ATAF SUGGESTED APPROACHES TO DRAFTING DOMESTIC MINIMUM TOP-UP TAX LEGISLATION

In December 2021, the Inclusive Framework – the broad coalition of countries and jurisdictions collaborating to address the tax challenges arising from the digitalisation of the economy – published the Global Anti- Base Erosion (GloBE) Model Rules. This was followed by the accompanying commentary in March 2022.

The GloBE rules comprise of two interlocking domestic rules: (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low-taxed income of a member of a multinational enterprise (a “constituent entity”); and (ii) an Undertaxed Profits Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low-taxed income of a constituent entity is not subject to tax under an IIR. The IIR is the primary rule and the UTPR only acts a backstop to the IIR. This means that the ordering of the GloBE rules generally works in favour of residence countries (in most cases developed countries) to the detriment of source countries (usually developing countries).