The Global Minimum Tax | Selected Issues on Pillar Two

1. Introduction

This chapter aims to explain the covered taxes under the GloBE Model Rules and why they are one of the cornerstones of Pillar Two. In simple terms, covered taxes are the taxes on income or profits paid or accrued by a constituent entity. Covered taxes are critical in determining the effective tax rate (ETR) paid in a jurisdiction by a constituent entity. That is because the covered taxes (post-applicable adjustments) are the numerator for the ETR calculation.

Likewise, the ETR paid by a constituent entity is vital in determining if a top- up tax must be levied. Therefore, if the covered taxes are well understood, the accurate calculation of the top-up tax to be paid by a constituent entity will be preserved. If the calculation of the covered taxes is distorted, so will the ETR which would defeat Pillar Two’s goal of imposing a global minimum income tax of 15%.

The definition of covered taxes followed the principles laid down in the Report on Pillar Two Blueprint (Blueprint). These principles state that the definition of covered taxes should be general, aligned with the tax base, clear, and consistent in the results. Moreover, the principles state that the definition sh...