Effective Tax Rate and Top-up Tax Under the GloBE Model Rules

How Article 5 Computes ETR and Top-up Tax

In this fifth instalment of our series on the OECD/G20 Global Anti-Base Erosion (GloBE) Model Rules, we look at how the Effective Tax Rate (ETR) is worked out, and how top-up tax is tested and charged. Together they decide whether multinational enterprises (MNEs) pay a minimum tax in each country. Chapter 5 is where the rules stop describing a policy and start producing a number: the tests apply to a group with consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years, and the rate they test against is 15%. We also set out what the rules mean in practice.

Effective Tax Rate Determination (Article 5.1)

The ETR is the key test in the rules. It shows whether the income of a group's constituent entities is taxed at or above the minimum rate. It is computed jurisdiction by jurisdiction rather than for the group as a whole, so one low-taxed country does not average out against a high-taxed one.

Method: The ETR for a jurisdiction is the total adjusted covered taxes of its constituent entities, divided by the total GloBE income earned there. That ratio decides whether extra tax (top-up tax) is due.

Adjustments: Both the top line (taxes paid) and the bottom line (income) are adjusted, so that the ETR reflects real activity and not only accounting or financial engineering. Covered taxes take in current tax and the total deferred tax adjustment amount, net of the items the rules exclude. The changes include, but are not limited to, taking out one-off gains or losses, allowing for the different tax treatment of some types of income, and lining up the tax bases used in each jurisdiction.

Top-up Tax (Article 5.2)

If a jurisdiction's ETR falls below the minimum rate, a top-up tax bridges the gap.

How it is worked out: The top-up tax percentage is 15% less the jurisdiction's ETR, applied to excess profit, which is GloBE income less the substance-based income exclusion. The total top-up tax for the jurisdiction is that amount, plus any additional current top-up tax, less any qualifying domestic minimum top-up tax payable there.

How it works: The top-up tax is an extra charge, so a country still collects a minimum level of tax even where its own rate is below the global minimum. It is charged by the parent jurisdiction under the income inclusion rule, or under the undertaxed profits rule where no qualified income inclusion rule applies.

Substance-Based Income Exclusion (Article 5.3)

This rule leaves out part of the income from real activity. It accepts that not all income should carry the same top-up tax.

What is left out: The rule covers income from tangible assets and payroll. Both point to a real presence and real activity in a jurisdiction. The exclusion is a fixed percentage of eligible payroll costs plus a fixed percentage of the carrying value of eligible tangible assets: 5% each once the transition ends, stepping down from 10% and 8% respectively over the fiscal years beginning 2023 to 2032.

Why it exists: By leaving some income out, the GloBE rules reward real activity in a jurisdiction rather than mere profit shifting. The carve-out also keeps the charge tied to where people work and assets sit, so what is raised comes from the profit that was moved.

Additional Current Top-up Tax (Article 5.4)

Some cases need tax to be charged at once to stop base erosion. An additional current top-up tax may then be due, and it brings the correction for an earlier year into the current computation instead of reopening that year.

When it applies: It applies where a downward adjustment to GloBE income, or an upward adjustment to covered taxes, in a later year increases a previous year's top-up tax. Where the amount is negative, it reduces the current year's top-up tax, and any remainder is not carried further.

De Minimis Exclusion (Article 5.5)

To keep the work down and focus on large profit shifts, the GloBE rules include a de minimis exclusion. A jurisdiction qualifies where the average GloBE revenue of its constituent entities is below EUR 10 million and their average GloBE income is below EUR 1 million, measured over the current and two preceding fiscal years. Where both tests are met, the top-up tax for that jurisdiction is zero for the year.

Thresholds and limits: Both tests must be met, so low revenue alone is not enough. Three-year averaging means one strong year in the window can take a jurisdiction out of the exclusion, so the figures have to be tracked every year the exclusion is used.

Minority-Owned Constituent Entities (Article 5.6)

Minority-owned entities have their own rules, so that the GloBE rules apply fairly where control and profit rights differ from ownership. Their income and covered taxes are taken out of the main jurisdictional computation and tested within their own minority-owned subgroup.

Fair treatment: These rules balance minority and majority owners' interests, so that tax follows the benefit each takes from the entity. That matters most in joint ventures and partly-held holding companies, where a minority stake can otherwise move a whole jurisdiction's ETR.

Conclusion

Working out the ETR and the top-up tax is a hard but central part of the global tax reform push. The aim is to make sure MNEs are taxed fairly wherever they work. With the rules above in mind, MNEs and their advisers can plan cross-border operations with fewer surprises and get the compliance right. The computation is also only as good as the figures behind it: jurisdictional GloBE income, covered taxes, payroll and asset data have to line up first, which is why data readiness for Pillar Two is where most groups start. In our next article, we will look at corporate restructurings and holding structures under the GloBE Model Rules: how a group's structure affects the result, and what a group can change in response to the changing global tax scene.

Basis and cut-off: This note follows Chapter 5 of the OECD/G20 Model Rules (December 2021) and the Commentary on Chapter 5 (March 2022), read with the Administrative Guidance issued since. Article references are to the Model Rules, and domestic implementing legislation is outside its scope. Research cut-off: October 2026.