same way as a dollar recognized in Singapore. The income figure is then adjusted to remove items the GloBE rules treat differently, including certain dividends, equity gains and losses, and international shipping income.

Dividends are generally excluded from GloBE income to prevent double taxation of the same profits. An exception applies to short-term portfolio shareholdings, defined as cases where the group holds less than 10% of the shares and has held them for less than 12 months.

How the Top-Up Tax Is Calculated

Once the jurisdictional ETR falls below 15%, the top-up tax percentage is the gap: 15% minus the ETR. A jurisdiction with an 11% effective rate produces a 4% top-up percentage.⁴

That percentage is not applied to the jurisdiction’s entire net income. First, the substance-based income exclusion is subtracted, producing what the rules call “excess profit.” The top-up percentage is multiplied by that excess profit to yield the jurisdictional top-up tax. The result is then allocated among the group’s constituent entities in the jurisdiction based on each one’s share of total income. An entity responsible for most of the low-taxed profits bears most of the additional tax.

Any amount already collected through a QDMTT is subtracted from the jurisdictional top-up tax before the IIR or UTPR apply. That offset prevents double collection and reinforces the QDMTT’s priority in the hierarchy.

Substance-Based Income Exclusion and De Minimis Relief

The substance-based income exclusion (SBIE) carves out a portion of income attributable to real economic activity before the top-up tax is calculated. The reasoning is straightforward: a company with factories and employees in a country is contributing to that economy in ways a shell company is not, and the top-up tax should target the latter.¹

The exclusion has two components. The payroll carve-out covers a percentage of eligible payroll costs (salaries, benefits, and similar compensation) for employees performing activities in the jurisdiction. The tangible asset carve-out covers a percentage of the carrying value of property, plant, and equipment located there.

At their permanent levels, both carve-outs sit at 5%. A 10-year transition period that began with the first applicable fiscal years provides higher exclusions during the early years. The payroll carve-out started at 10% and the tangible asset carve-out at 8%, with both declining annually toward the permanent 5% rate.⁶ A manufacturing company with large payrolls and significant physical assets in a low-tax jurisdiction may owe little or no top-up tax; a holding company with minimal substance in the same jurisdiction gets almost no exclusion.

Separately, a de minimis exclusion lets groups skip the top-up tax entirely for jurisdictions with very small operations. It applies when average GloBE revenue in a jurisdiction is below €10 million and average GloBE income is below €1 million (or the jurisdiction produces a loss), measured over a three-year averaging period.⁷ The relief spares groups from grinding through the full computation for amounts too small to matter.

How Tax Credits Are Treated

A tax credit’s interaction with Pillar Two depends on whether it is refundable, and the distinction has real consequences.

A “qualified refundable tax credit” under the GloBE rules is one where the government will pay out the excess in cash if the credit exceeds the company’s tax liability. These credits are treated as income rather than as a reduction in covered taxes. Because the credit adds to the denominator instead of being subtracted from the numerator, it has a smaller impact on the ETR. Countries offering refundable credits for activities like research and development can preserve much of their incentive value under Pillar Two without pushing the group’s ETR below the 15% floor.

Non-refundable credits work differently. They reduce covered taxes directly, lowering the numerator of the ETR fraction. A large non-refundable credit can drag the effective rate below 15% and trigger a top-up tax, effectively neutralizing the incentive. That has prompted some governments to redesign their credit programs as refundable.

Transitional Safe Harbours

Full GloBE calculations for every jurisdiction are enormously complex. To ease the burden during the early years, the framework provides safe harbours that allow groups to skip the detailed computation when simplified data shows a jurisdiction is clearly not undertaxed.

Transitional CbCR Safe Harbour

The Transitional Country-by-Country Reporting Safe Harbour lets groups rely on data they already prepare under existing CbCR obligations. It applies for fiscal years beginning on or before December 31, 2026, and not including any fiscal year ending after June 30, 2028. A jurisdiction qualifies if it satisfies any one of three tests:⁸

A de minimis test: revenue below €10 million and profit below €1 million (or a loss) in the jurisdiction.
A simplified ETR test: a simplified effective tax rate, calculated as tax expense from the financial accounts divided by profit, exceeds the minimum rate for the fiscal year.
A routine profits test: the jurisdiction’s profit falls below the substance-based income exclusion amount, meaning real economic activity there already exceeds the profits earned.

When a jurisdiction passes any test, the group’s top-up tax for that jurisdiction is deemed to be zero for the fiscal year.

Side-by-Side System

In January 2026, the OECD released a Side-by-Side package that introduced a more permanent safe harbour framework for groups headquartered in jurisdictions with robust tax systems.¹ The SbS Safe Harbour is available to groups whose ultimate parent sits in a jurisdiction with both an eligible domestic tax system and an eligible worldwide tax system; when elected, the group is exempt from the IIR and UTPR in other jurisdictions, though QDMTTs still apply. The UPE Safe Harbour is available to groups headquartered in a jurisdiction with an eligible domestic tax system; when elected, the ultimate parent’s jurisdiction is exempt from the UTPR, and again QDMTTs remain unaffected.

A jurisdiction qualifies as having an “eligible domestic tax system” if it has at least a 20% statutory corporate income tax rate (accounting for preferential regimes and subnational taxes), plus a QDMTT or financial-statement-based alternative minimum tax at a rate of at least 15% covering a substantial portion of in-scope groups’ domestic income. The jurisdiction must also show no material risk that in-scope groups will face an effective rate below 15% on their domestic operations.⁹ The “eligible worldwide tax system” requirement adds that the jurisdiction must tax its residents comprehensively on foreign income, including active and passive income of foreign branches and controlled foreign companies.

Where the United States Stands

The United States has not enacted Pillar Two into domestic law. The Trump Administration’s Day One Executive Orders made clear that the Biden-era OECD Pillar Two agreement would have no force or effect for the United States.¹⁰ Treasury then negotiated an agreement within the Inclusive Framework under which US-headquartered companies remain subject to US global minimum taxes while being exempt from Pillar Two’s IIR and UTPR as applied by other countries. The agreement also protects the value of the US R&D credit and other congressionally approved investment incentives.

This does not mean US multinationals can ignore Pillar Two. Countries that have enacted QDMTTs will still collect top-up tax on low-taxed income earned within their borders by US-parented groups. The US also has its own global minimum tax on foreign income through the Global Intangible Low-Taxed Income (GILTI) regime, which the Inclusive Framework treats as comparable to the IIR for purposes of the side-by-side arrangement.

GILTI and the GloBE rules pursue similar goals but differ in ways that matter. GILTI applies at 13.125% after 2025, below the 15% GloBE minimum. GILTI aggregates all foreign income and credits on an overall worldwide basis, while the GloBE rules measure income and taxes separately for each jurisdiction, so high-tax credits in one country cannot offset low-tax income in another. GILTI uses taxable income; the GloBE rules use financial accounting income. And the GloBE rules carry forward losses at 15% as future credits, while GILTI has no loss carryforward mechanism.⁵ A US multinational can pass GILTI scrutiny while still generating top-up tax liability in individual jurisdictions under other countries’ Pillar Two implementations.

The US Corporate Alternative Minimum Tax, enacted in the Inflation Reduction Act, is sometimes confused with Pillar Two, but it does not qualify as a QDMTT or an IIR under the GloBE framework. The CAMT applies on a worldwide aggregated basis, while a QDMTT must operate on a jurisdictional basis. US groups subject to both systems track their obligations under each independently.

Filing the GloBE Information Return

Compliance centers on the GloBE Information Return (GIR), a standardized filing that gives tax authorities the data needed to verify effective tax rates and any top-up tax due. The filing deadline is 15 months after the last day of the group’s fiscal year. For the first fiscal year a group falls within scope, a transitional extension pushes that deadline to 18 months.¹¹

The GIR is ordinarily filed in the jurisdiction of the ultimate parent entity. That country’s tax authority then shares the return with other jurisdictions through exchange-of-information agreements, cutting down on duplicate filings. Groups may still need to submit local notifications in each country where they operate, identifying which entity is responsible for the primary return. The OECD has published a compilation of the additional reporting requirements various jurisdictions have layered on top of the standard GIR, with early deadlines running through mid-2026.¹¹

Penalties for late or inaccurate filings vary by jurisdiction. Because implementing legislation is still being finalized in many countries, the penalty landscape remains in flux. The OECD has encouraged jurisdictions to apply penalty relief during the initial transition period, recognizing the complexity of the new reporting requirements.

Where Pillar Two Is Live

As of early 2026, Pillar Two has moved from blueprint to binding law across a significant number of jurisdictions. All 27 EU member states were required to transpose the EU Minimum Tax Directive (2022/2523) into national law, and the majority have completed that process, including France, Germany, Ireland, the Netherlands, and Sweden. Outside the EU, the United Kingdom, Canada, Australia, South Korea, and Japan have enacted their own implementing legislation. Several lower-tax jurisdictions that historically attracted profit shifting, including the Bahamas, Bahrain, and Barbados, have enacted domestic minimum top-up taxes to capture the revenue themselves rather than cede it through the IIR or UTPR.

Countries continue to refine their legislation. Germany, for example, passed a Minimum Tax Amendment Act in December 2025 to incorporate the latest OECD guidance. Groups operating across multiple countries face an evolving patchwork of local implementations, all built on the same OECD model but with jurisdiction-specific timing and administrative procedures.

1
OECD. Global Anti-Base Erosion Model Rules (Pillar Two)
2
Australian Taxation Office. When and How the Pillar Two Rules Apply
3
OECD. Agreed Administrative Guidance for the Pillar Two GloBE Rules
4
Inland Revenue Board of Malaysia. Global Minimum Tax – How to Calculate the Top-Up Tax
5
Congressional Research Service. The Pillar 2 Global Minimum Tax: Implications for US Tax Policy
6
OECD. FAQs on Model GloBE Rules
7
OECD. Pillar Two GloBE Rules Fact Sheets
8
Australian Taxation Office. Transitional CBC Reporting Safe Harbour
9
OECD. Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package
10
U.S. Department of the Treasury. Treasury Secures Agreement to Exempt US-Headquartered Companies from Biden Global Tax Plan
11
OECD. Compilation of Additional GloBE Information Reporting Requirements