Pillar 2

Chapter: Pillar 2 and GILTI: Coexistence, Conformity or Fracture?
To be published in: Annotations on the OECD Global Anti-Base Erosion Model Rules
(Pillar 2) and Commentary
DRAFT as of September 6, 2023
This chapter considers the interaction of the U.S. version of a global minimum tax – known by
its acronym GILTI (global intangible low-taxed income) and the pillar 2 GLOBE rules.1 It
begins with a summary of the GILTI regime, and then reviews the ways in which the two
regimes parallel each other, and the differences between them. It then analyzes the extent to
which GILTI may conform to the pillar 2 rules, or whether the two regimes may coexist. It
concludes with a review of the challenges posed to coexistence, and some thoughts about how
Pillar 2 might impact the future of tax competition.
11.1. Background: GILTI2
(a) To Whom Does it Apply
i. CFCs
GILTI was enacted in 2017 as part of the Tax Cuts and Jobs Act (TCJA),3 included within
subpart F of the Internal Revenue Code, pursuant to which the United States has been taxing the
foreign earnings of controlled foreign corporations (generally limited to passive, highly mobile
income) since 1962.4 Because GILTI was enacted as part of subpart F, the subpart F CFC regime
forms the building block to an understanding of, and the mechanics of the calculation of, the
GILTI minimum tax. That’s first of all the case in determining the scope of the regime, which is
governed by the rules in IRC §§ 951, 957, and 958, rather than the GILTI provision (IRC §
951A) itself.5
As with the subpart F regime, the starting point for a determination of whether an inclusions
under GILTI might be required is whether there is a foreign company that meets the definition of
a controlled foreign corporation (CFC).6 IRC § 957 defines a CFC as a foreign company if “U.S.
Shareholders” (a term defined in the Internal Revenue Code) own (directly, indirectly through
1
The tax on global intangible low-taxed income is imposed via IRC § 951A.
2
For more detailed background on GILTI, see Herzfeld, International Taxation in a Nutshell (13th ed.), Chapter 9.
Portions of the discussion below are adapted from that chapter.
3
The official name of the TCJA is An Act to provide for reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018, H.R.1, Pub. L. No. 115-97, 131 STAT. 2054.
4
The rules of subpart F can be found in IRC §§ 951-965. See Pub. L. No. 115-97, 131 STAT. 2054(2017), § 14201
for enactment of GILTI. IRC § 952 defines Subpart F income to include certain types of insurance income (as
defined in IRC § 953); foreign base company income (defined in IRC § 954); international boycott income (defined
by reference to IRC § 999); amounts paid as illegal bribes to foreign governments (with a reference to IRC § 162(c);
and income from foreign countries with which the United States does not conduct diplomatic relations (with
reference to IRC § 901(j). Under IRC § 954, foreign base company income includes foreign personal holding
company income, foreign base company sales income, and foreign base company services income.
5
Note that all references in this chapter to “IRC” are to the Internal Revenue Code of 1986, as amended, and all
references to Treas. Reg. §” are to the U.S. Department of Treasury regulations promulgated thereunder.
6
See IRC §§ 951A, 957.
Herzfeld, Mindy
GILTI and Pillar 2 Compared
Annotations on the OECD Global Anti-Base Erosion Model Rules (Pillar 2) and Commentary
DRAFT of September 6, 2023
attribution, or constructively) more than 50 percent of the total combined voting power of its
stock or more than 50 percent of the stock’s total value.7
A separate Internal Revenue Code section (IRC § 951(b)) defines a U.S. Shareholder as a U.S.
person (a term defined in IRC § 957(c)) owning at least 10 percent or more of the total combined
vote or value of the corporate stock directly, indirectly or constructively.
A U.S. person is defined under IRC § 957(c) generally by reference to IRC § 7701(a)(30). That
provision describes a U.S. person as including a citizen or resident of the United States, a U.S.
partnership, a U.S. corporation, any estate (other than a foreign estate), and any trust if a court
within the United States is able to exercise primary supervision over the administration of the
trust, and one or more U.S. persons have the authority to control all substantial decisions of the
trust.
An example helps explain the implications of the definitions of U.S. Shareholder and CFC. If 11
unrelated U.S. persons own equal interests in a foreign corporation, the corporation is not a CFC
because each shareholder owns less than a 10 percent interest. In this example, there are no U.S.
Shareholders of the corporation – i.e., no 10 percent shareholders; only a corporation with U.S.
Shareholders within the meaning of the statute can be a CFC. But if the same 11 individuals are
partners in a U.S. partnership that owns 100 percent of the corporation, the corporation is treated
as a CFC because a U.S. partnership is a U.S. person within the meaning of IRC § 7701(a)(30),
and therefore is considered U.S. Shareholder that owns more that 50 percent of the stock of the
corporation.8
Consider another example, where a foreign corporation is owned by 10 equal unrelated U.S.
Shareholders. Such a corporation is a CFC, because more than 50 percent of the shares are
owned by U.S. Shareholders. But if ownership percentages are a little different, and one of the
shareholders owns 50 percent and the other nine own the remaining 50 percent equally, the
corporation is not a CFC. That’s because U.S. Shareholders (i.e., 10 percent owners) do not own
more than 50 percent of the foreign corporation’s stock.
Ownership for this purpose can be direct, indirect or constructive.9 The meaning of direct
ownership is straightforward; indirect ownership generally only matters for these rules if a U.S.
person owns shares of a foreign corporation through a foreign entity. The Internal Revenue Code
contains complex constructive ownership rules, which require attribution of ownership between
members of a family, from entities to their owners, and from owners down to entities that they
own in some cases as well.10
7
IRC § 957(a).
8
But note that Treasury and the IRS have lessened the impact of such a result through regulations. See Treas. Reg. §
1.958-1(d).
9
IRC §§ 957(a) and 958.
10
On constructive ownership generally, see IRC § 304; as applied to foreign corporations and CFC status, see IRC §
958(b) and the regulations thereunder.
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The tax rate paid by an entity – effective rate or otherwise – is not relevant to the determination
of whether a CFC is subject to the GILTI regime. Similarly, the type of income earned by the
entity is not relevant, nor is the amount of revenue earned by the entity or its related affiliates.
GILTI applies to CFCs, regardless of whether they are subject to a zero or 50 percent effective
tax rate. Relief from double taxation is provided via the foreign tax credit, discussed in greater
detail below.
In short, the U.S. global minimum tax only applies to CFCs, a technical term defined under the
Internal Revenue Code.
ii. Who Has an Inclusion?
The inclusion of GILTI mandated by IRC § 951A is required only for certain types of U.S.
Shareholders – a term that includes both individuals and corporations.
Specifically, IRC § 951A provides that if a foreign corporation is considered a CFC within the
meaning of IRC § 957, each U.S. Shareholder (who owns stock on the last day of the year) must
include in income the sum of the shareholder’s pro rata share of the shareholder’s GILTI for the
shareholder’s taxable year. The statute further states that a person shall be treated as a U.S.
shareholder of a CFC for any taxable year of such person only if such person owns (within the
meaning of IRC § 958(a)) stock in such foreign corporation on the last day in the taxable year of
such foreign corporation on which such foreign corporation is a CFC.11
The reference to IRC § 958(a) means that for purposes of determining a GILTI inclusion, only
direct or indirect ownership is relevant = constructive ownership does not count for this
purpose.12 A foreign company can be considered a CFC through constructive ownership of its
shares by U.S. Shareholders, while still not having any U.S. Shareholders required to include an
amount in income because their ownership is only constructive, rather than direct or indirect.
There is no revenue threshold for a U.S. Shareholder’s GILTI inclusion. A single U.S. individual
who owns all of the shares of a foreign company will have a GILTI inclusion (provided the
income meets the definitional tests), regardless of how much (or little) revenue the company
generates.
(b) Calculating the Inclusion
Calculating the GILTI inclusion for a U.S. Shareholder requires several steps. Some of these
calculations are performed at the CFC level, and some are undertaken at the shareholder level.
First, GILTI is a term relevant only at the shareholder level. CFCs don’t earn GILTI; instead,
they earn what the statute refers to as “tested income.”13 Tested income is a catch-all phrase
designed to capture all gross income, with the exclusion of specific types of income listed in the
11
IRC § 951A(e)(2).
12
See Treas. Reg. § 1.958-1(d) for special rules that apply in the case of U.S. shareholders that are partnerships.
13
IRC § 951A(b).
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statute, less allocable deductions. The types of income that are specifically excluded from the
category of gross tested income include income effectively connected with a U.S. trade or
business (income taxable in the United States as U.S. source business income);14 gross income
taken into account in determining a CFC’s subpart F income (taxable at the higher statutory
rate); gross income excluded due to the high-tax exception to subpart F;15 dividends received
from related persons; and foreign oil and gas extraction income (defined in IRC § 907).16 How to
determine what deductions should be considered “properly allocable” to gross tested income is a
complex topic; Treasury Regulations provide detailed instructions that include different
allocation rules for different categories of items of expense.17 A CFC with positive tested income
is referred to as a “tested income CFC;” if a CFC’s allocable deductions are greater than the
gross tested income, the CFC is a “tested loss CFC.”
Once net tested income/loss is calculated on a CFC-by-CFC basis, a U.S. Shareholder aggregates
its pro rata share of net tested income/loss from all the CFCs in which it owns shares, a process
that allows the aggregate income from tested income CFCs to net against the aggregate loss from
any tested losses. The resulting amount is defined as “net CFC tested income,” which is a
shareholder level amount.18 But additional steps are necessary to derive the GILTI inclusion
from net CFC tested income. To get from net CFC tested income to GILTI, a U.S. shareholder
first has to determine its “net deemed tangible income return” (NDTIR) for the tax year. GILTI
is equal to the excess of a U.S. Shareholder’s net tested income for a tax year over its net NDTIR
for the same year.
NDTIR is defined by the statute as the excess of 10 percent of the aggregate of a U.S.
Shareholder’s pro rata share of the qualified business asset investment (QBAI) of each of its
tested income CFCs (i.e., only those CFCs with positive tested income; any investment in
tangible assets by CFCs that generate a net tested loss don’t count) for a tax year, over any net
interest expense taken into account in determining net CFC tested income.19 Generally speaking,
QBAI is equal to the investment in depreciable tangible property; the term is discussed in greater
detail below.
Calculating GILTI also is not the end of the story. The Internal Revenue Code allows U.S.
Shareholders of CFCs that are corporations a deduction against the GILTI amount. Through
2025, that deduction is equal to 50 percent (in 2026, it decreases to 37.5 percent).20 With a
14
See IRC § 952(b) for definition of income effectively connected with a U.S. trade or business.
15
Under the high-tax exception, a taxpayer can elect to exclude foreign base company income that is considered
high-taxed (defined as 90 percent of the U.S. rate) from Subpart F and GILTI. See IRC § 954(b)(4); Treas. Reg. §
1.951A-2(c)(7) for application of the subpart F high-tax exception to GILTI.
16
IRC § 951A(c)(2).
17
See Treas. Reg. § 1.861-8 et seq.
18
IRC § 951A(c)(1).
19
IRC § 951A(b)(2).
20
IRC § 250(a).
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statutory corporate tax rate in 2023 equal to 21 percent, the 50 percent deduction translates into a
tax rate on GILTI (for corporations) of 10.5 percent.21
For most CFCs, the majority of their earnings will be considered tested income, includible as
GILTI. This means that much of the earnings of CFCs is includible in their U.S. Shareholders’
U.S. taxable income in the year earned.
IRC § 951A treats U.S. Shareholders as having received a current distribution out of a CFC’s
earnings. As described in greater detail below, when GILTI is included in the taxable income of
a U.S. Shareholder under IRC § 951A, a previously taxed earnings (PTEP) account is established
to prevent double taxation of those earnings.22 A distribution of previously taxed earnings is not
includible as taxable income to the shareholder.
Calculating the GILTI inclusion of taxable income is not the final step. Additional adjustments
will be needed to the extent the taxpayer wishes to claim a foreign tax credit, as discussed in
greater detail below.
(c) Substance Based Exclusion
As noted above, the amount of gross tested income that would otherwise be includible as GILTI
may be reduced by a substance-based income exclusion, known as the NDTIR, or net deemed
tangible income return.23 The exemption for a return on investment in tangible assets is reflected
in the formula for calculating GILTI as follows: GILTI is equal to a U.S. Shareholder’s pro rata
share its CFCs’ net tested income minus the NDTIR. NDTIR is defined by reference to tested
income CFCs, as equal to 10 percent of such CFCs’ QBAI over the amount of net interest
expense not otherwise includible in another entity’s tested income.24
QBAI means the average of a tested income CFC’s aggregate adjusted bases as of the close of
each quarter in specified tangible property that is used in a trade or business for which a
deduction is allowable under IRC § 167.25 Specified tangible property is defined by reference to
a tested income CFC and a CFC inclusion year to mean tangible property of a tested income
CFC used in the production of gross tested income.26
Although the exemption from GILTI for QBAI provides a kind of substance based income
exclusion, it applies only with respect to CFCs that have positive tested income. An investment
21
Note that under the statute, only corporate taxpayers can claim the deduction. The regulations allow taxpayers to
make an election to be taxable as a corporation and to claim the deduction in that manner. See Treas. Reg. § 1.962-1.
22
IRC § 959. IRC § 961 provides for corresponding basis adjustments to reflect the inclusion of earnings and a
subsequent non-taxable distribution.
23
IRC § 951A(b)(1).
24
IRC § 951A(b)(2).
25
IRC § 951A(d); see also Reg. § 1.951A–3(b). IRC § 167 generally provides a deduction for depreciation for
property used in the trade or business or held for the production of income.
26
IRC § 951A(d)(2).
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in tangible property owned by a CFC that generates a tested loss does not produce any benefit to
the U.S. Shareholder in the form of an exemption from a GILTI inclusion.27
The regulations include a broad anti-abuse rule to protect against taxpayers trying to increase
their QBAI. If a CFC acquires specified tangible property with a principal purpose of reducing a
U.S. Shareholder’s GILTI inclusion, and the CFC holds the property temporarily but over at least
the close of one quarter, the property is disregarded in determining the acquiring CFC’s QBAI
for any CFC inclusion year during which it held the property.28
A U.S. Shareholder’s net deemed tangible income return on QBAI is reduced by interest expense
that reduces tested income (or increases tested loss) to the extent the interest income attributable
to such expense is not taken into account in determining the shareholder’s net CFC tested income
(“specified interest expense”).29. This generally means that only net interest income included in
gross tested income is taken into account in determining specified interest expense.30
(d) High-tax Election
Under Treasury regulations, U.S. Shareholders can make an election (on an annual basis) to
exclude the income of a CFC in which they own shares from tested income, if the CFC’s gross
tested income is subject to an effective foreign tax rate 18.9 percent (90 percent of the 21 percent
U.S. corporate rate).31 The effective foreign tax rate is determined by dividing foreign income
taxes paid or accrued for each tentative tested income item by the tentative tested income item
plus the related foreign income taxes.
For CFCs that are members of what the regulations refer to as a “CFC group,” the high-tax
election may be made only for all CFCs that are members of the CFC group. In other words, a
taxpayer cannot choose among its CFCs and decide to make the high-tax election for some but
not all, thereby limiting the taxpayer’s ability to engage in foreign tax credit planning.
The effective foreign tax rate for purposes of determining whether the high-tax exception applies
is calculated on a tested-unit basis. A tested unit is defined to include a CFC, an interest in a
passthrough entity directly or indirectly held by the CFC, or a specified branch of the CFC that is
either considered a taxable presence in the branch country or regarded as a taxable presence
under the owner’s tax law. If the tested units of a CFC are tax residents of, or are located in, the
same foreign country, they are considered a single tested unit. In this manner, the GILTI high-tax
27
Reg. § 1.951A–3(h)(1).
28
Reg. § 1.951A–3(h)(1). Property is presumed to be acquired temporarily with a principal purpose of increasing a
U.S. Shareholder’s substance-based exclusion if it’s held by the CFC for less than 12 months and the CFC’s holding
of the property as of the tested quarter close would have the effect of increasing the shareholder’s DTIR. Taxpayers
can rebut this presumption only if the facts and circumstances clearly establish that the subsequent transfer of the
property was not contemplated when the property was acquired and that a principal purpose of the acquisition of the
property was not to increase the DTIR.
29
IRC § 951A(b)(2)(B).
30
Reg. § 1.951A–4(b)(1)(i) and (iv).
31
Reg. § 1.951A-2(c)(7)(vi).
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election modifies the default (blended) calculation for a GILTI inclusion to one that’s performed
on a country-by-country basis, at the taxpayer’s election.
(e) Tax Rate
A special rate of tax applies to the U.S. Shareholder’s GILTI inclusion. But before getting to the
deduction allowed against the GILTI inclusion amount, there is one more step – an extra amount
to be added to a U.S. Shareholder’s GILTI inclusion. That’s the amount attributable to foreign
tax credits which the U.S. Shareholder can claim as an offset against the U.S. tax liability on
GILTI, known as the “section 78 gross-up.”32 (See the discussion on foreign tax credits below).
The GILTI inclusion is the sum of the taxpayer’s GILTI as computed under the rules of IRC §
951A and the gross-up amount calculated in accordance with IRC § 78. In calculating the U.S.
tax on this amount, a U.S. Shareholder that is a corporation can deduct (through 2025) 50
percent.33 (U.S. individual shareholders are not entitled to such deduction, unless they make an
election as provided in regulations.34) The 50 percent deduction means that through 2025, the
U.S. effective tax rate on GILTI is equal to 10.5 percent (before taking into account any foreign
tax credit). The deduction decreases to 37.5 percent after 2025, and thus the tax rate on GILTI
increases to 13.125 percent).
Once the GILTI inclusion has been determined at the U.S. Shareholder level, the amount is re-
allocated back down to each CFC. This allocation is needed to determine how much of the
foreign taxes paid by the CFC are considered attributable to the income includible as GILTI (see
discussion below), and to keep track of the previously taxed earnings of the CFC. Those earnings
should not be taxed again upon repatriation.35
(f) Relief from Double-Taxation: The Foreign Tax Credit
While the U.S. tax code mandates a full inclusion of most of a CFC’s foreign earnings (subject to
specified exclusions and the substance-based income exclusion, as noted above), it also allows
U.S. corporate shareholders who are required to include such amounts in income a credit for
foreign taxes paid as a means of alleviating double taxation.36 (U.S. individual shareholders are
generally not allowed to claim the foreign tax credit in this manner, but regulations permit an
election that allows them to do so, under IRC § 962.37)
Under IRC § 960, U.S. Shareholders that are corporations may claim a foreign tax credit upon
inclusions of GILTI required by IRC § 951A – this credit is known as the indirect foreign tax
credit. Under the general rules of IRC § 901, the credit is limited to foreign income taxes paid or
32
See IRC §§ 78, 960.
33
IRC § 250.
34
Treas. Reg. § 1.962-1.
35
IRC § 959.
36
IRC § 960.
37
Treas. Reg. § 1.962-1.
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accrued.38 The credit is limited by a number of other restrictions: in general, it’s limited to the
foreign taxes attributable to the income includible as GILTI; it is further limited to 80 percent of
such attributable taxes;39 and also generally limited to the U.S. tax liability on foreign source
income and within such category of income, the U.S. tax on income in the GILTI basket.40
Although the regime allows for foreign taxes paid in high-tax jurisdictions to be credited against
the GILTI inclusions from low-taxed jurisdictions, the credit is limited further because foreign
taxes paid on GILTI inclusions are segregated into a special “basket.”41 This means that foreign
taxes imposed on income that is considered GILTI are not creditable against other types of
income (for example, royalty income).
For a combination of reasons, primarily due to the limitation of the credit to the U.S. tax rate on
the specified income as well as the requirement to allocate a portion of U.S. expenses to foreign
source income for purposes of calculating the foreign tax credit limitation, many U.S.
headquartered companies have “excess credits” in the GILTI basket, meaning that they are not
fully able to credit all their foreign taxes paid on that income.
(g) Relief from Double Taxation: Exclusion for PTEP
The foreign tax credit system ensures that U.S. taxpayers are not subject to double taxation –
once in a foreign jurisdiction and a second time in the United States on the same income. A
second mechanism ensures that income taxable as GILTI in the United States at the time that it is
earned is not taxed a second time once distributed. This is the regime known as PTEP, or
previously taxed earnings and profits.
IRC § 959 operates to ensure that income taxed to a U.S. shareholder under IRC § 951A is not
subject to tax a second time when distributed by the foreign corporation. It requires taxpayers to
establish a PTEP account to track such earnings, in order to ensure that earnings previously
subject to tax as GILTI (or as subpart F) are exempt from tax when distributed.42
In addition to tracking a CFC’s earnings to ensure that they are not subject to double tax,
taxpayers also need to adjust the basis in the stock of CFCs the earnings of which were
previously subject to U.S. tax. The basis of the stock is adjusted upwards at the time of an
inclusion, and then downwards at the time of a distribution of PTEP.43 This prevents double
taxation in the event of a disposition of the CFC stock between the time of the GILTI inclusion
and the disposition. There are special rules for adjustment of the basis in stock in lower tier
entities.
38
Regulations, substantially revised in 2022, define what constitutes a foreign income tax for this purpose. See
Treas. Reg. § 1.901-2.
39
IRC § 960(d).
40
IRC § 904(a).
41
IRC § 904(d).
42
Foreign currency gain or loss may be recognized at the time of the distribution. IRC § 986(c).
43
IRC § 961.
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(h) A Note on the Corporate Alternative Minimum Tax

Although the focus here is primarily on the similarities and differences between the GLOBE and
GILTI, GILTI is not the only minimum tax in the Internal Revenue Code. The corporate
alternative minimum tax (CAMT), enacted in 2022, introduced a separate regime that also
applies a minimum tax on the foreign earnings of U.S. corporate shareholders of CFCs.44
The CAMT applies to corporate groups with a 3-year average annual adjusted financial
statement income that exceeds USD 1 billion; for foreign companies, an additional test applies
that requires that U.S. operations generally equal at least USD 100 million.45 Under IRC §
55(b)(2), the CAMT tentative minimum tax is equal to 15 percent of an applicable corporation’s
adjusted financial statement income, minus it’s CAMT foreign tax credit46 and its base erosion
and antiabuse tax.47 In its tax base – financial statement income – and its tax rate, the CAMT has
superficial similarities to GLOBE. But the differences are profound.
IRC § 56A defines adjusted financial statement income as a taxpayer’s net income or loss based
on its financial statement for a tax year. It also provides 14 adjustments to a company’s net
income or loss as reported in financial statements (these adjustments are not the same as the
adjustments to financial statement income provided by the GLOBE model rules).48 To define
applicable financial statement, the statute looks to IRC § 451(b)(3), which describes financial
statements prepared or audited under different standards and grants Treasury authority to define
the term in regulations or other guidance.
Specifically with regard to foreign earnings, IRC § 56A(c)(3) provides that a group’s financial
statement income is adjusted, in the case of U.S. shareholders of CFCs, to take into account their
pro rata share of items considered in computing the net income or loss in the applicable financial
statement. It also says that income from foreign subsidiaries (that are CFCs) that is included in
financial statement income is part of the CAMT base. In determining how much of a CFC’s
income is part of the CAMT base, the statute looks to tax rules rather than financial statement
consolidation rules. Questions have been raised about whether the CAMT permits the double
counting of foreign earned income; as of this writing, these questions have not been resolved.
In general, foreign earnings are included in the CAMT tax base only to the extent that they are
net positive in the aggregate. If a group’s foreign operations conducted through CFCs produce a
net loss, the U.S. parent company cannot utilize the foreign loss to offset its U.S. earned income
in determining its overall CAMT liability.49 But the regime does allow for a carryforward to
44
See § 10101 of Pub. L. No. 117-169, 136 Stat. 1818, the Inflation Reduction Act of 2022.
45
See IRC § 59(k). The U.S. Treasury can exclude entities that might otherwise meet this test.
46
See IRC § 59.
47
See discussion below for more detail on the base erosion and anti-abuse tax.
48
Here, too, the secretary is granted broad authority to issue regulations or other guidance to provide for any other
adjustments deemed necessary to carry out its purposes.
49
IRC § 56A(c)(3)(B).
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reduce the CAMT by allowing the loss to offset positive foreign-source income in later years,
requiring the establishment of a new CAMT foreign loss account.
Adjusted financial statement income is supposed to be “appropriately adjusted” to disregard any
federal or foreign taxes taken into account in the financial statements. Again, Treasury has broad
authority to issue guidance necessary to provide for the proper treatment of current and deferred
taxes to reflect the vague goal of appropriate adjustment, including when those taxes are properly
taken into account.
In general, a taxpayer can offset its CAMT tax liability with a CAMT foreign tax credit, under
different rules – and a more generous foreign tax credit limitation – than apply with regard to
GILTI and subpart F.
In summary, the CAMT is another type of U.S. minimum tax, which is truly global in that it
applies to both domestic and foreign source income. It can apply even when a taxpayer has
already included amounts as GILTI, and it allows for a foreign tax credit under different rules
than those applicable to the credit allowed to offset GILTI inclusions. It differs from GILTI in
that it is imposed on a tax base defined by reference to financial statement earnings, in that it
only applies to corporations, and that it applies an income threshold. Because it differs from the
GLOBE Model Rules, it likely does not qualify as a QDMTT.
(i) A Note on the BEAT
There’s yet another U.S. variation of a minimum tax relevant here. That’s the base erosion and
anti-abuse tax, or BEAT, enacted in 2017 as part of the TCJA.50
The BEAT was supposed to targes U.S. domestic companies’ profit shifting to foreign related
entities. The statute refers to such payments as base erosion payments; generally excluded from
the definition of base eroding payments are amounts calculated as cost of goods sold. If a
taxpayer’s base erosion payments exceed a specified threshold of its overall deductible
payments, the BEAT applies. The BEAT tax base adds back the otherwise deductible payments
(and a portion of a taxpayer’s net operating loss) to arrive at the modified BEAT tax base, which
also limits a taxpayer’s ability to claim otherwise allowable credits to offset the BEAT liability.
The BEAT tax liability is equal to the difference between 10 percent of a taxpayer’s modified
taxable income (as calculated under the BEAT) and its regular (pre-credit) tax liability reduced
by certain credits. If 10 percent of the BEAT taxable income minus credits exceeds regular tax
liability, an additional amount is due (the amount increases to 12.5 percent after 2025).
Like pillar 2 and the U.S. CAMT, the BEAT only applies to large corporate groups;
unfortunately, different thresholds apply for each set of rules. The BEAT applies to companies
50
IRC § 59A.
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with USD 500 million or more in average gross receipts in the prior 3 years, that generally have
payments from U.S. corporations to foreign related parties in excess of 3 percent of deductions.51
A taxpayer’s BEAT liability takes priority over any CAMT liability, in that the CAMT only
applies if the tentative amount owed as CAMT is larger than a taxpayer’s regular tax plus any
additional tax owed as a result of the BEAT.
11.2. Pillar 2 and GILTI: Parallels
Although GILTI and the GLOBE rules are two different regimes, they share a similar goal – that
of curtailing cross-border profit shifting -- and have a number of important similarities.
(a) Residence Taxation on Foreign Earned Income
Both GILTI and GLOBE seek to limit the incentives for cross-border profit shifting by imposing
a (minimum) tax at the level of the shareholder of controlled foreign corporations. In both
regimes, the minimum tax is imposed primarily through a mechanism of the parent company
jurisdiction (the residence jurisdiction) asserting taxing jurisdiction over the (low-taxed) income
of foreign controlled subsidiaries. In GLOBE, this is accomplished through the IIR, which
requires the parent company (or one or more intermediate holding companies) to impose a top-up
tax on the low-taxed income of companies in which it owns shares, directly or indirectly,
calculated on a separate jurisdiction basis.52 GILTI accomplishes this by imposing a tax at the
U.S. Shareholder level on the pro rata share of such shareholder’s foreign earnings of CFCs.53
(b) Taxes all Income Unless Specific Exclusion Applies
Historically, CFC rules have functioned in a limited fashion, having been designed as targeted
anti-abuse rules to subject to tax by the parent company jurisdiction either specific types of
income that was easily shifted to tax havens (i.e., passive income), or income that was subject to
a low rate of tax.54 Both GILTI and the GLOBE rules – although geared towards preventing
profit shifting – depart from traditional CFC rules in that they impose tax at the shareholder level
on active as well as passive, highly mobile earnings of foreign subsidiaries, except where those
earnings are subject to specific carve-outs or sufficiently high rates of tax. In this manner, both
regimes represent a fundamental departure from previous attempts to address concerns over
cross-border profit shifting.
(c) Rate below the statutory rate
51
Different base erosion percentage thresholds apply in the case of some financial services companies.
52
See Model Rules Section 2.
53
IRC § 951A.
54
For the U.S. subpart F regime, enacted in 1962, see IRC § 951 et seq. For background on CFC rules generally, see
OECD, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report,
(2015) https://doi.org/10.1787/9789264241152-en.
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Historical CFC rules generally subjected the in-scope income to tax at standard ordinary rates.55
But both GILTI and GLOBE – while addressing concerns similar to those that led to enactment
of CFC rules in the past –subject foreign earnings to tax at a rate that is generally lower than the
corporate statutory rates in many developed countries.56 In the case of GLOBE, that rate is 15
percent. For GILTI, the statutory rate is 10.5 percent (the effective rate imposed by GILTI is
higher in many cases, because of the limitations imposed on the creditability for foreign income
taxes paid on GILTI income, as well as the requirement to allocate a portion of U.S. expenses to
GILTI income in determining the foreign tax credit limitation).
The nominal 10.5 percent rate applicable to GILTI is scheduled to increase beginning in 2026 to
13.125 percent, which, when taking the foreign tax credit limitation into account, brings the U.S.
minimum tax rate on foreign earnings closer to the GLOBE rate.
(d) Substance-Based Exclusion
Although both the GILTI and GLOBE regimes subject to tax all of the income of CFCs within
scope, they also both allow for an exclusion for earnings nominally tied to substantive activities.
In GLOBE’s case, that exemption is the substance-based income exclusion.57 For GILTI, that
exclusion is a percentage of a profit making CFC’s qualified business asset investment, or
QBAI.58
(e) Loss Offsets and Blending
Because GILTI allows for blending of income (and foreign taxes paid) across high-and low-
taxed jurisdictions, whereas pillar 2 does not, many have suggested that there is a wide gap
between the two regimes in the extent to which they permit profit shifting across borders. But in
reality, both regimes allow for some measure of offsets among high- and low-taxed income, and
profit making and loss making entities; they just do so differently.
GILTI is nominally the more generous of the two regimes in permitting taxpayers to offset losses
against profits, because it allows for losses incurred in one jurisdiction to offset income earned in
another. But pillar 2 also allows for loss offsets, albeit less overtly: the GLOBE rules permit
losses incurred by a constituent entity to offset income earned by a profit generating constituent
entity in the same jurisdiction. Similarly, while GILTI allows for blending of high- and low-
taxed income across jurisdictions, the GLOBE rules still allow for blending of high- and low-
taxed income within the same jurisdiction.
Moreover, GILTI’s allowance of blending across jurisdictions is less generous than it might at
first appear, because the system does not allow taxpayers to take advantage of the substance-
based exclusion that might be generated from assets owned by entities that generate losses.
55
For the U.S. rule, see IRC § 951(a). For a summary of countries’ CFC rules, see OECD, Designing Effective
Controlled Foreign Company Rules, Action 3 - 2015 Final Report.
56
See OECD, Corporate Tax Statistics: 4th Edition (2022) for statistics on statutory corporate tax rates.
57
See Model Rules Art. 5.3.
58
See IRC § 951A(b) and discussion above at [x].
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Similarly, to the extent that such entities pay foreign taxes, those taxes are not allowed as a
foreign tax credit.
This chart by The Tax Foundation illustrates the convergence of tax rates under a blended GILTI
regime and a jurisdictional approach, especially when taking into account QDMTTs.59
11.3. Pillar 2 and GILTI: Differences

A high-level review of GILTI and GLOBE rules may suggest that the two regimes closely
resemble one another, in that they both attempt to prevent cross-border profit shifting by
imposing a minimum tax on foreign earnings (and in GLOBE’s case, on domestic parent
company low-taxed earnings as well). But the details of the two regimes’ rules expose important
differences between the two.
(a) To Whom does the Tax Apply?
The scope of GILTI and GLOBE differ in terms of the companies to which they apply, the types
of taxpayers to which they apply, and the definition of control or relatedness relevant for when to
require an inclusion by one person of the earnings of a company located in another jurisdiction.
Pillar 2 is limited in scope to large companies – those with at least EURO 750 million in
revenues -- although individual countries are provided the flexibility of lowering that threshold.60
59
Alan Cole and Cody Kallen, Risks to the U.S. Tax Base
from Pillar Two, The Tax Foundation (Aug. 2023), available at https://taxfoundation.org/wp-
content/uploads/2023/08/Risks-to-the-U.S.-Tax-Base-from-Pillar-Two.pdf. Reprinted with permission of The Tax
Foundation.
60
GLOBE Model Rules Art. 1.1. In practice, few countries have proposed expanding that threshold.
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GILTI, by contrast, has no minimum revenue threshold, and applies to all companies that meet
the definition of CFC, regardless of size.
Pillar 2 also only requires inclusions of GLOBE income by a specific type of taxpayers –
namely, taxpayers that are corporations: only “ultimate parent entities” or “constituent entities”
that are members of a corporate group (as defined under the model rules) are required to include
an amount in income under either the IIR or the UTPR. In contrast, GILTI requires an inclusion
by any shareholder that meets the definition of U.S. Shareholder under the statute – whether the
shareholder is an individual or a corporation.61
Within a corporate group (referred to as an MNE Group under the GLOBE rules), the Pillar 2
rules apply to a Group, defined as a collection of entities (also a defined term) that are related
through ownership or control such that the assets, liabilities, income, expenses and cash flows of
those entities are, generally speaking, included in the consolidated financial statements of the
ultimate parent entity.62 GILTI, in contrast, applies to require an inclusion of income from
controlled foreign corporations, a defined term under the U.S. tax code that requires greater than
50 percent ownership by U.S. Shareholders (10 percent owners who are U.S. persons), and so
can require an inclusion even by a shareholder that owns no more than 10 percent of the shares
of a CFC if the requisite aggregate U.S. ownership is met.
Finally, pillar 2 has specific exclusions for investment and real estate funds; GILTI has no such
exclusions other than those generally applicable in the U.S. Internal Revenue Code.
(b) The Tax Base
Although through both GLOBE and GILTI, residence countries assert taxing jurisdiction on
essentially all the low-taxed earned income of foreign subsidiaries within scope (subject to a
substance-based exclusion), the tax base differs significantly in the two regimes. The pillar 2 top-
up tax is imposed on an income as reported in a company’s financial statements. The GLOBE
model rules then make certain adjustments to financial statement income to arrive at GLOBE
taxable income. These adjustments include net taxes expense; excluded dividends; excluded
equity gain or loss; included revaluation method gain or loss; gain or loss from disposition of
certain assets and liabilities; asymmetric foreign currency gains or losses; policy disallowed
expenses; prior period errors and changes in accounting principles; and accrued pension
expense.63
In contrast, the calculation of the GILTI tax base starts with a definition of income found in the
U.S. tax code – IRC § 61, which refers to all income from whatever source defined. But it, too,
has specific exclusions from the catch-all category of gross income. Items of income that are
excluded from the GILTI tax base include U.S. effectively connected income; gross income
taken into account in determining the company’s subpart F income (generally, passive or highly
61
IRC §§ 951(a), 951A.
62
GLOBE Model Rules Art. 1.2.
63
GLOBE Model Rules Art. 3.2.1.
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mobile income); income that meets the high-tax exception to subpart F income; dividend income
received from a related person; and foreign oil and gas extraction income.64 Gross income is
reduced by allocable expenses to arrive at net taxable income; U.S. Treasury regulations have
extensive guidance as to how to allocate expenses (including taxes) between different categories
of income for this purpose.65
Although both the GLOBE rules and GILTI attempt to arrive at a rough approximation of a tax
base that includes most foreign earned income, the differences in the operation of the two regime
– some of which are due to the different starting points (financial statements v. tax code
definition) and some of which are attributable to specific policy choices made by rule-writers,
can mean that the minimum tax imposed by the two different regimes will be imposed on
different tax bases.
(c) The Mechanics: Top-Up Tax v. Foreign Tax Credit
Even more significant than the differences in the entities to which the minimum tax applies and
how the tax base on which the minimum tax is calculated are the mechanics applied by the two
different regimes to derive the minimum tax liability.
As described in the OECD model rules, GLOBE is a top-up tax. It applies through a multi-step
process: the first step is calculating a group’s effective tax rate in each jurisdiction in which it
owns subsidiaries (or has a permanent establishment).66 To the extent that the effective rate as
calculated under the GLOBE rules is below the 15 percent minimum rate, a top-up tax is then
imposed (after application of the substance based income exclusion) – either via the IIR or the
UTPR -- to reach the minimum rate.67
The mechanics for applying GILTI are very different. GILTI does not require any type of
effective rate calculation at the CFC level. Instead, all income that qualifies as GILTI is
includible as a U.S. Shareholder’s taxable income. The statutory U.S. rate then applies to that
income – subject to a deduction that in 2023 lowers the rate to 10.5 percent (for corporate
shareholders).68 To offset that tax liability, a foreign tax credit may be allowed.69
The different mechanics and calculations required by GLOBE and GILTI mean that when
applied to two companies with the same gross revenues, the two regimes could result in different
amounts of residual tax being imposed.
(d) Entity v. Jurisdiction v. Aggregate
64
IRC § 951A(c)(2).
65
See Treas. Regs. §§ 1.861-1 et seq.
66
See GLOBE Model Rules Art. 5.1.
67
GLOBE Model Rules Arts. 5.2; 2.1; 2.4.
68
IRC §§ 951A; 250.
69
IRC § 960.
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The difference most frequently highlighted between the GLOBE rules and GILTI derives from
the fact that the GLOBE rules require a determination of whether the threshold minimum tax rate
has been paid on a separate jurisdictional basis,70 whereas GILTI allows for blending of income
(which provides taxpayers with the flexibility to offset the income of profit-making jurisdictions
against loss-making ones, as well to blend the income of high-taxed jurisdictions against low-
taxed jurisdictions in calculating the residual U.S. tax imposed after the credit for foreign taxes
paid is allowed).
Changes proposed by the Biden administration (and passed by the House of Representatives, but
rejected by the Senate) would have modified GILTI to impose the tax on a jurisdictional basis.71
But given the GLOBE ordering rules which grant the qualified domestic minimum top-up tax
priority over both GILTI and the IIR, it is not at all clear how much of a difference the
calculation of a minimum tax on a jurisdictional basis as opposed to a blended basis actually
makes.
(e) Tax Rates
Tax rates are lower under the current GILTI regime than under GLOBE. Although the GILTI tax
rate (applicable through 2025) is 10.5 percent, for many taxpayers the effective tax rate on
GILTI income is higher, due to the limitation on foreign tax credits and the requirement to
allocate a portion of U.S. expenses to GILTI income for purposes of calculating the foreign tax
credit limitation. Specifically, the GILTI tax may apply as long as the foreign tax rate is below
the U.S. tax rate divided by the share of foreign tax credits allowed, equal to 80 percent. As a
result, the 10.5 percent rate of tax applies to income earned in foreign tax jurisdictions with rates
less than 13.125 percent under current law. After 2025, the GILTI tax rate increases to 13.125
percent (due to a decrease in the deduction allowed under IRC § 250), and the tax on GILTI will
apply to income earned in foreign tax jurisdictions subject to income tax rates of less than 16.4
percent (0.13125/0.8).72
(f) Substance Based Exclusion
Both GLOBE and GILTI have a substance-based exclusion that applies to exclude from the
scope of the tax a percentage of the income earned by foreign entities engaged in substantive
activities. But both the scope of the substance based carve-out and how it applies differ in the
two regimes.
70
See GLOBE Model Rules Art. 5.1.
71
Build Back Better Act; H.R. 5376 (Nov. 3, 2021) § 138126; U.S. Department of Treasury, Made in America Tax
Plan (Apr. 2021); Department of the Treasury, General Explanations of the Administration's Fiscal Year 2022
Revenue Proposals (May 2021) https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals .
72
Jane Gravelle and Mark Keightley, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy. CRS
Rep. No. 47174 (updated Jun. 29, 2023).
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The GLOBE substance based carve-out is the sum of two factors: an entity’s payroll expenses,
and the book value of it’s tangible assets.73 The payroll carve-out is equal to between 10 and 5
percent74 of the eligible payroll costs of an entity’s eligible employees who perform activities for
the group, other than capitalized payroll costs included in the carrying value of eligible tangible
assets or attributable to an entity’s international shipping income (which is excluded from the
computation of GLOBE income or loss).75 The tangible asset carve-out is equal to between 8 and
5 percent of the carrying value of an entity’s eligible tangible assets.76 For this purpose, eligible
tangible assets includes property, plant, and equipment located in the constituent entity’s
jurisdiction; natural resources located in that jurisdiction; a lessee’s right of use of tangible assets
located in that jurisdiction; and a license or similar arrangement from the government for the use
of immovable property or exploitation of natural resources that entails significant investment in
tangible assets.77
In contrast, GILTI contains no exclusion at all for payroll costs, and is limited to 10 percent of
the tax basis of tangible depreciable assets.78 It is not conceivable that the U.S. Congress would
adopt a payroll tax exclusion from GILTI, which would be viewed as tantamount to providing an
incentive for U.S. companies to hire workers overseas at the expense of American taxpayers.
Another important difference between the two substance-based exclusions is how and when they
apply. Although the calculation of the GILTI QBAI exemption begins at the entity level,79 the
amount of QBAI from each entity that generates positive tested income is then aggregated at the
shareholder level.80 This aggregate amount – the Net Deemed Tangible Investment Return -- is
subtracted from a shareholder’s net tested income to arrive at the GILTI amount.81 The
mechanics mean that the GILTI minimum tax creates an exclusion for a deemed return on
tangible assets prior to the determination of whether there is a GILTI tax liability.
The calculation of the substance-based income exclusion under GLOBE is different. The
determination of whether a GLOBE top-up tax applies is made solely based on whether a
73
GLOBE Model Rules Art. 5.3. The Model Rules state that the exclusion is equal to 5 percent of payroll costs.
However, according to transition rules (set out in Art. 9.2.1), the carve-out is equal to 10 percent in 2023, only
gradually decreasing to 5 percent in 2033.
74
The percentage starts at 10 percent and decreases over a 10-year period to 5 percent. See Model Rules Art. 9.2.2.
75
76
The percentage starts at 8 percent and decreases over a 10-year period to 5 percent. See Model Rules Art. 9.2.2.
76
77
GLOBE Model Rules, Art. 5.3.4. Although 5 percent is the carve-out stated in the model rules, the rules also
provide a transition rule, under which the carve-out starts at 8 percent of tangible asset book basis, only gradually
decreasing to 5 percent over 10 years. Art. 9.2.2.
78
The Biden Administration has proposed eliminating the exclusion. See Department of the Treasury, General
Explanations of the Administration's Fiscal Year 2022 Revenue Proposals (May 2021), available at
https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals.
79
QBAI is defined as defined as the average of a CFC's aggregate adjusted bases as of the close of each quarter of
such taxable year in specified tangible property used in a trade or business of the corporation, and of a type with
respect to which a deduction is allowable under IRC § 167.
80
The QBAI is offset by the foreign entities’ net interest expense in arriving at QBAI. IRC § 951A(b)(2).
81
IRC § 951A(b).
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Herzfeld, Mindy
jurisdiction’s effective tax rate is below the 15 percent minimum threshold, a determination that
does not take into account whether any of an entity’s income qualifies for the substance based
exclusion. The top-up tax is a percentage of the difference between 15 and the effective tax rate.
Only then does the substance based exclusion apply – so that the top-up tax is levied on an
amount of income that takes into account the exclusion.82
(g) Alternative Taxing Mechanisms
The discussion above has focused primarily on the differences between GILTI and the IIR – both
encompassing rules that impose tax at the shareholder level on income earned by a foreign
subsidiary in another jurisdiction (or, in the case of GLOBE, by a permanent establishment as
well). But – unlike GILTI -- the OECD model rules include two other important mechanisms for
imposing a minimum tax, the UTPR and the QDMTT. While the U.S. tax code imposes other
types of minimum taxes, these do not fit within the GILTI regime, and do not parallel the pillar 2
alternative minimum taxes.
Within the pillar 2 regime, the IIR is the primary taxing mechanism; the UTPR applies as a back-
up taxing mechanism. The UTPR is supposed to incentivize residence countries to adopt an IIR,
by allowing all other countries (including source countries) to impose tax on low-taxed income
earned anywhere in the group. Importantly, the UTPR allows countries other than the residence
country to tax a parent company’s income as well, if such income is considered low-taxed under
GLOBE. Yet another minimum tax rule included as part of pillar 2 is the QDMTT, under which
countries can impose a domestic minimum tax and, assuming the tax qualifies under the GLOBE
rules, can shield themselves from other countries applying an IIR or UTPR to tax their domestic
earned income.
Neither the UTPR nor the QDMTT have precise parallels within the U.S. tax regime. The new
corporate alternative minimum tax enacted by Congress in 2021 is imposed on financial
statement income, and so in that sense resembles the pillar 2 minimum tax.83 But the U.S.
corporate alternative minimum tax applies not just to domestic earned income but to foreign
earnings as well, making it far more expansive than a QDMTT. Meanwhile, the UTPR really
requires multilateral coordination to implement, and has no counterpart in the U.S. tax system.
It’s closest counterpart in the U.S. tax law is the base erosion alternative minimum tax, the
BEAT,84 which more closely resembles the UTPR’s prior iteration as an undertaxed payments
rule than its current version as an undertaxed profits rule. The BEAT imposes an alternative
minimum tax only on U.S. sourced payments to other jurisdictions; rather than considering the
tax rate imposed in the recipient jurisdiction, the threshold for the BEAT’s application is based
82
For a discussion of the importance of the ordering of the different rules in the calculation of the ultimate tax
liability under GLOBE and GILTI, see Michael Devereux. John Vella and Heydon Wardell-Burrus, Pillar 2: Rule
Order, Incentives, and Tax Competition. Oxford University Centre for Business Taxation Policy Brief 2022 (Jan. 14,
2022), http://dx.doi.org/10.2139/ssrn.4009002 .
83
See discussion above at [xx].
84
See discussion above at [xx] for more detail on the BEAT.
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on the percentage of outbound deductible payments made by a U.S. entity to related foreign
parties relative to its total deductible payments.85
11.4. Conformity and Coexistence
As the above discussion illustrates, GILTI and GLOBE – while both imposing minimum taxes
on foreign earned income – are not equivalent. The question then arises as to whether conformity
between GILTI and GLOBE is achievable and whether it is an important goal, or whether the
two systems can coexist in parallel. We explore the different possibilities below.
(a) Conformity
In the course of negotiations over GLOBE, government and OECD officials regularly advanced
the idea that in order for GILTI to conform to GLOBE, it needed to be modified so that the tax
inclusion (and the offsetting foreign tax credit) was calculated on a country-by-country basis –
and that such modification was sufficient for conformity. This idea was pushed forward by –
among others –the Biden administration; the administration’s budget proposals have generally
included proposals for modifying GILTI so that it operates on a country-by-country basis.86
Biden’s Made in America Tax Plan, introduced in April 2021, proposed to calculate GILTI on a
per-country basis, and increase the rate on GILTI to 21 percent (along with proposing an overall
corporate rate increase to 28 percent).87 But other changes proposed by the administration would
have widened the gap between GILTI and GLOBE, such as its plan to eliminate the QBAI
exemption.
The Build Back Better Act88 passed by the House of Representatives in 2021 included revisions
to GILTI that would have increased its conformity to GLOBE in some respects, but not in others.
For example, the Build Back Better Act increased the rate on GILTI to 15.015 percent, which
would have resulted in additional U.S. tax applying to income earned in countries with tax rates
of 15.8 percent or lower (ultimately dependent on the application of the foreign tax credit
limitation). Like the Biden administration proposals, it modified GILTI so that it applied on a
country-by-country basis, and decreased the substance based carve-out from 10 percent of the
basis in tangible assets to 5 percent.89 But the Build Back Better Act did not propose to change
the GILTI tax base from one rooted in Internal Revenue Code provisions to one that looked to
financial statements, calculated as under the GLOBE rules. In any case, these changes were not
adopted in the final version of the U.S. tax legislation that was enacted the following year (the
Inflation Reduction Act), which instead included another type of new minimum tax, the
corporate alternative minimum tax.90
85
See IRC § 59A.
86
Mindy Herzfeld, The Myth of GILTI Conformity, 105 TAX NOTES INT'L 755 (FEB. 14, 2022).
87
U.S. Department of Treasury, The Made in America Tax Plan (Apr. 2021), available at
https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf .
88
H.R. 5376, HR 117-130 (2021).
89
See IRC § 904 for the foreign tax credit limitation.
90
Pub. L. No. 117-169, 136 Stat. 1818 (2022).
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Even after the proposed changes to GILTI to modify the inclusion so that it was calculated on a
country-by-country basis were not incorporated in the tax bill ultimately passed by Congress in
2022, the administration has continued to propose changes to GILTI that would continue to bring
it into conformity in some respects – but not others – with GLOBE. The administration’s
FY2023 budget proposals91 included a plan to replace the BEAT with a UTPR-like tax, to apply
to companies with $850 million in revenues, on a tax base of financial income, allocated
according to a country’s share of the employees and tangible assets of a multinational group.
Also included was a proposal for QMDTT, and – through a plan to increase the corporate tax rate
to 28 percent and decrease the deduction allowed for GILTI inclusions – to raise the GILTI tax
rate to 20 percent.
But none of these proposals – from the Biden administration or from the U.S. Congress -- would
have fully aligned GILTI and the GLOBE regime; none of them proposed to substitute the
GLOBE tax base for the GILTI tax base, and none of them would have altered the fundamental
mechanics of a tax imposed on a full inclusion basis minus a foreign tax credit, to a top-up tax
calculation. Moreover, the OECD never explicitly acknowledged that the modification of GILTI
to a jurisdictional calculation would be sufficient for it to be considered a qualifying IIR,92 even
though some members of the inclusive framework and European Commission officials indicated
that it would.93
The EU directive on pillar 294 has set out clear guidelines for when a minimum tax rule enacted
by a country outside the EU would be considered “equivalent” to an IIR. Article 51 of the
directive says that this test if met as long as the minimum tax in question meets a number of
conditions: first, the jurisdiction must enforce a set of rules under which the parent entity of a
multinational group computes and collects its allocable share of top-up tax on low-taxed
constituent entities of the group; second, the regime must apply a minimum effective tax rate of
at least 15 percent; third, the calculation must be done on a separate country basis; and fourth,
the tax must provide relief for any top-up tax paid in an EU member state as an IIR. The EU
directive also says that an annex to the directive provides a list of the third-country jurisdictions
of equivalent qualified IIRs. As of September 2023, no such list exists.
Based on the criteria outlined above, the current version of GILTI would not meet the
requirements of the EU directive to be considered a qualifying IIR: the statutory rate on GILTI is
less than 15 percent (although it can be higher given the limitation on the foreign tax credit); the
GILTI calculation is performed on a blended basis; and GILTI doesn’t provide full relief for
taxes paid to EU member countries, because the foreign tax credit on income earned in the
91
U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue
Proposals (Mar. 2022), available at https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf .
92
Mindy Herzfeld, Questioning the Promise of GILTI Conformity, 107 Tax Notes Int’l 115 (Jul. 11, 2022).
93
See Stephanie Soong and Alexander Peter, Amended GILTI Would Be in Line With GLOBE Rules, Germany Says,
106 Tax Notes Int’l 1450 (Jun. 13, 2022).
94
EU Council Directive, COM(2021) 823 final 2021/0433 (CNS) SWD(2021) 580 final (Dec. 22,.2021).
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GILTI foreign tax credit basket is limited to 80 percent of foreign taxes paid.95 More generally,
its not clear whether taxes imposed under GLOBE as QDMTTs or under the UTPR would be
considered creditable foreign income taxes under US Treasury regulations, which would deny
creditability if the foreign tax regime departs in significant ways from the U.S. regime, such as
by denying certain deductions allowable under U.S. law.96
The changes in the version of the Build Back Better Act passed by the House of Representatives
would have achieved some of the conforming changes to bring GILTI closer to the standards set
out in the EU directive – including increasing the rate on GILTI to 15 percent and increasing the
foreign tax credit on GILTI income to 95 percent of taxes paid. If the version of the legislation
passed by the House had passed the Senate, GILTI might be considered a conforming IIR for EU
purposes. But the EU is not the whole world, and the version of GILTI changes passed by the
House did not end up becoming law.
(b) Coexistence
A larger question is why or whether conformity between the U.S. version of a minimum tax and
GLOBE is really needed. Perhaps coexistence is the more achievable goal? After all, the United
States does not conform to the world’s tax exchange of information regime – with the Common
Reporting System and the U.S. FATCA co-existing side by side. Perhaps that template could be
worthwhile exploring for GILTI-GLOBE as well. After all, given that both GILTI and GLOBE
impose minimum taxes, how important should it be whether the manner in which they do so is
identical?
The multilateral agreement on the minimum tax blueprint released in July 2021 stated that while
pillar 2 would apply a minimum rate on a jurisdictional basis, “in that context, consideration will
be given to the conditions under which the U.S. GILTI regime will co-exist with” the global anti-
base-erosion (GLOBE) rules, “to ensure a level playing field.”97 That consideration did not result
in a resolution, with the OECD’s December 2021 press release issued with the publication of the
model rules only reiterating that it would “address co-existence with” the GILTI rules at a later
date (such date has come and gone).98 The Administrative Guidance released in February 2023
treats GILTI as a CFC tax and provides that CFC taxes are offset after the application of the
QDMTT.99
95
See IRC § 960(d)(1).
96
See IRC § 901; Treas. Reg. § 1.901-2. But see Notice 2023-55; 2023-32 IRB 1, allowing taxpayers to apply
former, more generous foreign tax credit regulations through 2023.
97
See OECD, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of
the Economy (Jul. 1, 2021), available at https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-
address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf
98
See OECD, OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax
(Dec. 20, 2021), available at https://www.oecd.org/tax/beps/oecd-releases-pillar-two-model-rules-for-domestic-
implementation-of-15-percent-global-minimum-tax.htm
99
OECD, Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance
on the Global Anti-Base Erosion Model Rules (Pillar Two) (2023)
21
Herzfeld, Mindy
One reason why conforming GILTI to GLOBE is less of an imperative than it may have
appeared at the start is that the OECD administrative guidance interpreting GLOBE has included
special rules for how to allocate CFC taxes among constituent entities – including CFC taxes that
are calculated on a blended basis such as GILTI. Those rules minimize some of the perverse
effects of GILTI not being considered a qualifying IIR. Under the administrative guidance, when
the owners of a constituent entity are subject to a CFC regime, the amount of any covered taxes
included in the financial accounts of the CFC’s shareholders resulting from their share of the
CFC’s income is allocated to the CFC.100 This means that taxes paid by a shareholder under a
CFC regime are allocated to the entity that earned the income on which those taxes are paid for
purposes of computing an entity’s effective tax rate under GLOBE.101
The administrative guidance sets out a special allocation methodology for allocating CFC regime
taxes – included blended CFC taxes – to GLOBE constituent entities on a transitional basis. This
methodology prioritizes the allocation of blended CFC taxes to low-tax jurisdictions, decreasing
the chances of a top-up tax applying to those entities.102 Under the rules, allocable blended CFC
taxes are allocated from the owner of a GLOBE constituent entity constituent entities (as
required by Art. 4.3.2(c) of the GLOBE model rules) in accordance with a formula.103 For GILTI
taxes, the guidance provides that the allocable blended CFC tax can be determined from a U.S.
shareholder’s U.S. federal income tax return and (in the absence of a domestic loss) is equal to
the amount of GILTI (reduced by the GILTI deduction) multiplied by 21 percent less the foreign
tax credit allowed in the GILTI basket.
Under the formula, the blended CFC allocation key is multiplied by the amount of the allocable
blended CFC tax and divided by the sum of all blended CFC allocation keys.104 The blended
CFC allocation key is equal to the difference between the applicable rate minus the GLOBE
jurisdictional effective tax rate, multiplied by an entity’s attributable income. The appliable rate,
meanwhile, is equal to the rate at which foreign taxes on CFC income generally fully offset the
CFC tax through the tax credit mechanism applicable to the CFC tax regime. As the
administrative guidance explains, the formula results in constituent entities with lower effective
www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillartwo.pdf .
100
Administrative Guidance (Feb. 2023), Par. 2.10.1(4) and Par. 118.33-35.
101
For example, if a U.S. parent company (USCo) has a single subsidiary organized in the Netherlands (DutchCo),
for which USCo has an inclusion under a U.S. CFC regime of 100, and DutchCo pays covered taxes in the
Netherlands of 9 and USCo pays an additional 6 of tax in the United States under a U.S. CFC regime, the 6 of taxes
paid in the United States are considered covered taxes allocated to the Netherlands under Art. 4.3.2(c). As a result of
such an allocation, DutchCo’s effective tax rate in the Netherlands on its 100 of net GLOBE income is equal to 15
percent, and no additional top-up tax is due under the GLOBE rules (under an IIR, the UTPR, or a QDMTT) as a
result of the GLOBE income earned in the Netherlands. See Mindy Herzfeld, How to Allocate CFC Taxes Under
GLOBE, 108 Tax Notes Int’l 1513 (Dec. 19, 2022).
102
For this purpose, a blended CFC tax regime is a CFC tax regime that aggregates income, losses, and creditable
taxes of all the CFCs for the purposes of calculating the shareholder’s tax liability under the regime and that has an
Applicable Rate of less than 15 percent.
103
This methodology can be relied on for fiscal years that begin on or before December 31, 2025, not including any
fiscal year ending after June 30, 2027.
104
Administrative Guidance (Feb. 2023) Par. 2.10.3.
22
Herzfeld, Mindy
tax rates (as calculated under the GLOBE rules) and larger amounts of income as computed
under a blended CFC tax regime attracting the largest amount of blended CFC tax regime
(GILTI) taxes.105
The OECD guidance released in February 2023 provides a path forward for GLOBE-GILTI
coexistence. But challenges remain. One problem with assuming coexistence of GILTI and
GLOBE is that the GLOBE regime is specifically designed to impose penalties on countries that
do not adopt conforming regimes (through the UTPR). If the United States does not modify
GILTI to conform to pillar 2 – and adopt a QDMTT of its own – it risks subjecting the U.S.
domestic tax base to other countries’ taxes under the UTPR.106 We discuss why this risk has
arisen – for reasons having nothing to do with whether the GILTI inclusion is calculated on a
separate jurisdiction or on a blended basis – in the next section.
11.5 Challenges to Coexistence
There are several challenges to the idea of GLOBE / GILTI coexistence, generally related to the
fact that the final version of the pillar 2 model rules released in December 2021 result in a loss of
revenue for the U.S. government.107 The GLOBE rules, and in particular the UTPR, vastly
expand the original idea of a minimum tax on a parent company’s foreign income earned by its
subsidiaries, to encompass a minimum tax on a parent company’s domestic income. Related to
the threat of the imposition of the UTPR on the U.S. source income of U.S. headquartered MNEs
is that the definition of a qualifying tax under the GLOBE rules disfavors the type of credits the
United States typically offers. The fact that the UTPR allows other countries to impose GLOBE
taxes on U.S. domestic income has prompted threats of retaliation by members of Congress, and
does not bode well for long-term GLOBE-GILTI coexistence.108
Another feature of the inherent tension between the U.S. GILTI and GLOBE that makes
coexistence challenging is that the GLOBE substance-based income exclusion favors the type of
business activities conducted by labor intensive companies, but disfavors business activities that
105
Administrative Guidance (Feb. 2023) Par. 2.10.1(6).
106
See Jane Gravelle and Mark Keightley, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy.
CRS Rep. No. 47174 (updated Jun. 29, 2023).
107
As the Joint Committee on Taxation has noted, adoption by other countries of GLOBE, with no U.S. responses,
could lead to significant loss in U.S. revenues. See Jt. Comm. on Taxation, Possible Effects of Adopting the
OECD’s Pillar Two, Both Worldwide and in the United States (June 2023)
https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf. See also Alan Cole and Cody Kallen,
Risks to the U.S. Tax Base from Pillar Two, The Tax Foundation (Aug. 2023), available at
https://taxfoundation.org/wp-content/uploads/2023/08/Risks-to-the-U.S.-Tax-Base-from-Pillar-Two.pdf.
108
Congressmen have to date already introduced a number of bills that would penalize countries attempting to
impose a UTPR on U.S. companies. These include H.R. 4695, The Unfair Tax Prevention Act, introduced by
Republican Congressman Ron Estes on July 23, 2023, which would modify IRC §59A and expand the U.S. base
erosion and anti-abuse tax for foreign companies headquartered in jurisdictions that impose an “extra-territorial
tax,”; and H.R. 3665, the Defending American Jobs and Investment Act, introduced by House Ways & Means
committee chairman Jason Smith on May 25, 2023, that would increase the rate of U.S. tax by between 5-15
percentage points on U.S. outbound payments and U.S. taxation of branches of foreign corporations for payments to
or investments from foreign jurisdictions that have imposed an extraterritorial tax.
23
Herzfeld, Mindy
rely more heavily on highly profitable intangible income – which tilts the scales against the most
highly profitable U.S. businesses. Yet another threat to long-term GILTI-GLOBE coexistence
relates to the fact that pillar 2 encourages other countries to adopt QDMTTs; such adoption poses
a risk to U.S. revenues because it means that U.S. headquartered companies’ foreign
subsidiaries’ income likely will be subject to higher foreign taxes -- for which the U.S. generally
grants a foreign tax credit. Below we consider each of these challenges in turn, with a focus
primarily on the importance of business tax credits as a factor in the calculation of the GLOBE
effective tax rate and GLOBE income; such calculation is relevant in determining whether the
UTPR might apply to tax U.S. source income of U.S. headquartered companies.
(a) The UTPR and the U.S. Tax Base
To the extent that U.S. headquartered companies benefit from domestic tax incentives or other
favorable deductions that reduces their GLOBE effective tax rate to below 15 percent, the UTPR
potentially allows other countries to tax that income.109 This is intentional, by design of the
GLOBE drafters to encourage countries to opt into the GLOBE regime.110 Based on the
corporate statutory rate in the United States of 21 percent, the likelihood of U.S. companies’
effective tax rates being below 15 percent might have been expected to be minimal. But the
situation is more complex, because the GLOBE effective tax rate calculation takes into account
various tax incentives offered by governments in a manner that disfavors U.S. tax credits and
could cause U.S. companies that benefit from those credits to have a GLOBE effective tax rate
below 15 percent.
The Congressional Research Service – a nonpartisan research arm of the U.S. Congress – has
noted that the GLOBE regime “could increase taxes on multinationals’ operations in the United
States,” regardless of whether Congress acted to increase tax rates. It explains further how
“[o]ther countries could impose taxes on U.S. earnings of multinational firms triggered by a low
U.S. effective tax rate through the UTPR or IIR.” According to the CRS, Pillar 2 “could reduce
the benefit of domestic tax incentives such as tax credits;” it lists “[m]ajor tax credits” that could
be affected, including the research credit, the low-income housing tax credit, and credits for
renewable energy.111
The detrimental impact of the GLOBE rules on U.S. companies could make coexistence of
GLOBE and GILTI challenging from a U.S. political perspective.
(b) Qualifying Tax Incentives
109
Under the UTPR, a top-up tax is imposed to the extent there is low-taxed income in any jurisdiction in the
multinational group, including at the parent company. See discussion at [chapter 2, par. 2.4-2.6.]
110
See Jt. Comm. on Taxation, Possible Effects of Adopting the OECD’s Pillar Two, Both Worldwide and in the
United States (June 2023) https://www.finance.senate.gov/imo/media/doc/118-0228b_june_2023.pdf
111
Jane G. Gravelle & Mark P. Keightley, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy,
Congressional Rsch. Svc, Rep. No. 47174, (updated Jul. 21, 2023).
24
Herzfeld, Mindy
As the Congressional Research Service has noted, the risk of countries assessing the UTPR being
assessed on U.S. companies is closely tied to the treatment of U.S. tax credits and other
incentives by the GLOBE rules. Not all tax credits are equal under pillar 2.
This result follows from how the top-up tax is calculated under the GLOBE model rules. These
rules provide that a top-up tax applies if a taxpayer’s effective tax rate on the GLOBE tax base in
a jurisdiction is less than 15 percent. The effective tax rate is calculated by reference to covered
taxes, a defined term. The definition of a covered tax is based on accounting principles but is
adjusted as specified in the model rules. Specifically, the effective tax rate is equal to the sum of
the adjusted covered taxes for each entity in a jurisdiction, over the jurisdiction’s GLOBE net
income.112 As discussed in chapter [3], there is a difference between qualifying credits and non-
qualifying credits in the calculation of GLOBE income and the GLOBE effective tax rate. While
non-qualifying credits reduce the amount of covered taxes paid by the same amount as the credit
-- making it more likely that a company that reduced its domestic tax liability through the use of
these credits would be considered low-taxed – thereby potentially subjecting it to a top-up tax --
qualifying credits have a less pernicious result.
The starting point for the definition of covered taxes is the tax expense recorded in a company’s
financial statements.113 Adjustments are made to this accounting item of expense to arrive at
adjusted covered taxes.114 Some of these adjustments are an attempt to reconcile accounting
principles with the GLOBE; others create a carryover system for taxes paid in excess of the
minimum rate in a given year. The rules provide for a specific adjustment for qualified
refundable tax credits (QRTCs), requiring that covered taxes be increased by any amount of
credit or refund of a QRTC recorded as a reduction to current tax expense.
Under accounting principles generally, tax credits are recorded in financial statements as
reducing tax expense. As applied to the GLOBE rules, this means that tax credits generally are
treated as a reduction covered taxes paid, or a decrease of a taxpayer’s GLOBE effective tax rate
in a jurisdiction. Such a decrease increases the odds of triggering a top-up tax. The adjustment
proscribed for QRTCs changes that result, and thereby increases covered taxes and as a follow-
on, a taxpayer’s GLOBE ETR. Similarly, under Article 4.1.3 of the GLOBE model rules,
covered taxes are reduced by any amount of covered taxes refunded or credited and not treated as
an adjustment to current tax expense, except for any QRTC. Covered taxes also are reduced by a
credit or refund of a non-QRTC not recorded as a reduction to current tax expense.
Cumulatively, the adjustments mean that QRTCs, unlike other types of tax credits, do not
generally reduce a taxpayer’s amount of covered taxes considered paid for purposes of
computing a GLOBE effective tax rate. Conversely, the amount of covered taxes considered paid
is reduced when the taxpayer receives credits that are non-QRTCs.
112
GLOBE Model Rules, Art. 5.1.
113
GLOBE Model Rules, Art. 4.1. The other items reflect alternatives to income taxes, such as withholding taxes
and taxes based on retained earnings or on distributed profits.
114
25
Herzfeld, Mindy
A company’s benefits from tax credits also factors into the calculation of GLOBE net income.
The starting point for calculating GLOBE net income is a company’s financial statements; an
adjustment for tax credits is one of the adjustments required to financial statement income under
the GLOBE rules. For this purpose, QRTCs are treated as income, while non-QRTCs are not.115
The commentary to the GLOBE model rules notes that even though a non-QRTC may be treated
for financial accounting purposes as income of a relevant entity, these types of credits are
excluded in the calculation of GLOBE income; they are instead treated as a reduction in tax
expense. This result is achieved in the GLOBE rules because they require subtracting from a
company’s current tax expense the amount of credit or refund of a non-QRTC to the extent that
this amount is not already recorded as a reduction to current tax expense. This ensures that any
non-QRTC is treated as a reduction to current tax expense and not as an additional item of
income.
Under the GLOBE model rules, a tax credit is considered a QRTC if it is a refundable tax credit
that has to be paid as cash or available as cash equivalents within 4 years of the taxpayer’s
satisfying the conditions for receipt of the credit. The rules define a non-QRTC as a refundable
tax credit that is not a QRTC. The commentary expands on these definitions and explains that the
refundable tax credits described in the model rules do not constitute ordinary refunds of taxes
paid in a prior period because of a computation error, but are “government incentives delivered
via the tax system,” offered to taxpayers with the goal of encouraging engagement in desired
activities (such as research and development).116 Qualified refundable credits are designed to
allow taxpayers who have satisfied the criteria for engaging in specified activities or incurring
specified expenditures to offset their taxes dollar-for-dollar. The distinguishing feature between
qualified and non-qualified RTCs is the government’s promise to refund the amount of the
unused credit even if the taxpayer has no tax liability. The commentary explains that
refundability means the government is effectively paying for the activity or expenditure in a
manner similar to a grant, and that it is delivering the payment by a tax reduction to the extent
possible because it views this method as more efficient than sending checks from the government
to the taxpayer, at the same time that the taxpayer is paying their tax bill.
The commentary’s explanation for why QRTCs are treated as income under the GLOBE rules,
while nonqualified credits reduce tax expense, is consistent with the way accounting principles
distinguish between qualifying and non-qualifying credits. As the commentary notes, the
difference in treatment between qualifying and non-qualifying credits is due to the fact that
qualifying refundable credits share features of, and therefore are treated in the same way as,
government grants for accounting purposes – both are considered income, because they represent
115
116
OECD, Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global AntiBase
Erosion Model Rules (Pillar Two), (2022), https://www.oecd.org/tax/beps/tax-challenges-arising-from-
thedigitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two-commentary.pdf.
26
Herzfeld, Mindy
government support for a company’s activity that can ultimately be received in cash or cash
equivalents.
Under the commentary, a refundable tax credit is treated as a QRTC only if the refund
mechanism has practical significance. If – practically speaking -- the credit will never exceed
any taxpayer’s tax liability, the credit is not considered a QRTC. According to the commentary,
future OECD administrative guidance is supposed to ensure consistency of outcomes. Countries
could be asked to consider developing further conditions for credit eligibility or even explore
alternative rules for the treatment of tax credits and government grants if there are risks
identified with the treatment of tax credits and government grants under the current guidance that
leads to unintended outcomes.
All of this means that that whether a tax credit meets the definition of a QRTC or is treated
instead as a non-QRTC may end up being a determining factor in whether a taxpayer is subject
to a GLOBE top-up tax. As the OECD administrative guidance that has been released since the
model rules were published indicate, the policy reason for the special treatment of refundable
credits (whether qualified or not), relative to other types of tax credits or government grants is
not clear. This has led to some modifications in the treatment of specific types of credits; the
language in the model rules and commentary has already proved inadequate in drawing the line
between qualified and nonqualified refundable credits.
Administrative guidance that has been released to date generally modifies the accounting
treatment of tax credits as described in the model rules and commentary, to allow for more
favorable treatment of specific types of U.S. tax credits. The administrative guidance released in
February 2023 addressed U.S. tax credits that have historically been accessed via tax equity
partnerships, such low-income housing credits and energy credits. Although the model rules
raised questions about the extent to which the benefits provided by these credits might be
eliminated, the administrative guidance released in February provides a special rule to cover
flow-through tax credits, or tax credits that flow through tax-transparent entities (tax equity
partnerships), or credits that flow to an investor as a return of (rather than a return on) an
investment. Under this guidance, a QRTC derived through a flow-through entity accounted for
under the equity method of accounting is treated as income in computing the investor’s GLOBE
income, and a nonqualified or nonrefundable credit reduces the investor’s covered taxes.
The February 2023 administrative guidance did not address the renewable energy credits enacted
by the U.S. Congress in 2021 as part of the Inflation Reduction Act.117 These tax incentives were
offered under a new type of structure, which allowed them to be monetized by being freely
transferable.118 Accounting rules have historically not provided clear guidance for the treatment
of transferable, non-refundable credits. Accounting principles generally provide that if an entity
can elect to treat a credit as a direct payment of tax and receive a refund of that payment in the
117
Pub. L. No. 117-169, H.R. 5376, 117th Cong., 1st Sess. (2021).
118
See § 136401 of the Inflation Reduction Act.
27
Herzfeld, Mindy
absence of any taxable income, the credit represents a refundable credit outside the scope of ASC
(Accounting Standards Codification) 740.1.119 Because there is no specific, authoritative
guidance under U.S. Generally Accepted Accounting Principles as to how to recognize and
measure government assistance received by business entities, companies utilize different
approaches and often rely on international financial reporting standards.
A second set of administrative guidance released by the OECD in July 2023 acknowledges the
ambiguity of the accounting treatment of transferable credits.120 That guidance further modifies
the treatment of tax credits in the model rules to provide for a beneficial result for transferable
credits.121 As background to these changes, the OECD explains that the agreed treatment for
credits in the model rules was based on accounting principles, but also said that the model rules
failed to provide comprehensive rules for the treatment of all tax credits and acknowledged that
some of the commentary on the GLOBE treatment of tax credits was unclear.
In explaining its conclusions, the guidance notes that marketable transferrable tax credits have
similarities to QRTCs from the perspective of both the entity originating the credit and the
government providing the credit, and that in order to provide similar treatment to these tax
credits, marketable transferable tax credits are treated as income and not as a tax reduction under
the GLOBE rules.
But the series of modifications introduced to the definition of qualifying tax credits under
successive iterations of OECD guidance has not addressed the most commonly utilized type of
U.S. business tax credit – the research and development credit, which is non-refundable and so
not a qualifying credit under the GLOBE rules. The Congressional Research Service has noted
that the treatment of credits in the GLOBE rules is punitive for companies headquartered or
operating in the United States.122 Again, the unfavorable treatment for U.S. business credits
makes GILTI – GLOBE coexistence difficult.
(c) The Substance Based Carve-Out
Another point of tension between GILTI and the GLOBE rules is derived from the substance
based carve-out. The minimum tax imposed under the GLOBE model rules is based on a
calculation of net income and taxes in a jurisdiction. If that calculation results in a jurisdiction
being considered low-taxed then an additional calculation is required: GLOBE net income is
reduced by an amount equal to the substance-based income exclusion (SBIE), thereby reducing
the tax base to which the GLOBE top-up tax is applied. As this calculation illustrates, if a
119
ASC 740 is the GAAP guidance on income taxes.
120
OECD, Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance
on the Global Anti-Base Erosion Model Rules (Pillar Two) (July 2023), www.oecd.org/tax/beps/administrative-
guidance-global-anti-base-erosionrules-pillar-two-july-2023.pdf.
121
That variability is one reason why academic accountants have argued that accounting principles are a poor
substitute for legislatively enacted tax laws. See Mindy Herzfeld, Taxing Book Profits: New Proposals and 40 Years
of Critiques, 73(4) Nat’l Tax J. 1025 (2020).)
122
Jane G. Gravelle & Mark P. Keightley, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy,
Congressional Rsch. Svc, Rep. No. 47174, (updated Jul. 21, 2023).
28
Herzfeld, Mindy
company possesses sufficient substance in a jurisdiction, its top-up tax liability can be minimized
or even eliminated.
The SBIE is defined as the sum of a jurisdiction’s payroll and tangible asset carveouts.123 The
SBIE is more generous than the U.S.-based carveout, the QBAI. A substance-based carveout that
reduces a company’s tax liability based on where employees are located may impact business
decisions about where to hire personnel. The combination of the QDMTT, the SBIE, and the
ordering rules could alter the competitive landscape within countries as well as between different
countries.124 It could put the United States at a competitive disadvantage, because it is highly
unlikely to ever lower its overall corporate rate to the 15 percent minimum rate agreed to as part
of the GLOBE rules.
The different treatment of substance based activities under the GLOBE rules and GILTI is
another factor making coexistence of the two regimes challenging.
11.6. GLOBE, GILTI and Tax Competition
More broadly, the debate over the need for conformity of GILTI with pillar 2 and the questions
over the possibility of coexistence raise further questions about the effect of pillar 2 on tax
competition. Also implicated are questions over the likely winners and losers in the current
round of efforts to curtail tax competition. Preliminary analyses of the macroeconomic
consequences of the impact of pillar 2 mostly suggest that the winners are likely to be large,
high-tax countries, and the losers smaller countries that rely more heavily on tax competition to
attract investment.125
The U.S. Joint Committee on Taxation has explained how the details of the GLOBE rules – such
as the substance based income exclusion – could result in simply shifting tax competition to
different arenas. The JCT summarizes research that shows that where there is an adequate
amount of real economic activity in a low-tax jurisdiction, profits might be subject to tax at an
effective rate lower than the GLOBE rate; as a result, the substance-based income exclusion
could help some countries keep their tax rates low. The JCT describes how the substance-based
income exclusion undermines the goal of GLOBE of ending tax competition, because it grants
some portion of foreign-source income permanent tax-exempt status, thereby creating new types
of incentives for countries to attract jobs and investment. As a result of the GLOBE rules,
taxpayers are incentivized to concentrate their pre-tax profits, their employees, and their tangible
assets, in jurisdictions with lower income taxes. According to the JCT, the effect of the
123
For employee costs, the percentage starts at 10 percent and decreases to 5 percent over a decade. For tangible
assets, it starts at 8 percent and likewise decreases over a decade.
124
Michael Devereux, John Vella and Heydon Wardell-Burrus, Pillar 2: Rule Order, Incentives, and Tax
Competition (Jan. 14, 2022), Oxford University Centre for Business Taxation Policy Brief 2022, available at
https://ssrn.com/abstract=4009002 ; Michael Devereux, Johanna Paraknewitz, and Martin Simmler, Empirical
Evidence on the Global Minimum Tax: What Is a Critical Mass and How Large Is the Substance-Based Income
Exclusion?, 44 Fiscal Studies 9 (Mar. 2023).
125
See, e.g., IMF, Corporate Taxation in the Global Economy, Policy Paper No. 19/007 (Mar. 2019).
29
Herzfeld, Mindy
substance-based income exclusion on tax planning practices and international tax competition is
ambiguous.126
Further, even though countries are supposed to opt into a QDMTT in order to collect revenue
that would otherwise flow to other jurisdictions, the JCT suggests that jurisdictions may want to
offer tax credits at the same time, to preserve their competitiveness and attractiveness for foreign
direct investment.127 Pillar 2’s effectiveness could be weakened, if countries take the opportunity
to offer tax credits, while at the same time enacting a nominally high tax rate. This would simply
shift the competition from tax rate and base to one over tax credits. And there’s nothing to
prevent countries from utilizing a range of approaches, such as by enacting QDMTTs and
incentives and subsidies to attract investment. The U.S. Joint Committee on Taxation has
concluded that “even though Pillar 2 may reduce base erosion profit shifting, Pillar 2 may also
increase tax competition over other factors.”128
When considering the interaction between GILTI and GLOBE, competition seems the more
likely outcome than conformity or coexistence.
126
Jt. Comm. on Taxation, Background and Analysis Of The Taxation Of Income Earned By Multinational
Enterprises at 64.
127
See Mona Baraké, Paul-Emmanuel Chouc, Theresa Neef, and Gabriel Zucman, Revenue Effects of the Global
Minimum Tax Under Pillar Two, 50 Intertax 689 (2022).
128
Jt. Comm. on Taxation, Background and Analysis Of The Taxation Of Income Earned By Multinational
Enterprises at 64.
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Chapter: Pillar 2 and GILTI: Coexistence, Conformity or Fracture?

(h) A Note on the Corporate Alternative Minimum Tax

11.3. Pillar 2 and GILTI: Differences

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