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Pillar Two What is it and how does it work?

In Focus – International Taxation

Introduction – Progress on the BEPS-2 project

In 2019, the OECD (Organization for Economic Cooperation and Development) began working on the BEPS-2 project, through which it sought to address the challenges of the digital economy, with a disruptive approach that departs from the traditional slogans or principles assumed by international taxation, fundamentally physical presence and the separate company as axes of tax jurisdiction allocation. These aspects were addressed through Pillar One and Pillar Two.

In July 2021, almost all the component countries of the Inclusive Framework approved both schemes, which were validated in October 2021 by the G-20 and, consequently, undertook the commitment to adopt the world’s leading economies.

Pillar One contemplates the treatment of a portion of the profits earned by large multinational enterprises (MNEs) involved in automated transactions, based on a new concept of nexus and jurisdictional allocation. It will be applicable to MNEs with revenues exceeding €20 billion and profitability exceeding 10%. It provides that Amount A, equivalent to 25% of the excess profits, is allocated to the jurisdiction where the purchasers or users are located, regardless of the existence of the physical presence of the entities comprising the MNE. It also identifies Amount B in relation to the remuneration obtained by group entities that perform routine marketing and distribution functions in order to define standardized remuneration criteria.

Pillar Two determines the application of a minimum global tax of 15% to counter international tax competition. It does so through a coordinated system(GloBE Rules) for the application of a to-up tax on the profits of multinational companies, allocable to jurisdictions where the effective tax rate is lower than 15%.

This is achieved through the Income Inclusion Rule (IIR), which consists of a supplementary tax to be paid from the last controlling entity of the group downwards and its complement, the Undertaxed Payment Rule (UTPR), which includes the restriction to the deductibility of certain expenses in favor of group companies, when the supplementary tax could not have been fully satisfied through the IIR.

international taxation

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The incorporation of a Subject to tax Rule (STTR) in the agreements to avoid double taxation is also foreseen, by virtue of which certain payments will be subject to withholding tax when they are subject to a rate of less than 9% for the recipient. The implementation of the STTR is for a later date.

Progress on the implementation of Pillar Two – The Model Rules

The OECD has taken accelerated steps for the implementation of Pillar Two, as a result of the issuance by the OECD of the GloBE Model Rules (Model Rules) in December 2021 as well as the Commentaries and Examples of Application, the latter documents issued in March 2022.

The objective of the Model Rules is to establish detailed rules to facilitate the implementation of Pillar Two by the countries that adhere to it, since in order to ensure that MNEs are subject to an overall minimum rate of 15% in each jurisdiction in which their subsidiaries operate, it is essential that there is regulatory uniformity or, where appropriate, harmonization that allows the system to be effective. It is intended to be applicable as of 2023.

Minimum taxation will be achieved through the application of a supplementary tax for the calculation of which it is necessary to quantify, as a prior step, the effective tax rate borne by the multinational group in each jurisdiction. The system contemplated in Pillar Two is complex. The Model Rules comprise 10 chapters that cover the conditions for defining the applicability, the technical procedure to be followed for the determination of the complementary tax, the rules for the identification of the entity obliged to pay the complementary tax and other aspects such as the solution in case of mergers and acquisitions, specific issues for certain holding structures and tax neutrality regimes that affect very few taxpayers, administrative issues, transition rules and the provision of definitions.


Pillar Two covers MNEs with annual revenues exceeding €750 million (according to their consolidated financial statements) in two of the last four fiscal years. Its application is not mandatory for all countries that are members of the Inclusive Framework, but those that adopt it must respect the “common approach” criterion to ensure the uniformity and effectiveness of the system. It also contemplates the possibility for countries to apply the regime for entities with lower consolidated revenues based in their territory.

Governmental entities, international organizations, non-profit organizations and pension funds, among others, are excluded.

Structuring of the complementary tax to enter (top up tax)

The MNE must calculate the effective tax rate in each jurisdiction where a constituent entity (subsidiary or permanent establishment) operates, in order to determine, by difference with the minimum rate, set at 15%, the top-up tax to be paid.

Application of the IIR

The complementary tax is paid through the Tax Inclusion Rule (IIR), by virtue of which it must be paid by the last shareholder entity in priority and descending order, so that, if the country of residence of the last shareholder or parent entity has not implemented the IIR, the responsibility for the complementary tax payment would fall on the intermediate entity that succeeds it in the chain of ownership. For this reason, it is said that the complementary tax is applied from the “top down” in the group structure.

Rules are established to resolve the application of the IIR in relation to constituent entities whose partial ownership corresponds to the MNE, in which case the entity is obliged to pay the complementary tax and not the ultimate controlling entity.

It also contemplates the possibility for jurisdictions to introduce their own supplementary minimum tax based on the same GloBE mechanisms, in order to preserve the jurisdictions’ right to tax their taxpayers.

Application of the UTPR

When it is not possible to apply the IIR by the ultimate controlling entity or, if applicable, by an intermediate entity; or it cannot be paid in full, the Insufficient Taxation Rule applies subsidiarily.

The mechanism for applying the UTPR rule in a jurisdiction is through the partial challenge of the company’s deductions or the making of an “equivalent adjustment”, as determined by the domestic law of the jurisdiction of the obligated company, to give rise to a tax expenditure equivalent to the additional tax of the applicable jurisdiction. If the annual adjustment is insufficient to cover the corresponding complementary tax in the same tax year, it is carried forward.

For the allocation of the UTPR to the different jurisdictions, a formula is applied that considers the number of employees and tangible assets of each company in its jurisdiction, in proportion to the total number of employees and tangible assets of the UTPR jurisdictions.

How to calculate the complementary tax to be paid by each jurisdiction?

GloBE base

As mentioned above, the GloBEtop-up-tax requires, in the first instance, determining the effective tax rate borne by the MNE in each jurisdiction. For this purpose, the document defines in detail the two elements to be considered in the formula: the computable income or GloBE base and the Computable Taxes. Both concepts must be jurisdictionally aligned.

The GloBE Basis is calculated taking as a starting point the net income of each constituent entity determined in the individual financial statements, which must be prepared by applying the accounting principles used in the preparation of the consolidated financial statements of the last controlling entity (or which should be used if it is required to prepare consolidated financial statements). The document identifies IFRS as acceptable accounting principles, allowing the application of accounting principles used locally by the entities as long as they do not generate a material distortion with IFRS.

Certain adjustments for permanent differences, such as non-deductible expenses and capital gains on the transfer or revaluation of equity interests in companies, are made on this gain in order to bring the accounting results closer to the taxable results. Dividends received are also adjusted (negative adjustment), in line with the criteria for jurisdictional allocation of profits that generally consider the residence of the producing or source constituent entity. The deduction of stock option payments is allowed under certain conditions. For transactions between entities of the same MNE, the computation of the arm’s length value of remunerations is determined, as well as the application of Pillar One, if applicable.

In relation to the treatment to be assigned to losses, the document is based on the concept of deferred tax with certain adjustments considering the minimum tax rate.

Taxes Covered

It defines which are the covered adjusted taxes to be associated with the GloBe Base (they form the numerator of the formula), starting with the generic definition of the basic concept of net income tax, both the accrued tax and the subsequent tax levied on distributions of income, including capital gains. The document extends the consideration of several figures, such as special taxes that some countries apply on certain types of income, tax on retained earnings and on distributed earnings, among other assumptions.

The territorial allocation rules are highlighted, whereby withholdings incurred by an entity must be allocated to the jurisdiction of its residence, as well as input tax under the CFC rule. Taxes on dividends should be allocated to the entity that generated the distributed income.

In addition, the rules include specific mechanisms to neutralize temporary differences on the basis of the deferred tax mechanism and the management of a possible loss as a GloBE basis.

Procedure for calculating the Additional Tax (top-up-tax) per entity

The starting point is to determine the effective ETR rate by jurisdiction resulting from dividing the total amount of Covered Taxes of each company in each jurisdiction(blending approach), divided by the total GloBE Net Base earned in a fiscal year (income minus GloBE losses).

Next, the percentage of the complementary tax to be considered by jurisdiction is calculated, given by the difference between the 15% minimum tax and the ETR. This percentage should be applied to the jurisdiction’s GloBE base after excluding from the base the amount corresponding to activities with substance(carve out).

Such exclusion of substance responds to the estimated gain resulting from initially applying 10% on the remuneration of eligible personnel and 8% on tangible goods, margins that will be reduced during a transition period to 5% for both items.

A “de minimis” exception is included to allow the payment of the supplementary tax in the jurisdiction when two concurrent conditions are met in the annual period:

  1. the average GloBE revenue of that jurisdiction is equal to or less than €10 million; and
  2. that its results are a loss or a profit of less than €1 million.

The following numerical example shows the 9-step methodology to facilitate the explanation of these rules[1]:

  • Step 1: Determine the Basis (profit or loss) of GloBE in a jurisdiction.
  • Step 2: Determine the jurisdiction’s Covered Taxes.

Jurisdiction ABGloBE BaseTaxes covered
Company A10030
Company B2000

  • Step 3: Calculate the effective rate 30/300 = 10%.
  • Step 4: Low tax jurisdiction, given that 10% is less than 15%.
  • Step 5:Top-up percentage 5% Step 6:Top-up percentage 5% Step 7:Top-up percentage 5% Step 8:Top-up percentage
  • Step 6: Calculation of substance exclusion

Jurisdiction ABPayrollExclusion (10%)Tangible AssetsExclusion (8%)Total
Company A50593.757.5
Company B252.512510
  • Step 7: Determination of excess profit: 300 – 25 = 275
  • Step 8: Determination of thetop-up tax 275 x 5% = 13.75
  • Step 9: Allocation of Additional Tax to each Entity

The allocation is made in the proportion of each entity’s contribution to the total GloBE Base:

  • Entity A 100/300 x 13.75 = 4.58. Entity B 200/300 x 13.75 = 9.17

As mentioned above, the Enforcement Mechanism chapter includes the rules for allocation to different jurisdictions when there is more than one jurisdiction through the IIR or UTPR.

Specific situations

The last chapters of the Model Rules deal with specific cases of intra-group restructurings and holding companies, company-specific regimes and transparent funds or funds with a regime of -deduction of- distributions.

Transfer Pricing

Know our services – Transfer Pricing

The rules include details regarding administrative procedures, highlighting the obligation of each member entity of the group to file an informative GloBE affidavit with the tax administration of its jurisdiction. They also contemplate the possibility for the MNE to opt for a safe harbours mechanism for certain jurisdictions where taxation is estimated to exceed 15%.


In relation to our country, it is highly probable that it will adopt the Pillar Two rules, since it is one of the 137 member countries of the Inclusive Framework that adhered to them. This will imply a great administrative effort, including compliance by taxpayers.

Our country is characterized by high income taxation, which relativizes the potential effectiveness of the regime in relation to resident companies that are members of an MNE, but may affect groups with ultimate controlling shareholders in Argentina with respect to activities and profits attributable to some entities resident in other jurisdictions, as could be the case of Uruguay or Paraguay.

The implementation of Pillar Two will require significant efforts by the multinational group to produce the necessary information for compliance, which requires the application of accounting standards that may not be the legal ones in force in each jurisdiction, applying adjustments, quantifying the taxes included, following the process to quantify the Complementary Tax per entity and the allocation of the payment obligation under the IIR and the UTPR.

This is a task that must be addressed and monitored in a centralized and harmonized manner with the concurrence of the tax and accounting areas and, in turn, with the contribution of the teams of the local entities. They must adapt the collection of relevant information, as well as to comply with the information obligations imposed.

For more information contact:

Cecilia Goldemberg



Julieta Firpo

Transfer Pricing Director


[1] EY Global Tax Alert – www.ey.com/en_gl/tax-alerts/oecd-releases-model-rules-on-pillar-two-global-minimum-tax–deta