Computation of the Effective Tax Rate and the 'Top-up Tax'

Abstract

In the tax law community, the terms Pillar II and GloBE are generally associated almost automatically with the ‘Income Inclusion Rule’ (IIR) and the ‘Undertaxed Profits Rule’ (UTPR), commonly referred to as GloBE Rules. The fact that both ‘rules’ serve to levy a ‘Top-up Tax’, which is based on the difference between the agreed minimum tax rate of 15% and an ‘Effective Tax Rate’ (ETR), is often only addressed in the second place. Unjustly, the calculation of the ‘Top-up Tax’ has been pushed into the shadow of the GloBE Rules in the literature. However, from a purely legal perspective, prerequisite and legal consequence are twisted here: The ‘Top-up Tax’ is the actual tax to be levied to achieve the minimum level and the IIR and UTPR are merely mechanisms that determine which taxpayer is liable to pay the resulting minimum tax. A resulting ‘Top-up Tax’ is therefore a necessary precondition for the application of the IIR and UTPR. In this respect, it becomes obvious that the calculation of the ETR and the ‘Top-up Tax’ are at the heart of GloBE. It is not surprising that the GloBE Commentary on the GloBE Model Rules has also recognised that “[t]he ETR computation in Article 5.1 is a central element of the GloBE Rules” and even that is an understatement: Rather, it will become apparent that the ETR calculation is the central element of the GloBE Rules. The ETR creates the comparative value to the politically agreed minimum tax. It determines whether this minimum tax has been exceeded or not and thus whether a ‘Top-up Tax’ occurs in the first place and, ultimately, in what amount it is to be levied. The ETR computation is thus actually a part, or rather the starting point, of the ‘Top-up Tax’ computation. This contribution is devoted to the computation of the ETR and the ‘Top-up Tax’ and aims to shed light into these rather technical parts of the GloBE Model Rules.

Keywords: Pillar Two; minimum taxation; GloBE, Effective Tax Rate, Top-up Tax, Income Inclusion Rule, Undertaxed Payments Rule