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A Wrench in GLOBE’s Diabolical Machinery

Posted on Sep. 19, 2022
Ruth Mason
Ruth Mason

Ruth Mason ( is the Edwin S. Cohen Distinguished Professor of Law and Taxation at the University of Virginia School of Law. She is grateful to Heydon Wardell-Burrus and Alexander Rust for comments on the draft; however, all errors are her own.

In this article, Mason explains how the global anti-base-erosion rules induce cooperation by states, and how the proposal to enact those rules via a directive in the European Union undermines that inducement to cooperate.

This year’s annual International Fiscal Association Congress, the first in-person congress since the pandemic began, drew almost 2,000 participants. A much-discussed topic was the proposal from the inclusive framework on base erosion and profit shifting for global anti-base-erosion (GLOBE) rules. Panelists described the GLOBE rules in colorful language. Speaking at the Austrian embassy in Berlin, Claus Staringer of Vienna University of Economics and Business’s Institute for Austrian and International Tax Law called it “diabolical engineering.” Outgoing OECD tax chief Pascal Saint-Amans referred to its “devilish logic.” Both men spoke admiringly of these aspects of the GLOBE rules. This article recounts the logic of the GLOBE regime and explains why the proposal to enact it via an EU directive undermines that logic.

Building Cooperation

What forced the GLOBE negotiators to become diabolical engineers in constructing the GLOBE rules? In the absence of cooperation to coordinate effective tax rates, higher-tax countries may lose tax revenue and real investment to lower-tax countries. Moreover, high-tax countries feel pressure to lower their own effective corporate tax rates to compete with lower-tax countries to attract and retain investment. The ability of countries to set their effective tax rates autonomously results in a classic collective-action problem. Setting effective tax rates cooperatively would improve the collective welfare of the cooperating states by increasing the total amount of tax collected, but cooperation is either impossible or would be unstable because of the significant rewards available to defectors.

To resolve this problem, the high-tax states needed a way to neutralize the impact of defection and durably bind cooperating states to the deal. GLOBE accomplishes these goals through a set of redundant fiscal fail-safes.

Fiscal fail-safes are rules under which, if one country does not tax, another automatically steps in to fill the void.1 By enabling states to soak up tax entitlement not exercised by other states, fiscal fail-safes target both tax competition and tax planning. Although fiscal fail-safes are not new to international tax,2 the BEPS project saw the introduction of coordinated fiscal fail-safes. When multiple states coordinate to adopt the same fiscal fail-safe, that coordination reduces the risk that businesses can successfully flee the adopting jurisdictions to escape the fail-safe.3

The most memorable example of a coordinated fiscal fail-safe that emerged from the BEPS project was the anti-hybrid rules, which address tax avoidance arising from the use of hybrid debt-equity instruments. Taking advantage of mismatches between different states’ definitions of debt and equity, hybrids allowed taxpayers to secure interest deductions in one state with no offsetting inclusion in the other. The BEPS states employed a coordinated fiscal fail-safe to shut down hybrids. Specifically, the anti-hybrid action item contains a primary rule under which the paying state denies an interest deduction for payments that will not be included in the receiving state. Should the paying state fail to adopt or invoke the primary rule, however, the BEPS anti-hybrid regime also includes a defensive rule under which the receiving state would include the amounts deducted abroad. As a result of this redundancy, a hybrid mismatch would be shut down if at least one of the two countries (source or residence) adopted the anti-hybrid rule. Such redundancy is important because we know that some countries deliberately facilitate hybrid tax planning. Thus, it was not realistic to expect all states to adopt anti-hybrid rules. Building in redundancy enabled the BEPS states to neutralize hold-out states that deliberately facilitated hybrids.

The GLOBE rules are a clear intellectual descendant of the anti-hybrid rules. High-tax states — having competed with each other on taxes for years — resolved to cooperate to ensure that their effective tax rates on financial accounting income did not fall below 15 percent. There were two roadblocks to this resolution. First, cooperating states might lose business, investment, and headquarters to lower-tax states that did not join the deal. It would be particularly difficult to secure endorsement of the deal by small states and developing states that currently attract inbound investment by offering low effective tax rates to compensate for their inability to offer workforce, manufacturing capacity, and other attractions. Second, competition could re-emerge within the cooperating group. The deal would be subject to constant risks of defection.

Rewarding Cooperation

An ingenious solution was devised under the auspices of the OECD. It capitalizes on two phenomena: (1) the concentration of the ultimate parent companies (UPCs) of the world’s most successful multinationals in only a handful of high-tax states; and (2) a current desire among these high-tax states to reduce global tax competition, even if doing so requires severely reducing their own ability to use their tax laws to effectively deliver tax incentives. As a shorthand, I’ll call these states the pro-coordination states.

In conjunction with corporate tax due in the source state, the solution consists of two new rules:

  • The IIR, formerly known as the income inclusion rule. The pro-coordination states would adopt a coordinated fiscal fail-safe that takes the form of a harmonized controlled foreign corporation rule, the IIR. The IIR tops up — in the UPC state — the group’s effective tax rate to 15 percent of financial accounting income. Due to the concentration of the world’s largest multinational in only a few states, adoption by these states alone would make the IIR fairly comprehensive. Such comprehensiveness notwithstanding, the IIR by itself would be unstable. States adopting it might experience inversions as companies moved to states that did not adopt it. This, in turn, would put pressure on the cooperating states to themselves defect from the deal.

  • The UTPR, formerly known as the undertaxed profits rule. To achieve stability, the GLOBE negotiators pulled a page from the BEPS book: They added redundancy in the form of an additional coordinated fiscal fail-safe, the UTPR.4 The countries agreed that a multinational that had not been subject to an effective tax rate of at least 15 percent at source (under corporate income tax (CIT) or qualified domestic minimum top-up tax (QDMTT)), and was not subject to minimum tax in its UPC state (under the IIR), would nevertheless be taxed elsewhere to ensure minimum taxation.

    Under the UTPR, the difference between the additional top-up tax due from the group (to get it up to the 15 percent minimum effective tax on financial accounting income) and the actual tax paid by the group would be distributed among the cooperating countries according to a formula that takes into account the relative presence in the cooperating jurisdictions of the group’s employees and assets. Thus, any top-up tax entitlement not used at source or by the UPC’s state (for instance, because those states decided not to participate in the global deal) would be collected anyway by cooperating states.

These are the fiscal fail-safe aspects of the global tax. If one state does not tax, another state (or states) will automatically fill the tax void. Operating the deal as a series of redundant fiscal fail-safes means that a country cannot unilaterally protect multinationals from minimum taxation.5 Failure to cooperate does not protect companies from tax; it merely results in a loss of tax revenue for the uncooperative state.

This ineluctability of taxation, combined with the revenue priority rules, which induce cooperation by rewarding the state with new tax entitlements (as in the IIR or UTPR) or priority in tax entitlements (as in the CIT/QDMTT and IIR), creates an incentive for states to join the deal. The priority to tax under the GLOBE rules — for cooperating states — is as follows: tax at source by the source state (via CIT or QDMTT), then tax in the UPC jurisdiction by the UPC state (under the IIR), then tax wherever else the firm has assets and payroll, potentially by many states splitting the tax entitlement via formula (under the UTPR). Viewed from the perspective of a legislator, if minimum taxation of in-scope multinationals is inevitable because cooperative states ultimately will collect the tax one way or another, then you may as well sign on to the deal to preserve your own state’s priority to tax in its capacity as a source state or UPC jurisdiction, and to get a share of any tax due under the UTPR.

For example, imagine a state that would like to assess less than 15 percent at source, perhaps with the hope of attracting in-bound investment. Under the GLOBE rules, any tax shortfall (short of 15 percent of financial accounting income) would be collected first by the UPC state, or, if that state does not cooperate, then pro rata by the cooperating states under the UTPR. Because the tax will be collected elsewhere anyway, the rational choice is for the source state to raise its own effective corporate tax rate (or QDMTT) to 15 percent. Likewise, because the UPC state goes next after the source state in order of priority to collect tax, UPC states will be motivated to join the deal so that they can collect the top-up tax, instead of leaving it to be split among the cooperating states under the UTPR rules. If 15 percent taxation is inevitable whether your state cooperates or not, then the rational choice for each state is to cooperate to improve its position in line to collect revenue.

The Devilish Logic

This devilish logic has motivated traditionally low-tax Switzerland to propose amending its constitution to enact the minimum tax deal. Switzerland’s lawmakers understand that if Switzerland cannot protect multinationals from minimum taxation, Switzerland may as well collect 15 percent tax for its own coffers. If you can’t beat ’em, join ’em.

Thus, once in motion, the diabolical machinery of the GLOBE rules is not vulnerable to defection by the small states that we typically think of as effective tax competitors. Defection by any one state is pointless; the cooperating states will top up the tax to 15 percent elsewhere in the corporate group. Failure to cooperate results in a revenue loss for the uncooperative state, but it does not protect any multinational from taxation.

This diabolical machinery must, however, be set into motion. Enough jurisdictions must cooperate to get the deal off the ground in the first instance — coverage must be sufficient to dissuade multinationals from structuring their affairs to avoid jurisdictions that have adopted the GLOBE rules. Because of heavy mutual investment among the largest economies, the deal could get off the ground and survive even if some states that host in-scope UPCs do not join. This phenomenon is important because, despite the U.S. Treasury’s endorsement of the October 8, 2021, agreement6 laying out the terms of the global tax deal, Congress so far has been unwilling to enact it.7

However, like Switzerland, the United States is equally subject to GLOBE’s diabolical logic. Specifically, if a critical mass of other states enacts the bargain, those cooperating states will begin collecting minimum tax from U.S.-headquartered multinationals under the UTPR. Put differently, whatever revenue the United States leaves on the table by refusing to enact the GLOBE rules will redound to the benefit of cooperating countries’ fiscs. As a result, if and when other states adopt the GLOBE rules, U.S. lawmakers will face pressure to implement it, too, to direct to the United States — instead of to other countries — any additional minimum tax due. Moreover, this pressure on the United States would persist as long as other countries maintain the GLOBE rules.

This is the diabolical machinery of GLOBE. By building multiple redundancies into the system (source tax, UTPR, IIR), the negotiating states sought to neutralize the benefits of defection, resolving the collective-action problem of tax competition — defined broadly to include low tax rates, indulgence of corporate tax avoidance, deviations from a normative tax base that incentivize inbound investment, and so on.

The Wrench in the Machine

This “no-exit” quality of the GLOBE rules motivated commentators at the International Fiscal Association to describe it as devilish and diabolical. No state can escape its logic or — after adoption reaches a critical mass — its reach. It strips states of an effective means of defection from the cooperative outcome.

But the proposal to enact GLOBE via an EU directive reintroduces an effective method of defection. Because EU tax directives require the unanimous consent of the EU member-state finance ministers, refusal of even one state’s minister to sign on to the directive scuttles the whole thing. Whereas GLOBE’s diabolical machinery was designed to divest all states of effective means of defection, the EU directive procedure grants every single member state an effective veto over the EU’s participation.

In the last few months, we have seen first Poland and now Hungary hold up the directive — indeed hold up Europe — by threatening to vote against it. Although no one knows exactly how many countries (or which ones) are needed to set GLOBE’s diabolical machinery into motion, it’s safe to say that neither Hungary nor Poland is near the top of anyone’s list. Put differently, even if they decided never to implement the GLOBE rules, neither Poland nor Hungary, nor both together, has enough economic clout to stand against the economic logic of the GLOBE rules. But EU law gives Poland and Hungary the legal clout they need to block GLOBE for Europe, and maybe the world.8

This suggests that the strategy to enact the GLOBE rules as a directive in Europe may be faulty. Setting aside the legal advantages that arise from enacting the GLOBE rules through a directive rather than enacting them unilaterally in each member state,9 the logic behind enactment via a directive may have been that simultaneously delivering many states’ cooperation would exert significant pressure on other states — especially the United States — to likewise adopt the rules. But rather than multiplying the inducement to join the GLOBE regime, the decision to enact the rules as a directive seems instead to have prevented or at least delayed its enactment by the countries in Europe that are its most ardent supporters. That the EU legislative process reintroduces effective means for EU countries to defect from the GLOBE agreement — that is, that the EU directive procedure halts the diabolic machinery of redundant fiscal fail-safes — has not escaped the attention of EU finance ministers in member states that support the deal. On September 9, the finance ministers of France, Germany, Italy, the Netherlands, and Spain released a statement renewing their commitment to implement the minimum tax “by any possible means.”10 The analysis presented here suggests that unilateral enactment (or enhanced cooperation11) could be a more viable path forward than an EU directive.


1 Ruth Mason, “The Transformation of International Tax,” 114 Am. J. Int’l. L. 353, 376-380 (2020) (defining fiscal fail-safe as rules that (1) link tax treatment across countries, (2) specify the conditions under which tax treatment in one state triggers a response in the other, (3) specify special tax treatment, which constitutes a deviation from the implementing state’s ordinary tax treatment of the relevant income, and under which (4) the goal of the triggered treatment is normative; it aims to curb abuse).

2 Controlled foreign corporation rules are a simple form of fiscal fail-safe. CFC rules are minimum taxes; if a domestic company’s foreign subsidiaries don’t pay enough tax, the residence state of the parent collects the difference.

3 Hence, long-standing U.S. policy has been to encourage other countries to adopt CFC rules as a way to level the playing field and reduce incentives to invert or shift profits.

4 The treaty-based subject-to-tax rules are not considered here.

5 The GLOBE regime has many exceptions and limitations, as agreed by the countries. For example, the GLOBE applies only to multinationals with revenue over €750 million; the rules include substance-based, sectoral, and de minimis carveouts.

7 The expiration of provisions of the Tax Cuts and Jobs Act in 2025 may present an opportunity for the United States to reconsider and join pillar 2.

8 Worse, Hungary and Poland have used their EU vetoes over the global tax deal to extract unrelated concessions from the rest of Europe. In both cases, they have demanded that the European Commission release EU funds that the commission withheld pending the states’ remedy of rule-of-law violations.

9 Implementing the GLOBE rules as a directive would override treaties, whereas EU member states typically cannot override tax treaties using ordinary domestic law. The concern that tax treaties may prevent the application of the GLOBE rules arises, inter alia, from judgments such as Société Schneider, in which the French Conseil d’État held that article 7 of the France-Switzerland tax treaty combined with an obligation to relieve double tax via exemption prevented application by France of its CFC rules to a French company with profits earned in a subsidiary in a treaty country. French Conseil d’État, Re Société Schneider Electric, CE No. 232276 (June 28, 2002).

10 Joint statement by France, Germany, Italy, the Netherlands, and Spain, “Implementation of the Global Minimum Effective Tax in 2023” (Sept. 9, 2022).

11 Enhanced cooperation allows only nine states to implement harmonized legislation, and it would obviate some tax treaty concerns raised in note 9, supra. Unlike a directive, enhanced cooperation does not require unanimity of all 27 member states. See article 20 of the Treaty on European Union; article 330 of the Treaty on the Functioning of the European Union.


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