In our previous video of step 5 we mentioned that, once it is clear that the effective tax rate in a certain jurisdiction is below 15%, it should be determined who will file the relevant top-up tax return.
There are three ways of allocating the taxing rights between the countries in which the group is active:
Rule 1 is the Qualified Domestic Minimum Top-up Tax (QDMTT)
This rule creates a taxation obligation for a country on companies of a multinational group that are situated in that country if they fall under the 15% effective tax rate. This rule has priority over the following other options: namely the income inclusion rule and the undertaxed profit rule.
Rule 2 is the Income Inclusion Rule
This rule applies if there are foreign subsidiaries within the group that, at the jurisdiction level, do not meet the 15% tax rate. And it has priority over option 3, the Under Taxed Profit Rule.
The IIR Initial top-up tax obligation lies with the top entity of the group but will shift downward if the top entity is not situated in a country that implements Pillar Two. Furthermore, the top-up tax obligation may also shift down in case there are partially held sub-holding companies within the group.
Rule number 3 is the UnderTaxed Profit Rule
This rule will apply if there are companies within the group that, at the jurisdiction level, do not meet the 15% tax rate. It only applies if options 1 and 2 do not apply in a specific situation. The top-up tax liability is divided between group companies that are situated in jurisdictions that have implemented Pillar Two. UTPR is based on substance in the relevant countries.
