1. The Global Base Erosion rules (GloBE Rules) have been developed as part of the solution for addressing the tax challenges of the digital economy. They are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. The GloBE Rules are intended to be implemented as part of a common approach. A jurisdiction that joins the common approach is not required to adopt the GloBE Rules but, if it chooses to do so, it agrees to implement and administer them in a way that is consistent with the outcome provided under the GloBE Rules and the commentary on the GloBE Rules (including the agreement as to rule order). Consistency in the implementation and administration of the GloBE Rules is intended to result in a transparent and comprehensive system of taxation that provides predictable outcomes for MNEs and avoids the risk of double or over-taxation.

2. The GloBE Rules apply a system of Top-up Taxes – that is, an IIR and a UTPR – that brings the total amount of taxes paid on an MNE’s Excess Profit in a jurisdiction up to the Minimum Rate. This Topup Tax does not operate as a typical direct tax on income of an Entity. Rather it applies to the Excess Profits calculated on a jurisdictional basis and only applies to the extent those profits are subject to tax in a given year below the Minimum Rate. Rather than a typical direct tax on income, the tax imposed under the GloBE Rules is closer in design to an international alternative minimum tax, that uses standardised base and tax calculation mechanics to identify pools of low-taxed income within an MNE Group and imposes a co-ordinated tax charge that brings the Group’s ETR on that income in each jurisdiction up to the Minimum Rate. The design of the GloBE Rules as a Top-up Tax facilitates the co-ordinated application of the GloBE Rules by ensuring that the aggregate amount of incremental tax payable under the rules in each jurisdiction does not cause the ETR to exceed the Minimum Rate. The design of the IIR and UTPR as Top-up Taxes, however, does not restrict a jurisdiction from legislating those rules under a corporate income tax system in its domestic law.

3. These GloBE Rules are drafted in the form of model rules in order to provide jurisdictions with a template for domestic implementation. This Commentary provides tax administrations and taxpayers with guidance on the interpretation and application of those rules. The Commentary is intended to promote a consistent and common interpretation of the GloBE Rules that will facilitate co-ordinated outcomes for both tax administrations and MNE Groups. The Commentary explains the intended outcomes under the rules and clarifies the meaning of certain terms. It also includes examples which illustrate the application of the rules to certain fact patterns. The Inclusive Framework may develop further examples on the application of the rules through Administrative Guidance provided under Article 8.3. A breakdown of the contents of each Chapter is set out below.

Scope

4. Chapter 1 sets out the scope of the GloBE Rules. The GloBE Rules will apply to the Constituent Entities of an MNE Group that meets the consolidated revenue threshold as set out in Article 1.1. Article 1.1 is modified by Article 6.1 which sets out further rules clarifying the application of the consolidated revenue threshold in the case of mergers and de-mergers.

Charging provisions

5. Chapter 2 contains the operating mechanics for the IIR and the UTPR. The IIR is the primary rule that is applied by a Parent Entity within the MNE Group to that Parent Entity’s Allocable Share of Top-up Tax of any LTCE. The IIR incorporates a top-down approach which ensures priority in the application of the IIR is given to the Parent Entity at the highest point in the ownership chain. Under this approach, an Intermediate Parent Entity shall not apply the IIR where it is controlled by another parent entity further up the ownership chain that is subject to a Qualified IIR. However, the top-down approach has some exceptions (e.g., split-ownership rules). In order to avoid double taxation in these cases, the IIR includes an offset mechanism that allows the Parent Entity to reduce the Top-up Tax otherwise payable under the IIR where that tax is brought into charge by another Parent Entity.

6. The UTPR operates as a backstop to the IIR, applying only in specific circumstances where the Top-up Tax is not brought into charge under an IIR. The application of a UTPR in a UTPR Jurisdiction shall result in that jurisdiction imposing an additional cash tax expense on the Constituent Entities of an MNE Group that is equal to the UTPR Top-up Tax Amount. Chapter 2 sets out the rules for calculating the UTPR Top-up Tax Amount for each Low-Tax Jurisdiction and the mechanism used to allocate the UTPR Top-up Tax Amount to a UTPR Jurisdiction.

Calculating ETR on a jurisdictional basis

7. Chapter 3 sets out the mechanics for calculating a Constituent Entity’s GloBE Income or Loss. The starting point for this calculation is the financial accounting net income or loss determined for the Constituent Entity in the preparation of the Consolidated Financial Statements for the Fiscal Year. The GloBE Rules use the Entity’s financial accounting net income or loss as the starting point for determining GloBE Income or Loss because it provides a uniform measure of income that can be applied in all jurisdictions. Moreover, because it draws on information already used in the preparation of Consolidated Financial Statements, it reduces the MNE Group’s compliance costs. In order to account for certain permanent differences between accounting and the GloBE tax base, the GloBE Rules then adjust this amount to arrive at that Entity’s GloBE Income or Loss. Chapter 3 further includes mechanisms for allocating income between a Main Entity and a PE and between a tax transparent entity and its owners. The exclusion for International Shipping Income set out in Article 3.3 provides an exclusion for income derived from international shipping based on the scope of Article 8 of the OECD Model Tax Convention (OECD, 2017).

8. Chapter 4 sets out the mechanics for determining the amount of Covered Taxes on the GloBE income of each Constituent Entity. The Covered Tax calculation is done in a number of steps. The first step takes the current taxes determined for the Constituent Entity for the Fiscal Year and then adjusted this amount to arrive at that Entity’s Adjusted Covered Taxes. These adjustments include adjustments based on the principles of deferred tax accounting to address differences in the timing of the recognition of income and expense. The GloBE Rules include deferred tax accounting adjustments to the current tax amount to prevent permanent differences in the GloBE tax liability from arising solely due to timing differences. The GloBE Rules rely on deferred tax accounting principles to address timing differences because they address timing issues as they arise and in a more targeted and refined manner than other approaches, such as carry-forwards. This approach also reduces compliance costs because it draws on information and accounting systems the MNE Group already uses for other purposes. This Chapter also includes mechanisms designed to ensure that certain cross-border taxes (such as Controlled Foreign Company (CFC) taxes) are appropriately allocated to the jurisdiction where the income arises. Chapter 4 also includes a mechanism for dealing with post-filing adjustments in respect of changes relating to a local tax liability.

9. Chapter 5 sets out the steps to be taken in determining the amount of Top-up Tax of each LTCE. First, a Constituent Entity’s aggregates its net income and Adjusted Covered taxes with those of other Constituent Entities located in the same jurisdiction to determine the ETR and Top-up Tax Percentage for each jurisdiction. If that jurisdiction is a Low-Tax Jurisdiction then the Substance-based Income Exclusion is applied to the total GloBE Income in the jurisdiction in order to determine the Excess Profits in that jurisdiction. The Top-up Tax Percentage is then applied to such Excess Profit in order to determine the Top-up Tax for each Low-Tax Jurisdiction. The final step is then to allocate such jurisdictional Top-up Taxes to the Constituent Entities in the Low-Tax Jurisdiction, which is where the chapter connects back with Chapter 2. Special rules apply in respect of minority owned groups. Chapter 5 further includes a de minimis exclusion for the Constituent Entities located in the same jurisdiction when their aggregated revenue and income does not exceed certain thresholds.

Reorganisations and special ownership structures

10. The consequences of a transfer of part or all of the Controlling Interests, or transfer of assets and liabilities, of a target Constituent Entity are addressed through a number of specific rules in Chapter 6. These rules include specific rules for the application of the consolidated revenue threshold to MNE Groups after a merger or demerger. They further provide for the apportionment of the target’s GloBE Income and Covered Taxes and the value of deferred tax assets and deferred tax liabilities between the seller and purchaser as well as rules for calculating the tax base of the assets and liabilities of the target entity. Chapter 6 also includes special rules for JVs that bring the MNE Group’s share of the JV income into scope of the GloBE Rules and special rules for Multi-parented MNE Groups.

Tax neutrality and distribution regimes

11. Chapter 7 provides specific rules that apply to certain tax neutrality and distribution regimes in order to avoid unintended outcomes under the GloBE Rules. These rules include special rules for reducing the GloBE Income of UPEs that are Tax Transparent Entities or subject to a Deductible Dividend Regime and whose owners are subject to taxation above the Minimum Rate on the UPE’s GloBE Income. The rules also contain special rules for the computation of the ETR of a controlled Investment Entity and certain elections in respect of such Entities. Finally, the chapter contains special rules related to Distribution Tax Systems.

Administration and Transition rules

12. Chapter 8 sets out certain provisions in respect of the administration of the GloBE Rules. This includes the information that must be filed by the relevant Constituent Entities to demonstrate compliance with the GloBE Rules under Article 8.1. Chapter 8 also provides for the possibility of safe harbours and the issuance of administrative guidance to reduce compliance burdens, including duplicative reporting, where possible. Chapter 9 provides transition rules including rules for taking into account losses and other tax attributes that arose prior to the application of the GloBE Rules.

Defined terms

13. Chapter 10 sets out definitions of terms used in the GloBE Rules, and provides rules in Article 10.2 to define Flow-through Entities, Tax Transparent Entities, Reverse Hybrid Entities, and Hybrid Entities.

Co-ordination and consistency requirements under common approach.

14. The GloBE Rules are intended to be implemented as part of a common approach. A jurisdiction that joins the common approach is not required to adopt the GloBE Rules but, if it chooses to do so, it agrees to implement and administer them in a way that is consistent with the outcomes provided under the GloBE Rules and this Commentary. Consistency in the implementation and administration of the GloBE Rules is intended to result in a transparent and comprehensive system of taxation that provides predictable outcomes for MNEs and avoids the risk of double or over-taxation.

Scope

15. The limitations on scope in Article 1.1 play an important role in the co-ordination mechanics for the GloBE Rules by ensuring that the application of the rules in one jurisdiction does not come into conflict with the intended outcomes under the GloBE Rules in another jurisdiction. For example, if a jurisdiction were to set a lower revenue threshold for the application of the UTPR under its domestic law this would cause the UTPR to operate as the primary rule for those MNE Groups that were above this domestic threshold but below the agreed GloBE threshold, resulting in outcomes that were contrary to the basic design of the GloBE Rules and undermining the expected outcomes for MNEs headquartered in jurisdictions that have adopted a Qualified IIR.

16. Equally, however, a co-ordinated approach to the GloBE Rules does not prevent those jurisdictions that adhere to the common approach from introducing additional measures to tax their own domestic taxpayers in respect of the foreign income of their subsidiaries and branches, provided those rules do not come into conflict with the intended outcomes under the GloBE Rules. For example, the introduction of a tax in respect of income of foreign subsidiaries that was similar to the IIR, but applied only to the foreign income of smaller locally headquartered MNE Groups (i.e. MNE Groups with annual consolidated revenues below the threshold in Article 1.1), would not be contrary to the design of the GloBE Rules or undermine the rule order that had been agreed as part of the common approach.

Currency conversion

17. The GloBE Rules set out a number of monetary thresholds that are denominated in the Euro currency. These include the consolidated revenue threshold in Article 1.1 and the De Minimis Exclusion in Article 5.5. The use of monetary thresholds can give rise to co-ordination issues where jurisdictions set these monetary thresholds in a currency other than Euros or when MNE Groups that are subject to the GloBE Rules prepare their Consolidated Financial Statements in a currency other than one referenced in the applicable domestic law.

17.1 (july guidance 17.1-3) In addition, to ensure the co-ordination and consistency of an MNE Group’s GloBE calculations in each jurisdiction, MNE Groups will be required to undertake their GloBE calculations for each relevant jurisdiction in the presentation currency of their Consolidated Financial Statements. The presentation currency of the MNE Group is the currency in which its Consolidated Financial Statements are presented. This requirement applies regardless of the local currency of the relevant jurisdiction.

17.2 Depending on the accounting and consolidation processes within a MNE Group, many of the amounts needed for GloBE computations will have been translated to the presentation currency based on the Authorised Financial Accounting Standard in connection with the preparation of the Consolidated Financial Accounts. Other amounts that are relevant to the GloBE calculations will not have been translated for purposes of the Consolidated Financial Statements, either because those amounts do not exist in presentation currency or because the amounts are translated at the aggregate level for GloBE computation purposes post accounting consolidation (i.e. not at the Constituent Entity level). These amounts will need to be translated to the presentation currency specifically for GloBE computation purposes. An MNE Group must translate amounts necessary for the GloBE calculations to the presentation currency pursuant to the relevant currency translation principles of the Authorised Financial Accounting Standard used to prepare its Consolidated Financial Statements (for example, IAS 21 or ASC 830), regardless of whether such translations are required for preparation of the Consolidated Financial Statements or for other financial accounting purposes.

17.3 After the amount of Top-Up Tax allocable (or equivalent adjustment) to a Constituent Entity in accordance with Chapter 2 of the GloBE Rules in the MNE Group’s presentation currency has been determined, jurisdictions are free to apply their own foreign currency translation rules to convert the Top-up Tax liability due in their jurisdiction into local currency, as long as the exchange rate used is reasonable and relevant to the Fiscal Year. Jurisdictions may choose to adopt any reasonable foreign exchange translation basis, including (but not restricted to):

a.) The average foreign exchange rate for the Fiscal Year;

b.) The foreign exchange rate on the last day of the Fiscal Year; or

c.) The foreign exchange rate on the date payment is required.

While jurisdictions are free to choose any foreign exchange translation basis, it is recommended that specific rules are adopted in domestic legislation to give MNE Group’s certainty to comply with the GloBE Rules.

Monetary thresholds set in local currency

18. The monetary thresholds under the GloBE Rules are set in Euros. In order to avoid the risk of differences in the application of GloBE Rules among jurisdictions it is recommended that jurisdictions implementing the GloBE Rules also use the Euro currency in their domestic legislation when setting their own thresholds. However, some jurisdictions that implement the GloBE Rules may face legal or practical impediments to using a foreign currency when setting their own monetary thresholds under domestic legislation. In these cases, a jurisdiction may provide for a threshold in its domestic currency but it should re-base the local currency threshold every year in order to minimise the difference between the local threshold and those set by other countries.

19. For those jurisdictions that introduce the GloBE Rules into their legislation using local currency thresholds other than Euros, the preferred approach would be for those jurisdictions to use a consistent methodology to re-base their local currency. Application of a consistent re-basing rule will minimise differences between the local currency thresholds used by different jurisdictions. Therefore, jurisdictions should rebase their non-Euro denominated thresholds annually, based on the average foreign exchange rate for the month of December determined by the foreign exchange reference rates as quoted by the European Central Bank (ECB) and apply the rebased thresholds to any Fiscal Year that starts on (or by reference to) any day of the following calendar year. Where the local currency of the jurisdiction is not quoted in the foreign exchange reference rates of the ECB or the jurisdiction faces legal or practical impediments to using such exchange rate when setting their own monetary thresholds under domestic legislation, the jurisdiction should rebase their non-Euro denominated thresholds based on the average foreign exchange rate for the month of December as quoted by the jurisdiction’s Central Bank.

19.1 The rebasing rule described above only applies for the purposes of rebasing the following thresholds in the domestic legislation of an implementing jurisdiction and not for the purposes of translating amounts from the Consolidated Financial Statements to the relevant currency that the threshold is denominated in domestic legislation:

a.) Articles 1.1, 1.2, and 6.1.1 – which refer to revenue included in the Consolidated Financial Statements equal to or greater than EUR 750 million.

b.) Article 3.1.3 – which refers to permanent differences in excess of EUR 1 million.

c.) Articles 4.6.1 and 4.6.4 – which refer to an aggregate decrease of less (Article 4.6.1) or more (Article 4.6.4) than EUR 1 million in the Adjusted Covered Taxes.

d.) Articles 5.5.1(a) and (b) – which refer to Average GloBE Revenue of less than EUR 10 million and Average GloBE Income or Loss of less than EUR 1 million.

e.) Article 9.3.2 – which refers to the sum of the Net Book Values of Tangible Assets not exceeding EUR 50 million.

f.) Article 10.1, “Material Competitive Distortion” – which refers to an aggregate variation of greater than EUR 75 million in a Fiscal Year.

g.) Article 10.1, “Policy Disallowed Expenses” – which refers to expenses accrued by the Constituent Entity for fines and penalties that equal or exceed EUR 50 000.

h.) (guidance july) Any Euro-denominated threshold incorporated into the Commentary of the GloBE Rules through Administrative Guidance.

19.2 Where the relevant Article is a threshold that references previous Fiscal Years, the foreign exchange rate for each individual year for the purposes of determining the relevant threshold translated into local currency will be based on the average foreign exchange rate for December of the calendar year immediately preceding the calendar year in which such previous Fiscal Year starts and not a single foreign exchange rate applied for the purposes of all the relevant Fiscal Years. For example, Article 1.1 sets out that the GloBE Rules apply to Constituent Entities that are members of an MNE Group that has annual revenue of EUR 750 million or more in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year. Assuming the tested Fiscal Year is 2026 and the jurisdiction expresses the threshold in local currency, then for the purposes determining whether the MNE Group’s revenues exceeded the threshold, the MNE Group’s revenues would need to exceed the threshold in two of the four years based on the annually translated rates outlined below, rather than applying a single foreign exchange rate to all the Fiscal Years in question:

a.) For the 2022 Fiscal Year – EUR 750 million translated into local currency based on the average foreign exchange rate for the month of December 2021 determined by the foreign exchange reference rates as quoted by the ECB.

b.) For the 2023 Fiscal Year – EUR 750 million translated into local currency based on the average foreign exchange rate for the month of December 2022 determined by the foreign exchange reference rates as quoted by the ECB.

c.) For the 2024 Fiscal Year – EUR 750 million translated into local currency based on the average foreign exchange rate for the month of December 2023 determined by the foreign exchange reference rates as quoted by the ECB.

d.) For the 2025 Fiscal Year – EUR 750 million translated into local currency based on the average foreign exchange rate for the month of December 2024 determined by the foreign exchange reference rates as quoted by the ECB.

20. As noted further below, an MNE Group that prepares its Consolidated Financial Statements in a different currency from the one used by the domestic legislation will still need to translate the results of those financial statements into that currency to determine whether (and how) the MNE Group is subject to the GloBE Rules in that jurisdiction. This translation can only be made at the end of the MNE Group’s Fiscal Year. Nevertheless, a jurisdiction can minimise the potential for uncertainty by ensuring that the methodology for re-basing currency thresholds provides MNE Groups with certainty as to what those thresholds will be at the beginning of the relevant Fiscal Year.

20.1 To minimise potential distortions and to ensure consistent application of the monetary thresholds in the GloBE Rules, the MNE Group must translate the relevant threshold amounts from its presentation currency to the currency used in the implementing jurisdiction’s domestic law based on the same average foreign exchange rate for the December month of the calendar year prior to the commencement of the relevant Fiscal Year. The average foreign exchange rate for the December month of the previous Fiscal Year will be determined by:

• If the domestic threshold is expressed in EUR – the foreign exchange reference rates as quoted by the European Central Bank (ECB). Where the ECB does not provide a foreign exchange reference rate for the local currency of a jurisdiction, the average foreign exchange rate will be determined by that quoted by the implementing jurisdiction’s Central Bank.
• If the domestic threshold is expressed in a non-EUR currency – the average foreign exchange rate will be determined by that quoted by the implementing jurisdiction’s Central Bank.

20.2 Similar to the explanation provided in paragraph 19.2 above, where a threshold amount has been calculated in relation to the previous Fiscal Year, MNE Groups will not be required to recalculate and retranslate the amount based on the December average exchange rate applicable to the current Fiscal Year. That is, the amount of revenue of the MNE Group (for example, EUR 750 million) for the Fiscal Year commencing in 2023, translated into local currency based on the average foreign exchange rate for the month of December 2022 determined by the foreign exchange reference rates as quoted by the ECB, will remain the same for local currency purposes, for the purposes of calculations (for example, Article 1.1) for future Fiscal Years.

20.3 Where a jurisdiction does not rely on European Central Bank’s exchange rates, to assist taxpayers in undertaking the necessary foreign exchange translations, it is recommended that jurisdictions make the average rates calculated by reference to the jurisdiction’s Central Bank quoted rates for the month of December publicly available.

20.4 It is recognised that this translation requirement may lead to counter-intuitive outcomes for MNE Groups. For example, MNE Group members in a jurisdiction may have an accounting functional currency in local currency. Under Article 3.1.3, a Constituent Entity in its financial accounts (expressed in the local currency, for example GBP) may have permanent differences below the rebased GBP equivalent of EUR 1 million. However, because the permanent differences are required to be translated to the MNE Group’s presentation currency (for example, USD) based on the average rate of the Period and then translated from USD to GBP based on the December average of the previous Fiscal Year, it may be the case that due to foreign exchange effects, the permanent differences exceed the rebased GBP equivalent of EUR 1 million. Similarly, the foreign exchange translation rules may also have the opposite effect. However, given the fundamental importance that the GloBE monetary thresholds apply consistently across implementing jurisdictions, such outcomes are considered acceptable to give certainty to MNE Groups and tax administrations in the application of the GloBE Rules to a Covered Group for a Fiscal Year.

Co-ordination rule in the event of differences in thresholds as a result of local currency fluctuations

21. (changes as of 17 july AAG + 22 – 23 and 24 deleted) In the rare circumstances where there are differences in the application of a threshold in one jurisdiction from other jurisdictions and in the determination of the GloBE tax base, these differences could potentially, in turn, have adverse implications for co-ordination and rule order. Such differences could result in Country Y applying the charging provisions under Chapter 2 in circumstances that were not contemplated by the GloBE Rules, thereby undermining the expected outcomes for another jurisdiction that has also adopted these rules.

22. Accordingly, jurisdictions that implement monetary thresholds in a currency other than Euros must create provision in their law to ensure that any such differences do not result in outcomes that are inconsistent with the common approach and the intended outcomes under the Model Rules and this Commentary. Co-ordination mechanisms consistent with the common approach may be considered as part of the Implementation Framework which will set out a process for assessing whether the domestic rules meet the qualification standards for a Qualified IIR, UTPR or Domestic Minimum Top-up Tax.