Noam Noked (noam.noked@cuhk.edu.hk) is an assistant professor with the faculty of law at the Chinese University of Hong Kong. He thanks Reuven S. Avi-Yonah, Jesse Kavanagh, Zachary Marcone, Michael Olesnicky, Leopoldo Parada, Sol Picciotto, Kaushal Tikku, Jeff VanderWolk, and Heydon Wardell-Burrus for their helpful comments.
In this article, Noked examines the implications of a new rule in the pillar 2 model rules regarding qualified domestic minimum top-up tax. He argues that many countries would benefit from adopting domestic minimum taxes, which would take priority over the global minimum tax under the OECD’s global anti-base-erosion regime.
This article explores a tax policy question that countries should consider while preparation for the adoption of pillar 2 continues: Should they impose domestic minimum taxes on low-taxed constituent entities of multinationals?
Under the OECD’s global anti-base-erosion (GLOBE) regime, countries will tax the income of multinational enterprises if other countries have not exercised their primary taxing rights over that income. However, the non-exercising countries can defend their taxing rights by adopting qualified domestic minimum top-up taxes (QDMTs), which are in essence domestic minimum taxes with the same design as the GLOBE rules. The recently published pillar 2 model rules provide that the amount payable under a domestic minimum tax is credited against GLOBE top-up taxes on the relevant income. In other words, domestic minimum taxes will take priority over the global minimum tax.
Many countries would benefit from adopting domestic minimum taxes.1 If most countries adopt QDMTs, the GLOBE regime will operate as a rarely used backstop or secondary rule, giving way to domestic minimum taxes as the primary measures to ensure MNEs pay a minimum level of tax.
I. Introduction
According to the pillar 2 blueprint, the GLOBE regime’s global minimum tax is generally similar to a controlled foreign corporation regime under which the residence country of the MNE’s ultimate parent entity (UPE) imposes a top-up tax on low-taxed constituent entities (LTCEs) in other jurisdictions.2 That design has been harshly criticized as giving priority to developed countries because most MNEs are headquartered there. In a December 2020 joint submission to the OECD, the Tax Justice Network, Oxfam International, and other organizations said:
The proposed rules discriminate against developing countries by giving priority to residence country rules. We believe that any base erosion protection tax that is introduced internationally should have a balanced allocation of taxing rights between source and residence countries. Furthermore, as we have stressed in previous submissions, we believe that if any hierarchy between different rule systems is introduced, it should give priority to source country rules.
However, a new rule in the final design of the GLOBE regime gives priority to domestic minimum taxes over the global minimum tax and favors developing countries and other source jurisdictions in allocating taxing rights.3 Under that rule, countries can impose QDMTs on domestic LTCEs of in-scope multinationals.4 If they choose to impose that tax, other countries (including UPE jurisdictions) will be unable to impose GLOBE top-up taxes on the relevant income.5
Which countries would benefit from adopting a QDMT in response to GLOBE? Many, especially developing countries, financial centers with substantial economic activities, and developed countries with low corporate tax rates or pockets of low-taxed profits. As discussed below, tax havens with no substantial economic activities and high-tax countries that neither have nor expect to have any LTCEs would see little or no benefit from adopting a QDMT.
While in many countries adopting a QDMT would be a rational response to GLOBE, that kind of tax is not a panacea for many policy challenges. To address broader base erosion and profit-shifting problems, countries should consider additional tax measures, which could coexist alongside a QDMT.6
There are early signs that countries are seriously considering adopting a QDMT. As discussed below, the European Union recently described the QDMT as a measure that would preserve sovereignty and allow its member states to collect additional tax revenue from their domestic entities. The U.K. government recently published a consultation document that explores the idea of introducing a domestic minimum tax. According to the document, that kind of tax would raise additional revenue for the U.K. “exchequer without increasing the overall tax burden on entities operating” in the United Kingdom and “could reduce the compliance and administrative burdens on businesses and increase taxpayer certainty.”7 Switzerland is also considering adopting a domestic minimum tax in response to GLOBE.8
If most countries adopt domestic minimum taxes as advocated in this article and others,9 the GLOBE regime will operate as a rarely used backstop or secondary rule. Source jurisdictions’ domestic minimum taxes would be the primary measures ensuring a minimum level of taxation on MNEs’ income. According to a 2020 OECD economic impact assessment, UPE jurisdictions might benefit from reducing MNEs’ profit-shifting incentives but not from the collection of GLOBE top-up taxes.10 The adoption of domestic minimum taxes would achieve the GLOBE regime’s main goals of setting a floor for tax competition and ensuring that MNE income is subject to a minimum level of tax.11
II. The Model Rules’ QDMT
The pillar 2 model rules define a QDMT as a minimum tax included in the domestic law of a jurisdiction that:
determines the excess profits of constituent entities in the jurisdiction (domestic excess profits) as the GLOBE rules do;
increases the domestic tax liability for domestic excess profits to the minimum rate for the jurisdiction and constituent entities for a fiscal year; and
is implemented and administered consistently with the outcomes outlined in the GLOBE rules and commentary, provided that a jurisdiction does not provide any benefits related to those rules.12
In other words, a domestic minimum tax with the same design as the GLOBE rules would be a QDMT. Countries that implement the GLOBE regime can impose a QDMT by extending the GLOBE rules to domestic LTCEs and addressing several QDMT-specific design questions.13
How does a QDMT affect the calculation of the GLOBE top-up tax? The model rules provide a formula for the jurisdictional top-up tax14:
Jurisdictional Top-Up Tax = (Top-Up Tax Percentage * Excess Profit) + Additional Current Top-Up Tax - Domestic Top-Up Tax
Thus, under the model rules, a QDMT is credited against the GLOBE top-up tax liability.15
A similar result can be achieved if the rules provide that the QDMT is a covered tax so that it increases the constituent entity’s effective tax rate (ETR) to 15 percent.16 However, the model rules exclude the QDMT from the definition of covered taxes and account for it by crediting it against the GLOBE top-up tax. That approach is different than the one in the blueprint, which noted that a “supplementary tax which applies a top-up tax to the net income of domestic entities would also fall within the definition of a covered tax.” Even so, the result under both approaches is largely similar: The domestic constituent entity will pay a domestic tax of 15 percent on its excess profit — that is, GLOBE income minus carveouts — and no other country will impose a GLOBE top-up tax on that income.17
One potential advantage of the model rules’ approach is that it would enable easier data collection and monitoring of how much revenue is raised under the QDMT. However, it will likely impose a higher compliance burden on MNEs because it requires calculating GLOBE top-up taxes even when those taxes are not expected to apply. Under the model rules, although GLOBE top-up taxes are not expected to apply to entities in a country with a QDMT, MNEs will still be required to calculate the GLOBE top-up taxes and then credit the QDMT against them. Under the alternative approach of treating a QDMT as a covered tax, the compliance would be simpler because the relevant entities would not be considered LTCEs, so the calculation of GLOBE top-up taxes is not required. Given the priority of QDMTs over the GLOBE top-up taxes and to simplify compliance, the OECD should consider providing a safe harbor under which the calculation of GLOBE top-up taxes would not be required for entities in jurisdictions with QDMTs.18
Some QDMT design questions must be addressed. For example, how should a QDMT apply to an LTCE that is partially owned by minority shareholders outside the multinational group? Under the GLOBE rules, the income inclusion rule (IIR) top-up tax would be limited to the amount attributable to the parent entity based on its ownership interest,19 and the amount attributable to other owners would not be subject to a GLOBE top-up tax.20 Under one QDMT approach, the QDMT would impose a top-up tax on the domestic constituent entity’s income without excluding any amount attributable to minority shareholders outside the group. This approach would lead to an overall higher tax burden than under GLOBE. Under another approach, calculating the top-up tax under a QDMT and the IIR would be similar and not include a top-up amount attributable to owners outside the group.21 However, that approach involves more complexity and might raise additional concerns.22
Notably, the pillar 2 blueprint’s proposed GLOBE rules did not include a QDMT. The tax, which did not appear in earlier publicly available documentation, has been called a “surprising development.”23
In the discussion of the undertaxed payments rule (UTPR), the pillar 2 blueprint noted that countries could increase their jurisdictional ETR by adopting a domestic minimum tax with the same base and rate as specified in the GLOBE rules. However, because the blueprint did not explicitly address how domestic minimum top-up taxes modeled after GLOBE would affect GLOBE top-up taxes, the treatment of domestic minimum taxes was uncertain. Without clear guidance, there was a risk that countries might impose GLOBE top-up taxes even when the relevant income is subject to a domestic minimum tax modeled after GLOBE. That could lead to double taxation and disputes over which jurisdiction has priority when applying top-up taxes.
I have stressed the importance of confirming that countries can impose a domestic minimum tax modeled after GLOBE on the income of domestic LTCEs, thereby preempting the imposition of GLOBE top-up taxes on that income by other jurisdictions.24 As noted, the model rules resolve that by providing that a QDMT is credited against GLOBE top-up taxes. Under the rules, countries can be certain that a domestic minimum tax that meets the definition of a QDMT would have priority over GLOBE top-up taxes.
III. LTCEs in UPE Jurisdictions
How the GLOBE rules will apply to LTCEs in UPE jurisdictions is relevant to whether countries should adopt QDMTs. The IIR, which is the primary rule under GLOBE, does not apply to LTCEs in the UPE jurisdiction.25 According to the model rules, the UTPR, a secondary rule triggered only when the IIR does not apply, could apply to those constituent entities. In general, the UTPR applies a top-up tax by disallowing deductions or making equivalent adjustments in the jurisdictions where an MNE has a presence.26 The allocation of the UTPR top-up tax to each UTPR-implementing jurisdiction follows a formulary apportionment based on employees and tangible assets.
The blueprint proposed a cap on the UTPR top-up tax for LTCEs in the UPE jurisdiction. The result of that cap is that LTCEs in the UPE jurisdiction could be subject to a tax rate lower than 15 percent under the GLOBE regime. If this proposed cap were adopted, introducing a domestic minimum tax would increase the tax on LTCEs in UPE jurisdictions above the tax that would apply to them under the GLOBE regime.27 If countries were to impose domestic minimum taxes of 15 percent on foreign-owned constituent entities while reducing or waiving the domestic minimum taxes on constituent entities of domestically headquartered MNEs, that might be considered discrimination against foreign-owned constituent entities.28 While governments might support imposing a domestic minimum tax on foreign-owned constituent entities, they would likely face opposition from domestic MNEs with domestic LTCEs that might experience a rate increase beyond the additional tax prescribed under the GLOBE rules.
The model rules avoided that problem by not setting a cap on the UTPR top-up tax for LTCEs in UPE jurisdictions. Instead, they adopt a narrow exclusion from the UTPR for multinational groups in the initial phase of international activity.29 Because the model rules do not have a cap, LTCEs in the UPE jurisdiction should be subject to the same overall tax burden under GLOBE and a QDMT modeled on GLOBE. Adopting a QDMT would result in the UPE jurisdiction collecting the top-up taxes that would otherwise be collected by UTPR-implementing jurisdictions. Given the complexity involved in complying with the UTPR, MNEs with LTCEs in the UPE jurisdiction may prefer paying a QDMT in the UPE jurisdiction rather than UTPR top-up taxes in multiple jurisdictions.30
IV. Who Would Benefit?
This section summarizes my previous publications on the tax policy considerations that support the adoption of a domestic minimum tax modeled after GLOBE.31
First, a domestic minimum tax would not materially change the incentives for MNEs subject to the GLOBE regime: The main difference is that under a domestic minimum tax, the domestic tax authority would collect the tax from domestic LTCEs. Thus, when an MNE’s overall tax liability under GLOBE and QDMT is similar, a QDMT is not expected to materially distort the MNE’s activities beyond the distortions created by the GLOBE rules.32
Second, from a distributive perspective, the main effect of domestic minimum taxes is the distribution of the relevant tax revenue across jurisdictions: The country with the primary taxing rights collects the tax. That seems an appropriate approach under the rationale that the GLOBE rules should apply only when countries do not exercise their primary taxing rights over MNE income.33
Third, a domestic minimum tax should be designed so that it does not violate any applicable anti-discrimination rule under treaties or domestic law. It should apply to foreign- and domestic-owned constituent entities equally.34 Countries should consider whether applicable nondiscrimination norms require that a domestic minimum tax also apply to large groups with purely domestic activities, as proposed by the EU.35 Constituent entities of in-scope MNEs may argue that they are discriminated against because they are subject to a higher tax than other domestic entities. However, that treatment stems from the GLOBE regime — disparate treatment will apply if a domestic minimum tax is not introduced. If the GLOBE regime is not considered discriminatory, a QDMT should not be, either.36
Fourth, a QDMT is not expected to add much complexity because the relevant MNEs would have to comply with the GLOBE rules anyway. As noted above, jurisdictions implementing GLOBE could adopt QDMTs by extending the GLOBE rules to domestic entities. QDMTs could simplify compliance with the GLOBE rules, especially for LTCEs in UPE jurisdictions.37 Introducing a safe harbor for constituent entities in jurisdictions with QDMTs would further simplify compliance.
Fifth, as noted by the European Commission, adopting domestic minimum taxes would preserve countries’ tax sovereignty.38 While countries are generally allowed to protect their tax bases, the pillar 2 model rules make it clear that countries can choose to adopt QDMTs and collect top-up tax from their domestic LTCEs.
As discussed below, developing countries, financial centers with substantial economic activities, and developed countries with low corporate tax rates or pockets of low-taxed income can benefit from adopting QDMTs.
A. Developing Countries
The OECD economic impact assessment notes that developing countries collect much less tax revenue as a share of GDP than higher-income jurisdictions and “often resort to more generous tax incentives.” The GLOBE regime will limit developing countries’ ability to attract foreign investments by offering tax incentives that would reduce the constituent entities’ ETR below 15 percent,39 thus reducing the incentives for MNEs to invest in locations where higher tax results in lower after-tax returns.40 Because GLOBE top-up taxes will apply to LTCEs if domestic minimum taxes are not adopted, many developing countries that offer tax incentives would be better off collecting the additional tax from domestic LTCEs instead of ceding that tax revenue to UPE jurisdictions.41 Developing countries could use that additional revenue for various purposes, including offering nontax investment incentives.42 Importantly, nontax benefits must not be tied to a domestic minimum tax, or the tax will not qualify as a QDMT.43 If developing countries are harmed by corporate tax avoidance, which could involve both foreign and domestic MNEs, QDMTs could safeguard their tax bases to some extent.
Because QDMTs will piggyback on the implementation of the GLOBE regime, any additional administration costs are unlikely to be high: MNEs will likely comply with the GLOBE regime and any QDMT as part of the same global compliance exercise. Therefore, developing countries that adopt QDMTs would likely need to invest little additional administration and enforcement resources.
However, adopting QDMTs will not address many of the tax-related problems affecting developing countries — for example, they will not prevent MNEs from shifting profits out of high-tax developing countries.44 Given the GLOBE regime in its current form, many developing countries with LTCEs would be better off adopting a QDMT and collecting the additional tax revenue instead of ceding it to other countries. Developing countries should consider additional tax measures that could coexist alongside QDMTs to address broader BEPS problems and other challenges. Alternatively, developing countries could adopt tax measures to increase domestic constituent entities’ ETR without introducing QDMTs — for example, they could increase corporate income tax rates and repeal tax incentives. However, those measures (which might not be limited to in-scope MNEs) might not be desirable or feasible.45
B. Financial Centers
Hong Kong, Singapore, and other financial centers that host substantial economic activities would likely benefit from introducing QDMTs. Those jurisdictions have relied on low levels of taxation and tax incentives to attract investment and economic activities, but if they do not impose top-up taxes on domestic LTCEs, other countries will. While Hong Kong and Singapore would like to preserve their low-tax environment for other taxpayers, they have little to gain from ceding taxing rights over domestic LTCEs.46 Therefore, it would serve their interests to impose QDMTs and use the additional resources for their fiscal needs, including increasing their international competitiveness through nontax measures.
However, that approach might not be beneficial for offshore financial centers that do not host substantial economic activities.47 If an MNE records profits in a constituent entity in a tax haven without carrying on commensurate economic activities there, other countries might tax those profits even if the tax haven imposes a QDMT. Other countries’ tax claims could be based on transfer pricing rules, antiavoidance doctrines, CFC regimes, and other tax rules. MNEs would have a stronger incentive to exit tax havens that adopt QDMTs. That will present an interesting natural experiment: By observing which offshore jurisdictions adopt QDMTs, we can infer which are probably tax havens with little or no substantial economic activities.48
C. Developed Countries
Several developed countries have statutory tax rates or average ETRs below 15 percent.49 Several others have average ETRs that exceed 15 percent by a few percentage points, which suggests that many corporate taxpayers likely pay ETRs lower than 15 percent. Also, MNEs’ ETRs might be lower than the average ETRs if those companies receive more tax incentives or have more opportunities to minimize their taxes. Developed countries that impose low levels of corporate taxation on constituent entities would benefit from adopting QDMTs instead of ceding their taxing rights to other jurisdictions.
That might also be true for high-tax countries. According to the OECD economic impact assessment, there might be high-tax countries with pockets of low-taxed profits. That could be the result of offering tax incentives or MNEs otherwise paying low levels of tax.
Countries that do not have and are not expected to have any LTCEs would have little interest in adopting domestic minimum taxes — it is unclear how many countries fall in that category.
V. Early Reactions: The EU and United Kingdom
Two days after the publication of the model rules, the European Commission proposed a directive (COM(2021) 823 final) for the implementation of pillar 2 by EU states.50 The explanatory memorandum states:
To preserve sovereignty of Member States, the Directive provides that a Member State can opt to apply the top-up tax domestically to constituent entities located in its territory (Domestic Top-up Tax). This election allows that the top-up tax is charged and collected in a jurisdiction in which low-level of taxation occurred, instead of collecting all the additional tax at the level of the UPE. When this election is exercised, the parent entity applying the IIR will be obliged to give credit for the qualified domestic top-up tax when calculating the top-up tax in respect of the relevant jurisdiction.
The EU proposal also notes that imposing those kinds of domestic minimum taxes would allow member states to benefit from the top-up tax revenue collected on LTCEs in their territories. The proposed directive adopts the model rules’ definition of a qualified domestic top-up tax and the computation method for the jurisdictional top-up tax.51 It also extends the application of the IIR to large domestic groups to avoid any risk of discrimination “between an entity that belongs to a group with cross-border activities and a group with purely domestic activities.”
Interestingly, the European Commission views a country’s election to impose a QDMT as a measure that preserves sovereignty and allows the country to receive the taxes collected from its domestic entities.52 Ireland has already announced that it will increase the corporate rate that applies to in-scope MNEs to 15 percent, and other countries are reportedly considering adopting QDMTs.53 The European Commission’s prompt endorsement of a domestic minimum tax could encourage more countries to follow suit.
As noted, the U.K. government recently published a consultation document exploring the adoption of a domestic minimum tax. The document states two reasons for introducing the tax: revenue protection and simplification.
According to the document, absent a domestic minimum tax, the GLOBE rules will likely result in low-taxed profits in the United Kingdom being topped up in foreign jurisdictions. The tax would therefore secure additional revenue for the United Kingdom without increasing the overall tax burden on entities operating in the country. A domestic minimum tax also could reduce compliance and administrative burdens on businesses and increase taxpayer certainty, especially for U.K.-headquartered MNEs that would otherwise need to pay UTPR top-up taxes in multiple jurisdictions.
The U.K. government has proposed limiting the tax’s application to multinational groups that would be subject to the GLOBE rules. The consultation document also notes that applying the domestic minimum tax to both U.K.- and foreign-headquartered MNEs would provide a level playing field for all in-scope MNEs operating in the United Kingdom and ensure that top-up taxes on U.K. profits are collected there.54 As noted, the Swiss government is also considering adopting a domestic minimum tax in response to GLOBE.
VI. Concluding Remarks
Members of the inclusive framework that choose to adopt the GLOBE rules have agreed to implement them in a manner consistent with the model rules. One remaining policy choice that each government is free to make is whether to adopt a QDMT, which, as argued here and elsewhere,55 should be an obvious choice. With the model rules clarifying that a QDMT would have priority over GLOBE top-up taxes, many countries would benefit from adopting a domestic minimum tax.
Mass adoption of domestic minimum taxes would have substantial consequences on the revenue allocation of top-up taxes between source and UPE jurisdictions. Source jurisdictions’ domestic minimum taxes would be the primary measure for ensuring a minimum level of taxation of MNE income. The GLOBE regime would operate as a backstop or secondary rule that would raise little in top-up taxes but encourage countries to adopt domestic minimum taxes. UPE jurisdictions would benefit from reducing MNEs’ profit-shifting incentives, which would likely increase their tax revenue, but not from collecting GLOBE top-up taxes. That would achieve the main goals of the GLOBE regime of setting a floor for tax competition and ensuring that MNE income is subject to a minimum level of tax. That could be the new equilibrium for MNE taxation — that is, until BEPS 3.0.
FOOTNOTES
1 This article builds on the author’s prior publications, including “Defense of Primary Taxing Rights,” 40(2) Va. Tax Rev. 341 (2021); “Potential Response to GLOBE: Domestic Minimum Taxes in Countries Affected by the Global Minimum Tax,” Tax Notes Int’l, May 17, 2021, p. 943; and a submission to the OECD’s public consultation on the reports on the pillars 1 and 2 blueprints.
2 That description refers to the income inclusion rule (IIR), which is the primary rule under GLOBE. For further background on GLOBE, related matters, and critiques, see, e.g., Reuven S. Avi-Yonah, “Build Back Better and Pillar Two: Two Alternative Scenarios,” SSRN (Dec. 30, 2021); Joachim Englisch, “International Effective Minimum Taxation — Analysis of GloBE (Pillar Two),” SSRN (Apr. 18, 2021); Vikram Chand et al., “Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the Various Challenges,” SSRN (Nov. 23, 2021); Leopoldo Parada, “Full Taxation: The Single Tax Emperor’s New Clothes,” 24(2) Fla. Tax Rev. 729 (2021); and Daniel Shaviro, “What Are Minimum Taxes, and Why Might One Favor or Disfavor Them?” 40(2) Va. Tax Rev. 395 (2021).
3 See infra Section II; and Michael Devereux, John Vella, and Heydon Wardell-Burrus, “Pillar 2: Rule Order, Incentives, and Tax Competition,” Policy Brief (Jan. 14, 2022). As discussed in Section IV, a QDMT does not solve the problem of profit shifting from source jurisdictions. For example, if a U.K.-headquartered MNE has an Indian subsidiary whose profits are shifted to an LTCE in Bermuda, the low-taxed profits in Bermuda will typically be subject to the GLOBE top-up tax in the UPE jurisdiction. Adopting a QDMT in the source country does not eliminate that preference for residence jurisdictions. For a proposal that could change that preference, see Alex Cobham et al., “A Practical Proposal to End Corporate Tax Abuse: METR, A Minimum Effective Tax Rate for Multinationals,” IES Working Paper 8/2021 (2021).
4 See chapter 10 of the model rules for the definition of common terms such as “low-taxed constituent entities.”
5 That rule, found in the pillar 2 model rules, is discussed in sections II and III, infra. The GLOBE rules require a common approach: Inclusive framework members do not have to adopt the rules, but if they do, they should implement and administer them consistently with the outcomes outlined in pillar 2, taking into consideration agreed model rules and guidance. Inclusive framework members should also accept the application of the GLOBE rules by other members, including agreement on rule order and safe harbors. OECD, “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy” (Oct. 8, 2021).
6 If other tax measures raise a constituent entity’s effective tax rate above 15 percent, the QDMT will not be triggered.
7 HM Treasury, “OECD Pillar 2: Consultation on Implementation,” at 53-54 (Jan. 2022).
8 See “Big Swiss Companies to Pay Minimum 15 Percent Tax Rate From 2024 Under OECD Deal,” NewsMax, Jan. 13, 2022.
9 See Noked, “Defense” and “Response,” supra note 1.
10 Source jurisdictions would also benefit from reduced profit-shifting incentives.
11 OECD, “Global Anti-Base Erosion Proposal (‘GloBE’) — Pillar Two — Public Consultation Document,” at 6 (Nov. 2019).
12 The model rules also specify that a QDMT can compute domestic excess profits based on an acceptable financial accounting standard permitted by an authorized accounting body or standard adjusted to prevent any material competitive distortions rather than on the financial accounting standard used in the consolidated financial statements.
13 See Noked, “Defense,” supra note 1, at 368.
14 A jurisdictional top-up tax is imposed if the resulting amount is positive.
15 See also OECD, “The Pillar Two Rules in a Nutshell,” at 4 (Dec. 20, 2021).
16 For further discussion on the design considerations of the relevant alternatives, see Devereux et al., “What Is the Substance-Based Carve-Out Under Pillar 2? And How Will It Affect Tax Competition?” 5(39) EconPol Policy Brief (Nov. 17, 2021); and Johannes Becker and Englisch, “GloBE Minimum Taxation: Calculating the Local ETR With Carve-Outs,” Kluwer International Tax Blog (Dec. 17, 2021).
17 As discussed below, the different approaches could lead to different tax outcomes in some situations. See infra note 21 and accompanying text.
18 The author thanks Jesse Kavanagh for that idea.
19 The parent entity’s allocable share of the top-up tax is the top-up tax for the relevant LTCE multiplied by the parent’s inclusion ratio, which reflects the parent’s ownership interest.
20 It appears that the UTPR top-up tax would not apply in that situation because all of the UPE’s ownership interests in the LTCE are held directly or indirectly by at least one parent entity that must apply an IIR to the constituent entity.
21 That approach will not work well if a QDMT is a covered tax because it would result in an ETR lower than 15 percent. However, it could work under the model rules because they credit a QDMT against the GLOBE top-up taxes.
22 For further discussion, see Noked, “Defense,” supra note 1, at 359-360.
23 Allan Lanthier, “The Anti-Tax Haven Law Is a Windfall for . . . Tax Havens,” Financial Post, Jan. 25, 2022. See also Devereux, Vella, and Wardell-Burrus, supra note 3.
24 See supra note 1.
25 Under the model rules, a parent entity in the implementing jurisdiction must apply the IIR-charging provisions to an LTCE that is not in that jurisdiction. That means that the IIR applies only to LTCEs in jurisdictions other than the parent’s jurisdiction. For more on the GLOBE IIR and potential issues with its implementation, see Carla de Pietro, “The GloBE Income Inclusion Rule and Its Global Character: Complexities Underlying Its Fully Effective Application,” 30(5/6) EC Tax Rev. 220 (2021).
26 See OECD, “Global Anti-Base Erosion Model Rules (Pillar Two): Frequently Asked Questions” (Dec. 2021).
27 For example, assume that because of the cap, the UTPR top-up tax that would apply to a Singaporean MNE’s domestic LTCEs would be 10 percent. If Singapore adopted a domestic minimum tax of 15 percent, the LTCEs would be subject to a tax higher than what would apply to them under GLOBE.
28 See commentary on article 24(5) of the OECD model convention.
29 That exclusion applies for a limited time only if the MNE has constituent entities in no more than six jurisdictions and the sum of its tangible assets’ net book values of all constituent entities other than in the reference jurisdiction (as defined in the model rules) is not more than €50 million. A domestic minimum tax could include a similar exclusion.
30 For a similar view, see HM Treasury, supra note 7, at 54.
31 See supra note 1.
32 But recall the discussion in Section II regarding the potentially different tax treatment under GLOBE and QDMT when the constituent entity is partially owned by the MNE. Also, for any MNE, there could be temporary differences in the taxation or tax positions of the relevant entities, which could create a preference for paying tax in a particular jurisdiction. However, it is unclear whether MNE-specific differences affect the overall long-term incentives for MNEs. See Noked, “Defense,” supra note 1, at 365; and Devereux, Vella, and Wardell-Burrus, supra note 3, at 4.
33 See Noked, “Defense,” supra note 1, at 366; and Devereux, Vella, and Wardell-Burrus, supra note 3, at 4.
34 See OECD commentary, supra note 28.
35 See infra discussion of the proposed EU directive in Section V.
36 See Noked, “Defense,” supra note 1, at 366-367. Whether the GLOBE regime is discriminatory is outside the scope of this article.
37 That is the U.K. government’s position in its public consultation, discussed in Section V, infra.
38 See infra Section V.
39 For more on the impact of GLOBE on developing countries, see Parada, “La Propuesta de un Impuesto Minimo Global: Una Mirada Critica,” Transformacion Digital y Justicia Tributaria (2021) (in Spanish).
40 See Noked, “Defense,” supra note 1, at 365.
41 A country can adopt a domestic minimum tax modeled after GLOBE without adopting the GLOBE regime itself.
42 For further discussion, see Noked, “From Tax Competition to Subsidy Competition,” 42 U. Penn. J. Int’l L. 445 (2020).
43 To be considered a qualified domestic top-up tax, the jurisdiction must not provide any related benefits. For example, if a nontax subsidy is calculated in reference to the amount paid as a domestic minimum tax so that it effectively reduces or waives the tax, then other countries might not consider the relevant domestic minimum tax as a qualified domestic top-up tax; as a result, GLOBE top-up taxes may apply.
44 The GLOBE regime is expected to reduce MNEs’ incentives to shift profits to low-tax jurisdictions, which could reduce incentives to shift profits out of high-tax developing countries.
45 For detailed discussion, see Noked, “Defense,” supra note 1, at 354-356.
46 Id.
47 Id. at 366. Under EU pressure, several offshore financial centers adopted legislation requiring economic substance for some in-scope activities, but it is unclear whether MNEs generally have substantial economic activities in those jurisdictions and would be willing to pay domestic minimum taxes on profits recorded there.
48 For further discussion on the effect of GLOBE on tax havens, see Niels Johannesen, “The Global Minimum Tax,” SSRN (Nov. 30, 2021); and Colleen Essid, “The Global Minimum Tax Agreement: An End to Corporate Tax Havens?” 73 St. Louis U. L.J. Online (Sept. 4, 2021).
49 OECD, “Corporate Tax Statistics” (July 29, 2021).
50 For background on the challenges of implementing GLOBE rules in the EU, see Englisch, “Designing a Harmonized EU-GloBE in Compliance With Fundamental Freedoms,” 30 EC Tax Rev. 136 (2021); Maria Kendrick, “The Legal (Im)Possibilities of the EU Implementing the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting,” 17 Glob. Trade Cust. J. 19 (2022); and Luc de Broe and Melanie Massant, “Are the OECD/G20 Pillar Two GLOBE-Rules Compliant With the Fundamental Freedoms?” 30 EC Tax Rev. 86 (2021).
51 See articles 3(23) and 26 of the model rules. Article 10 provides that countries may elect to adopt qualified domestic top-up taxes.
52 For a similar view, see Noked, “Defense,” supra note 1, at 368-369. For more on the difficulties EU states face when implementing GLOBE measures unilaterally, see Englisch, “Non-Harmonized Implementation of a GLOBE Minimum Tax: How EU Member States Could Proceed,” 30 EC Tax Rev. 207 (2021).
53 See Zoe Andrews, “Global Minimum Tax Model Rules,” European Tax Blog, Dec. 21, 2021.
54 The consultation document raises several questions for public comments, such as whether respondents agree that a domestic minimum tax could help reduce compliance costs for businesses and should apply only to MNEs with more than €750 million of annual revenue.
55 See supra note 1.
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