Global Minimum Tax: OECD Pillar Two (Globe Rules)

Pillar Two is an international tax rule agreed by many countries (through the OECD) to make sure very large companies (multinationals) pay at least 15% tax on profits in every country they do business.

This is to stop companies from shifting profits to very low-tax places and paying almost no tax.

When a company’s effective tax rate in a country is below 15%, a “top-up tax” is calculated to bring it up to 15%

Pillar Two consists of several rules:

• Income Inclusion Rule (IIR): Parent entity pays top-up tax on low-taxed foreign profits.
• Undertaxed Profits Rule (UTPR):  Additional backstop rule allowing other jurisdictions to collect top-up tax if the parent jurisdiction does not apply an IIR.
• Qualified Domestic Minimum Top-Up Tax (QDMTT): Allows a country to collect the top-up tax domestically before other jurisdictions apply IIR or UTPR.

What is QDMTT?

QDMTT = Qualified Domestic Minimum Top-Up Tax

It is a domestic version of the global minimum tax, applied by a country on the entities within its own borders.

Core Criteria for QDMTT

To be a Qualified Domestic Minimum Top-up Tax, the domestic tax must:

1. 1. Determine Domestic Excess Profits-

Identify and compute the “Excess Profits” of MNE constituent entities in the jurisdiction in a way equivalent to the OECD Globe Rules.

2. 2. Raise Tax to the Minimum Rate-

Increase the domestic tax liability on those excess profits up to the minimum rate (15%) for that fiscal year

3. 3. Be Consistent With Globe Outcomes-

The tax must be implemented and administered in a manner consistent with the objectives and results of the OECD Global Anti-Base Erosion (Globe) rules, without offering “related benefits” that skew those outcomes

If these conditions are met, the domestic tax qualifies as a QDMTT and can be credited against Pillar Two top-up taxes that might otherwise arise under IIR/UTPR.

For Examples:-

If a multinational’s subsidiary pays only 10% tax in Country A:

• If Country A has a QDMTT, it charges the 5% top-up tax domestically.
• If no QDMTT exists, then the parent country’s IIR/UTPR may collect that 5%.

👉 SBIE is an amount excluded from the top-up tax base to account for real economic activity (like payroll and tangible assets).

Substance-Based Income Exclusion (SBIE)

Calculation:

 Step 1 — Top-up Tax Percentage

• Top-up tax percentage = 15% (Minimum) – 10% (ETR) = 5%

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

Under a QDMTT, only Excess Profits are taxed — i.e., income above the SBIE:

• • Excess Profits = 100 – 25 = 75
  • QDMTT = 5% × 75 = 3.75

So the domestic minimum tax payable under the QDMTT is 3.75.
Since it meets the OECD requirements for a qualified tax, this fully discharges all Pillar Two top-up tax liability — no further Pillar Two top-up is owed under IIR/UTPR.

2. 2. Non-Qualified Domestic Minimum Tax

If the jurisdiction instead had a non-qualified minimum tax (not recognized as QDMTT), it might simply top up the domestic ETR to 15% by applying the 5% top-up to all income:

• • Non-qualified minimum tax = 5% × 100 = 5

Because it’s non-qualified, this tax:

• Is treated as a Covered Tax in Globe calculations
• Does not fully discharge Pillar Two top-up
• Additional top-up may be imposed under the OECD Globe rules (IIR/UTPR) by the parent jurisdiction or others.

Key Insights

 QDMTT

• Only taxes excess profits (after SBIE).
• Results in a smaller top-up tax (3.75 vs 5 in our example).
• If it meets OECD requirements, it eliminates further cross-border top-up tax under Pillar Two.

Non-Qualified Minimum Tax

• Applies top-up to all taxable profits.
• Produces higher tax amount (5 in this example).
• Does not fully discharge Pillar Two obligations — home jurisdictions can still impose additional Globe top-up tax.

Why QDMTT Matters

• Revenue protection: This prevents other jurisdictions from collecting the top-up tax.
• Simplicity for MNEs: One jurisdiction handles the top-up.
• Tax sovereignty: It helps countries retain their own tax base.

How QDMTT Appears in Financial Statements?

Under the amended Ind AS 12:

• Current Tax Expense- QDMTT paid or payable in the reporting period is recognised as current tax expense in the profit & loss statement
• No Deferred Tax Recognition-Companies do not create deferred tax assets/liabilities.
• Disclosure Requirements- Companies should disclose material impacts of Pillar Two and related QDMTT exposure, and the accounting policies adopted.