Under Pillar Two, the effective tax rate (ETR) and top-up tax work together as a floor on how lightly a large multinational’s profits can be taxed in any single country. For each jurisdiction where a group operates, the ETR equals adjusted covered taxes divided by GloBE income; if that figure comes in under 15%, top-up tax is owed on the excess profit in that jurisdiction. The rules apply to multinational enterprise groups with at least €750 million in consolidated annual revenue.1OECD. Global Minimum Tax
Which Groups Are In Scope
A multinational group falls within Pillar Two if its consolidated revenue reaches or exceeds €750 million in at least two of the four fiscal years immediately before the tested year. The threshold is measured against the ultimate parent entity’s consolidated financial statements.2OECD. FAQs on Model GloBE Rules
Government entities, international organizations, nonprofits, pension funds, investment funds acting as the ultimate parent, and real estate investment vehicles at the top of a group structure are carved out. The exclusion protects only the parent entity itself. If a pension fund owns a multinational group that meets the revenue test, the operating entities beneath it stay in scope.
How the Effective Tax Rate Is Calculated
The GloBE rules measure taxation country by country rather than looking at a group’s overall global tax burden. For each jurisdiction, the ETR is the group’s adjusted covered taxes in that jurisdiction divided by its GloBE income there.3OECD. Pillar Two GloBE Rules Fact Sheets
GloBE Income
GloBE income starts with an entity’s financial accounting net income or loss and then applies adjustments that strip out items capable of distorting the tax base, including certain equity gains, asymmetric currency gains, and policy-driven revaluations. The result is a standardized profit figure comparable across jurisdictions regardless of local accounting conventions.
Adjusted Covered Taxes
Covered taxes include income taxes and taxes on distributed profits recorded in the entity’s financial statements. Consumption taxes, payroll taxes, property taxes, digital services taxes, and excise duties do not count.4Inland Revenue Authority of Singapore. Multinational Enterprise (Minimum Tax) Act 2024 – Computation of Adjusted Covered Taxes The figure is then adjusted for timing differences between when taxes are booked and when they are actually paid or recovered.
Deferred Tax Adjustments and Recapture
Deferred tax assets and liabilities feed into the covered tax figure, but they are capped at the lower of the 15% minimum rate or the local statutory rate. If a jurisdiction taxes at 25%, the deferred tax amounts are recast as if the rate were 15%, so high-rate deferred balances cannot mask genuinely low-taxed income in the current period.5OECD. Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two) – June 2024
A recapture rule then adds a safeguard. If a deferred tax liability has not reversed by the end of the fifth fiscal year after it was created, the amount is recaptured and treated as additional top-up tax in the jurisdiction where it arose.
When Top-Up Tax Applies
When a jurisdiction’s ETR falls below 15%, the group owes top-up tax on the “excess profit” in that jurisdiction. Excess profit is not the full amount of GloBE income. The rules first subtract a substance-based income exclusion that carves out a return attributable to real economic activity in the country.3OECD. Pillar Two GloBE Rules Fact Sheets
The exclusion equals a percentage of eligible payroll costs plus a percentage of the carrying value of eligible tangible assets in the jurisdiction. At their permanent levels, both percentages sit at 5%. During a ten-year transition running from 2023 through 2032, the rates start higher and phase down: payroll begins at 10% and tangible assets at 8%, each stepping down to the 5% floor. For fiscal year 2026, the payroll carve-out sits at roughly 9.4% and the tangible asset carve-out at roughly 7.4%.
Once the exclusion is subtracted, the top-up tax percentage (15% minus the jurisdiction’s actual ETR) is applied only to the remaining excess profit. A group with a large workforce and heavy fixed assets in a country can therefore shield a meaningful slice of its profit before any top-up tax hits.
Who Collects the Top-Up Tax
Three interlocking mechanisms determine which country actually collects the top-up. They apply in a strict order.
Qualified Domestic Minimum Top-Up Tax
A jurisdiction can adopt a qualified domestic minimum top-up tax (QDMTT) that imposes the top-up itself before any other country can claim it. The QDMTT must calculate excess profits equivalently to the GloBE rules and bring domestic tax on those profits up to 15%. Tax collected through a QDMTT reduces the top-up owed under the other two mechanisms one for one.3OECD. Pillar Two GloBE Rules Fact Sheets
Income Inclusion Rule
After any QDMTT, the Income Inclusion Rule (IIR) operates from the top down. The ultimate parent entity’s jurisdiction charges top-up tax on the parent’s share of low-taxed profits earned by subsidiaries elsewhere. If the ultimate parent’s home country has not adopted a qualified IIR, the liability can cascade down to an intermediate parent in a jurisdiction that has.
Undertaxed Profits Rule
The Undertaxed Profits Rule (UTPR) is the backstop. If low-taxed income is not fully addressed by a QDMTT or an IIR, the UTPR allocates the remaining top-up tax to jurisdictions where the group has other operations. Those jurisdictions can then deny deductions or impose equivalent charges on local subsidiaries to collect. In practice, this closes the escape routes: even if the parent’s country opts out, other jurisdictions step in.
Transitional Safe Harbours That Zero Out the Top-Up
Full GloBE calculations are demanding. Temporary safe harbours let a group set its top-up tax to zero in a particular jurisdiction without running the full computation, provided it can demonstrate compliance using Country-by-Country Reporting (CbCR) data.6OECD. Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two) A jurisdiction qualifies if it passes any one of three tests:
- De minimis: the group’s average GloBE revenue in the jurisdiction is below €10 million and average GloBE income is below €1 million.
- Simplified ETR: the jurisdiction’s simplified ETR, calculated from CbCR and financial accounting data, meets or exceeds 15% for fiscal years beginning in 2024 and 2025, 16% for 2026, and 17% for 2027.
- Routine profits: the jurisdiction’s pre-tax profit is equal to or less than the substance-based income exclusion amount, leaving no excess to tax.
These are transitional. They apply to fiscal years beginning on or before December 31, 2026, and ending no later than June 30, 2028. After that window, full GloBE calculations become mandatory in every jurisdiction.
Interaction With US GILTI
The United States taxes foreign income through the Global Intangible Low-Taxed Income (GILTI) regime, and the mismatch with Pillar Two creates real complications for US-headquartered groups. GILTI blends income and taxes from all foreign subsidiaries into a single global calculation, while Pillar Two measures the ETR country by country. A US group can pass GILTI’s global test while still falling below 15% in specific jurisdictions under GloBE.
The OECD has classified GILTI as a “blended CFC tax regime,” so taxes it generates are treated as CFC taxes that can be allocated to jurisdictions for purposes of the GloBE ETR calculation. GILTI does not, however, qualify as a full Income Inclusion Rule. Foreign jurisdictions with a QDMTT or UTPR can still impose top-up tax on US groups despite the taxes those groups already pay under GILTI. How the US responds legislatively remains in flux.
Filing the GloBE Information Return
The GloBE Information Return gives tax authorities the data to verify a group’s top-up tax position. It contains jurisdictional profit and loss figures, adjusted covered tax calculations, substance-based income exclusion amounts, and the resulting ETR for each country.7OECD. Tax Challenges Arising from the Digitalisation of the Economy – GloBE Information Return Authorities exchange the return across borders, so a filing in one country feeds compliance checks in others.
The return must be filed within 15 months of the end of the fiscal year. For the first year a group comes within scope in a particular jurisdiction, the deadline is extended to 18 months. Under OECD administrative guidance, filing deadlines for initial periods could not fall earlier than June 30, 2026.
Penalty Relief During Transition
For fiscal years beginning on or before December 31, 2026, and not ending after June 30, 2028, implementing jurisdictions have agreed not to impose penalties or sanctions in connection with GloBE filings where a group has taken “reasonable measures” to comply. The guidance points to good-faith errors from unfamiliarity with new rules, isolated mathematical mistakes, and positions based on a reasonable interpretation of ambiguous provisions. Relief does not extend to avoidance, fraud, or abuse, and it does not eliminate the obligation to correct errors and pay any underpaid top-up tax with interest.
Where Implementation Stands
As of mid-2026, 44 jurisdictions have completed their process for an IIR and 50 have done so for a domestic minimum top-up tax, and 37 jurisdictions have a qualified IIR or QDMTT in effect for the 2024 reporting fiscal year.8OECD. Global Minimum Tax: Release of a Common Understanding of Implementing Jurisdictions and Further Administrative Guidance to Support Compliance Most EU member states enacted legislation in late 2023 or 2024 under the EU minimum tax directive, and Australia, Canada, and several Gulf states have enacted domestic legislation.
The practical point for affected groups is that compliance does not depend on whether the parent’s home country has adopted Pillar Two. If any jurisdiction in the group’s operating footprint has enacted the rules, the group needs to be ready to calculate its ETR, identify any top-up, and file.