BDO Corporate Tax News

International - Pillar Two updates: Status of implementation around the world

Last update on 30 November. It was originally published on 15 November 2023. For updated and a more comprehensive analysis of the implementation of Pillar Two globally, see BDO's Implementation Status around the World

  • European Union: The EU minimum taxation directive (Council Directive (EU) 2022/2523 of 14 December 2022) entered into force on 23 December 2022 and must be transposed into the domestic law of the 27 EU member states by 31 December 2023. The chart provides a high-level summary of the minimum tax directive and indicates the status of implementation as of 15 November 2023.
Status of implementation of EU minimum taxation directive
The EU minimum taxation directive (Council Directive (EU) 2022/2523 of 14 December 2022) entered into force on 23 December 2022 and must be transposed into the domestic law of the 27 EU member states by 31 December 2023. The directive is based on the OECD Pillar Two Global Anti-Base Erosion Rules (GloBE) and commentary and provides a common framework for implementing those rules into the domestic laws of the EU member states, adjusted to take into account certain features of EU law. Overall, the directive aims to reduce the risk of BEPS and ensure that the largest groups pay at least a minimum rate of corporate tax; this is achieved by a system of taxation under which a top-up tax is imposed on profits arising in a jurisdiction if the effective tax rate (ETR) is below a minimum 15% rate.
Covered entities
The global minimum income tax will apply to a large MNE group whose consolidated group revenues in at least two of the previous four years is at least EUR 750 million, where either the group parent company or a group subsidiary is located in an EU member state. Unlike the OECD Pillar Two rules, the directive also applies to large purely domestic groups that meet the annual EUR 750 million revenue threshold. Including domestic groups within the scope of the directive is to achieve consistency with EU law and eliminate any risk of claims of discrimination between entities in groups with cross-border activities and those with purely domestic activities.
There are several exclusions from application of the top-up tax to the profits of a group, even if the ETR is below 15%:
  • Excluded entities: Certain entities—government entities, international or nonprofit organisations, pension funds and investment funds that are parent entities of an MNE group—fall outside the scope of the directive.
  • De minimis exclusion: This is an exclusion for MNE groups or large-scale domestic groups that have an average revenue of less than EUR 10 million and an average qualifying income or loss of less than EUR 1 million in a jurisdiction.
  • Substance-based income exclusion: This exclusion allows for a reduction in the tax base on which the "top-up tax” would apply; a company will be able to exclude an income amount equal to 5% of the value of tangible assets located in its jurisdiction plus 5% of the payroll relating to employees that perform activities in that jurisdiction.
  • Initial phase of cross-border activities: Low-taxed activities of MNE groups that are in the initial phase of their international activities are excluded for a transitional five-year period, provided the group does not have constituent entities in more than six jurisdictions. The same rule applies to large covered domestic groups.
Minimum tax rate, IIR, UTPR and QDMTT
The global minimum tax rate is set at 15% of the profits earned in any country in which a group company carries on economic activities, with the tax level calculated on a jurisdiction-by-jurisdiction basis. The ETR is determined by dividing the tax paid by entities in a jurisdiction by their net qualifying income in that country. An ETR below 15% triggers the Pillar Two rules, with the effect that the group must pay an additional tax, i.e., a top-up tax, to bring the statutorily enacted tax rate up to 15%. The top-up tax will apply to each low-tax jurisdiction in which the entity operates to ensure it is paying a minimum ETR of 15%. The top-up tax can be levied at the level of the UPE or in the country of the companies that are effectively low taxed via a domestic top-up tax.

The directive is structured around two interlocking rules, the income inclusion rule (IIR) and the undertaxed profits rule (UTPR).

The primary mechanism for collecting the top-up tax—the IIR—is directed at MNEs operating in low-tax jurisdictions (i.e., those where the ETR is less than 15%). The IIR ensures that the minimum 15% tax will be collected because the ultimate parent entity (UPE) of the group located in an EU member state is subject to the IIR with respect to its low-taxed constituent entities located in the same or other jurisdictions, whether within or outside the EU. The UPE makes the calculations unless the group assigns this responsibility to another entity or the UPE is not resident in the EU. If the UPE is located in a third country and that country does not apply the IIR, an EU-resident intermediary parent entity may be subject to the IIR in respect of its low-taxed constituent entities located within and outside the EU.

If the 15% tax level is not achieved by applying the IIR, EU member states will apply a backstop or secondary rule known as the UTPR. A member state will effectively collect part of the top-up tax due at the level of the entire group if some jurisdictions where group entities are based impose tax at less than the minimum 15% rate and do not impose a top-up tax. The amount of top-up tax collected by a member state from group entities in its territory will be determined based on a formula.

The UTPR is also applicable when the UPE is located outside the EU in a jurisdiction that has implemented the IIR, but the UPE (along with the other constituent entities in that jurisdiction) is low-taxed. In this case, the top-up tax corresponding to the UPE’s jurisdiction is allocated to all entities that have implemented the UTPR, including those located in EU member states. The UTPR does not apply if the UPE is located in a member state because the IIR would apply in this situation.

The directive grants member states an option to introduce a qualifying domestic minimum top-up tax (QDMTT) on constituent entities located in its jurisdiction to ensure a minimum taxation of 15%. This will allow the tax to be allocated to and collected in the low-tax jurisdiction rather than being collected at the level of the UPE. If a member state adopts a QDMTT, the amount of the top-up tax due from the UPE will be reduced by the amount of top-up tax due from the constituent entities.
Safe harbours
There are safe harbours to reduce administrative and compliance burdens and benefit groups with entities operating in low-BEPS-risk countries.
Reporting obligations
Constituent entities of an MNE group located in a member state must file an annual top-up tax information return within 15 months after the end of the constituent entity’s fiscal year, unless the return is filed in another jurisdiction with which the Member State has an exchange of information agreement. The annual return must include specific information about the constituent entities in the group, the overall group structure, information needed to compute the ETR for each relevant jurisdiction and the top-up tax liability of each constituent entity, etc. Penalties may apply for noncompliance.
Transposition date
EU member states must transpose the directive into their domestic law by 31 December 2023 so that the IIR and QDMTT will become effective for fiscal years starting on or after that date and the UTPR will become effective for fiscal years starting on or after 31 December 2024. The directive allows member states with 12 or fewer UPEs of in-scope MNEs to defer the application of the IIR and the UTPR for up to six consecutive fiscal years starting from 31 December 2023 (i.e., until 1 January 2030), but the European Commission must be notified of the election before 31 December 2023. Member states that elect to postpone the application of the IIR/UTPR are nevertheless required to incorporate provisions in the directive into their domestic law to ensure the functioning of the GloBE rules.




  • Barbados: On 7 November 2023, Barbados’ prime minister announced changes to the corporate income tax system that will be introduced in 2024 in conjunction with the country’s implementation of the minimum tax rules. Draft legislation in line with the GloBE rules is expected to be released in the near future and once approved, the measures will apply as from 1 January 2024. It is unclear whether the legislation will include an IIR or UTPR, but Barbados intends to introduce a QDMTT for in-scope companies.
  • Bermuda: On 15 November 2023, the government released the third public consultation paper on the proposed introduction of a corporate income tax, which includes draft legislation for a tax on Bermuda businesses that are part of MNE groups with annual revenue of EUR 750 million or more. The third consultation focuses on open issues and addresses comments made in the two previous consultations. The second public consultation, which ended in October, focused on compliance with the GloBE rules and aimed to ensure that Bermuda’s corporate income tax is a covered tax. Bermuda does not intend to introduce an IIR or UTPR. Legislation is expected to be enacted by 31 December 2023 and will become effective as from 1 January 2025.
  • Ireland: Finance Bill 2024 contains the legislation to implement the 15% minimum effective tax rate for large companies, as provided for under the OECD Pillar Two agreement and to transpose the EU minimum tax directive into domestic legislation (see the article in this issue).
  • Kuwait: The OECD announced on 15 November 2023 that Kuwait has joined the Inclusive Framework and, therefore, has committed to participate in Pillars One and Two. Kuwait is considering the introduction of a 15% Business Profit Tax that would apply to all entities operating in the country (corporate tax currently only applies to foreign companies doing business in Kuwait (see the article in this issue).
  • Malaysia: Budget 2024 includes a proposal to introduce the global minimum tax in 2025 (see the article in this issue).
  • Norway: The government has tabled a bill before parliament that would introduce the 15% minimum tax under Pillar Two, according to a press release issued on 24 November 2023. If approved, the rules would apply as from 1 January 2024.
  • OECD: The OECD Inclusive Framework (IF) announced on 3 October the conclusion of negotiations on a multilateral instrument (MLI) to implement the Pillar Two Subject to Tax Rule (STTR). The STTR will enable developing countries to tax certain intragroup payments in situations where the payments are subject to a nominal corporate income tax rate under 9%. The MLI is open for signature by all states without reservations (see the article in this issue).
  • Philippines: The OECD announced on 10 November 2023 that the Philippines has joined the Inclusive Framework and, therefore, has committed to participate in Pillars One and Two.
  • United Arab Emirates: There are reports that the UAE may not implement Pillar Two rules in 2024; instead, the Ministry of Finance will hold a public consultation on the rules and their impact on UAE taxpayers in Q1 2024 (see the article in this issue). A decree published on 24 November 2023 revises the Corporate Income Tax Law in preparation for the implementation of the top-up tax for MNEs. For example, definitions are included for a top up tax and MNE, and further guidance will be issued on the rules, procedures, conditions, etc. for the application of the tax.
  • Vietnam: The National Assembly approved a resolution on the application of a global minimum tax on 29 November 2023. The rules will include the introduction of a QDMTT and IIR.