GloBE Rules

GloBE Rules (Global Anti-Base Erosion Rules) are the OECD Pillar Two international tax standards designed to ensure that multinational enterprise groups with annual consolidated revenues of at least 750 million euros pay an effective tax rate of at least 15% across every jurisdiction where they operate through a coordinated top-up tax mechanism.

Endorsed by over 140 jurisdictions in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), these rules do not replace domestic corporate tax regimes. Instead, they introduce an interconnected enforcement system. When an enterprise's accounting profits in a specific country face an effective tax rate below 15%, other jurisdictions receive the legal right to collect the difference as a top-up tax.

Scope and Revenue Threshold under GloBE Rules

The GloBE Rules apply to multinational enterprise (MNE) groups whose annual consolidated group revenue equals or exceeds 750 million euros in at least two of the four fiscal years preceding the tested financial year. In Indian currency, this equates to roughly 6,700 crore to 7,000 crore rupees depending on prevailing exchange rates.

When an MNE crosses this threshold, the rules encompass all its constituent entities. A constituent entity is any entity or permanent establishment included in the Ultimate Parent Entity's (UPE) consolidated financial statements. However, the rules exclude specific entities from top-up tax liabilities:

• Governmental entities, sovereign wealth funds, and international organisations
• Non-profit organisations and qualifying pension funds
• Regulated investment funds and broad-based real estate investment vehicles that act as the group's Ultimate Parent Entity

While excluded entities do not pay top-up tax or compute effective tax rates, their revenues count toward evaluating whether the MNE group satisfies the 750 million euro threshold.

How the GloBE Charging Mechanisms Work

The GloBE framework uses three interrelated charging rules applied in a strict priority order. This hierarchy prevents double taxation while making sure undertaxed income faces the minimum tax rate.

1. Qualified Domestic Minimum Top-up Tax (QDMTT)

A QDMTT gives the source country the first right to tax low-taxed profits arising within its borders. When a jurisdiction implements an OECD-compliant QDMTT, it collects the top-up tax locally. This mechanism ensures that local tax revenue stays within the host nation rather than flowing to foreign treasuries.

2. Income Inclusion Rule (IIR)

The IIR is the primary international collection mechanism. It requires the Ultimate Parent Entity to pay top-up tax in its home jurisdiction for any low-taxed foreign subsidiary. If the UPE resides in a country that has not implemented the IIR, the taxing right cascades down to the next Intermediate Parent Entity in the corporate structure.

3. Undertaxed Profits Rule (UTPR)

The UTPR operates as a global backstop. If profits remain undertaxed because neither a QDMTT nor an IIR applies, other group entities located in participating jurisdictions collect the remaining top-up tax. They do this by denying tax deductions or making an equivalent local tax adjustment.

The diagram below outlines the priority sequence among these three mechanisms when evaluating undertaxed group entities.

flowchart TD
    A["Calculate Jurisdictional ETR"] --> B{"Is ETR Under 15%?"}
    B -- "No" --> C["No Top-Up Tax Required"]
    B -- "Yes" --> D["Apply QDMTT Locally"]
    D --> E{"Top-Up Fully Paid?"}
    E -- "Yes" --> F["Tax Collected in Source Country"]
    E -- "No" --> G["Apply IIR at Parent Level"]
    G --> H{"Residual Tax Due?"}
    H -- "No" --> I["Tax Collected via Parent IIR"]
    H -- "Yes" --> J["Apply UTPR across Group"]

Calculating the Effective Tax Rate and Top-Up Tax

Determining liability under the GloBE Rules requires calculating the effective tax rate (ETR) on a jurisdictional basis rather than entity by entity. The framework follows a standardized multi-step formula.

Jurisdictional Effective Tax Rate (ETR)

The jurisdictional ETR formula compares covered taxes against financial income:

Jurisdictional ETR = Adjusted Covered Taxes / Net GloBE Income

Net GloBE Income starts with financial accounting net income prepared under qualifying accounting standards such as Ind AS, IFRS, or US GAAP. Finance teams must adjust this figure for specific book-to-tax differences, such as removing qualifying dividends, equity gains, fines, penalties, and non-arm's-length intercompany transactions.

Adjusted Covered Taxes include income taxes, withholding taxes, and qualified deferred tax expenses recorded in the financial statements. To curb artificial inflation of covered taxes, deferred tax assets and liabilities are capped at the 15% minimum rate. Certain deferred tax liabilities must also reverse within five years, or they face recapture under GloBE adjustments.

Substance-Based Income Exclusion (SBIE)

If the jurisdictional ETR falls below 15%, the top-up tax percentage equals 15% minus the calculated ETR. This percentage does not apply to total profit. The Substance-Based Income Exclusion (SBIE) carves out income linked to real economic activity based on eligible payroll costs and carrying values of tangible assets located in that jurisdiction. Top-up tax applies only to excess profits above this carve-out.

De Minimis Exclusion and Safe Harbours

To reduce compliance burdens, the framework includes a de minimis exclusion. If an MNE group's average GloBE revenue in a jurisdiction is under 10 million euros and its average GloBE income is under 1 million euros (or a loss), top-up tax for that territory is zero. Groups can also use transitional Country-by-Country Reporting (CbCR) safe harbours to avoid full calculations during the initial implementation phase.

Impact of GloBE Rules on Indian Businesses

Although India has not enacted domestic Pillar Two legislation into the Income-tax Act, the GloBE Rules directly affect Indian corporate groups operating across borders.

Outbound Indian Multinationals

Indian headquarters with consolidated revenues above 750 million euros face immediate overseas exposure. If an Indian group maintains operating subsidiaries, treasury units, or shared service centers in low-tax jurisdictions such as the UAE, Singapore, Switzerland, or Ireland, foreign jurisdictions enforcing the UTPR can impose top-up taxes on those profits. Once India enacts its own IIR or QDMTT, the parent entity in India will calculate and pay these taxes domestically to the Income Tax Department.

Inbound Foreign Multinationals Operating in India

Foreign MNEs operating in India generally face a base corporate tax rate of 22% under Section 115BAA (25.17% including surcharge and cess), which exceeds the 15% threshold. However, specific tax incentives can push the accounting ETR below 15%:

• Tax deductions under Section 10AA for units located in Special Economic Zones (SEZs)
• Tax holidays under Section 80LA for units in the International Financial Services Centre (IFSC) at GIFT City
• Concessional 15% base tax rates under Section 115BAB for qualifying domestic manufacturing entities
• Heavy accelerated depreciation allowances and R&D incentives creating timing mismatches

If an Indian subsidiary's ETR dips below 15% and India lacks a QDMTT, the foreign parent's jurisdiction collects top-up tax under its IIR. This strips away the tax benefit of Indian incentives without reducing the group's global tax bill.

Mandatory Disclosures under Ind AS 12

The Ministry of Corporate Affairs and the Institute of Chartered Accountants of India (ICAI) amended Ind AS 12 (Income Taxes) to provide accounting guidance for Pillar Two taxes. The standard provides a mandatory temporary exception from recognising deferred taxes stemming from GloBE legislation. However, entities must disclose their current and estimated qualitative and quantitative exposure to Pillar Two taxes in their financial statement notes.

Common Compliance Pitfalls and Practical Solutions

Complying with the GloBE Rules introduces significant operational complexity for corporate tax and accounting teams. Common pitfalls include:

• Relying on headline tax rates: A 22% statutory corporate tax rate does not guarantee a 15% GloBE ETR once permanent differences and exemptions are factored in.
• Underestimating GIR reporting requirements: The GloBE Information Return (GIR) requires hundreds of data points per jurisdiction across legal entities, local books, and tax reconciliations.
• Miscalculating deferred tax caps: Failing to restate deferred tax movements at the 15% rate leads to flawed ETR computations and incorrect top-up tax liabilities.
• Overlooking transitional safe harbours: Teams often bypass qualified CbCR safe harbours, causing unnecessary administrative overhead and manual calculations.

Managing these requirements requires unified data across legal entities and jurisdictions. At MYND, we help multinational enterprises streamline international accounting and compliance through our record to report outsourcing and finance and accounts outsourcing services. Our delivery models reduce operating costs by 35-40% while maintaining 99% compliance achievement across complex statutory regimes. Through our centralized shared services center operations and comprehensive compliance management services, we assist corporate teams in gathering reliable jurisdictional data. By deploying compliance tracking technology such as the MYNDACT digital compliance solution, businesses can monitor multi-jurisdictional filings and documentation seamlessly.

Preparing Your Organization for GloBE Rules

The GloBE Rules transform global tax strategy by shifting the focus from statutory tax rates to consolidated accounting profits and effective tax rates. To safeguard your business against surprise top-up tax liabilities, corporate finance leaders must audit entity-level accounting data, model jurisdictional ETRs across all territories, and establish rigorous reporting controls. Proactive preparation ensures your enterprise maintains complete compliance while protecting cross-border shareholder value under the evolving GloBE Rules framework.

Frequently Asked Questions

What is the core difference between Pillar One and Pillar Two GloBE Rules?

Pillar One reallocates taxing rights over a share of profits from the world's largest enterprises to market countries where users and consumers are located. Pillar Two GloBE Rules establish a 15% global minimum tax across all jurisdictions to curb tax competition and profit shifting.

Are Indian groups with only domestic operations affected by GloBE Rules?

No. If an Indian enterprise operates exclusively within India and has no foreign subsidiaries, branches, or permanent establishments, the GloBE Rules do not apply, regardless of revenue size.

What is the GloBE Information Return (GIR)?

The GloBE Information Return is a standardized reporting template created by the OECD. In-scope multinational groups must file it annually to report group structures, ETR calculations, safe harbour elections, and top-up tax allocations across all operating countries.

Why does an Indian entity with a 25% tax rate still face top-up tax risks?

Top-up tax is driven by the accounting effective tax rate, not the statutory rate. Entities claiming tax holidays under Section 10AA in SEZs or Section 80LA in GIFT City may have an accounting ETR under 15%, which triggers top-up tax under foreign parent IIRs or UTPRs.