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21 December 2021 / news

OECD publishes Pillar Two model rules on IIR and UTPR

On 20 December 2021, the OECD released its Pillar Two model rules, also referred to as the “Anti Global Base Erosion” or “GloBE” rules, for participant jurisdictions to implement most of the Pillar Two rules. These rules seek enforcing a minimum 15% effective tax rate on profits earned by large multinational enterprises in each jurisdiction where they realise profits. The entry into force is targeted for 2023.

International Tax Flash: OECD's Pillar Two model rules

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The publication of the GloBE rules lifts the veil on a range of details that are very relevant for taxpayers, such as how pre-Pillar Two losses will be taken account, which entities can effectively benefit from a carve-out, and what Pillar Two compliance will require.

The publication of the model rules marks the launch of the implementation phase. Participating jurisdictions in the OECD Inclusive Framework may have different paces of implementation, which may increase Pillar Two compliance complexity during an initial period.

The European Commission is expected to publish shortly a proposal for a directive on Pillar Two. In early 2022, the OECD will release its commentary relating to the GloBE rules and address co-existence with the US Global Intangible Low-Taxed Income (GILTI) rules. This will be followed by the development of an implementation framework focused on administrative, compliance and co-ordination issues relating to Pillar Two. The OECD Inclusive Framework is also developing the model provision for the supplemental Subject-to-Tax Rule, together with a multilateral instrument for its implementation, to be released in the early part of 2022.

Our Pillar Two team is available to support you in analysing and modelling the impact of the Pillar Two rules on your group, setting up compliance processes and exploring ways to mitigate increased taxation and complexity.

For more general information on Pillar Two including the GloBE rules we refer to our tax flashes of 13 October 2020, 2 July 2021 and 11 October 2021. Below we will shortly outline the general characteristics of the GloBE rules and the main new elements that follow from the GloBE rules.

The released GloBE rules concern the Income Inclusion Rule (IIR) and Undertaxed Payment Rule (UTPR). The IIR gives top-up taxing rights to the ultimate parent entity of the group; the UTPR is the backstop rule and gives top-up taxing rights to the constituent entities in the jurisdictions that have implemented the UTPR.

Graph Eligibility

Graph Eligibility

Next steps

The European Commission is expected to publish shortly a proposal for a directive on Pillar Two, thereby seeking a consistent implementation across the European Union by the end of 2022, in time for an entry into force in 2023.

In early 2022, the OECD will release its commentary relating to the GloBE rules and address co-existence with the US Global Intangible Low-Taxed Income (GILTI) rules. This will be followed by the development of an implementation framework focused on administrative, compliance and co-ordination issues relating to Pillar Two, subject to consultation in February 2022. The Inclusive Framework is also developing the model provision for a Subject-to-Tax Rule, together with a multilateral instrument for its implementation, to be released in the early part of 2022, subject to consultation in March 2022.

The publication of the model rules marks the launch of the implementation phase. Participating jurisdictions in the OECD Inclusive Framework may have different paces of implementation, which may increase Pillar Two compliance complexity during an initial period.

How can we support you?

As more than 135 jurisdictions have committed to the Pillar Two rules, and given the very ambitious and tight implementation schedule, MNEs’ tax departments can and should already start modelling the impact of the rules to identify red flags and potentially make urgent changes to the structuring of intragroup transactions or the remittance of income in territorial tax jurisdictions. This effort is bound to be regularly updated in the coming months, as jurisdictions may also react to the Pillar Two rules through tax reforms, e.g., by introducing a domestic minimum 15% ETR for large MNEs.

Our Pillar Two team is available to support you in analysing and modelling the impact of the Pillar Two rules on your group, setting up compliance processes and exploring ways to mitigate increased taxation and complexity.

Should you have any question in the meantime, please contact a member of our Pillar Two team or your regular trusted contact at Loyens & Loeff.



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