This lesson provides a detailed examination of the two interlocking rules that form the core of the GloBE regime, explaining their operation, ordering, and interaction.

• The Income Inclusion Rule (IIR): The IIR imposes top-up tax on a parent entity with respect to the low-taxed income of a member of its multinational entity group. It operates on a top-down basis, meaning the ultimate parent entity jurisdiction applies the IIR first. If the ultimate parent entity is in a jurisdiction that has not implemented the IIR, an intermediate parent entity jurisdiction may apply the IIR. The IIR is designed to ensure that top-up tax is collected from the parent entity rather than requiring collection from each subsidiary individually.

• The Undertaxed Profits Rule (UTPR): The UTPR denies deductions or requires an equivalent adjustment to the extent the low-tax income of a constituent entity is not subject to tax under an IIR. It acts as a secondary or “backstop” rule, applying only where the IIR has not fully captured the low-taxed income of a jurisdiction.

• Rule Order: In terms of rule order, QDMTTs apply before qualified IIRs, and the UTPR is applied last as the backstop rule. The application of a QDMTT (meeting the terms of the QDMTT safe harbour) limits the need for an ultimate or intermediate parent entity to apply an IIR.

• Transitional CbCR Safe Harbour: To ease the transition to the full GloBE rules, a Transitional Safe Harbour based on Country-by-Country Reporting was introduced. This allows MNE Groups to apply a simplified approach in lieu of the full GloBE Rules for up to the first three years of GloBE application, when a jurisdiction meets one of three separate tests: the Simplified ETR Test, Routine Profits Test, or De Minimis Test.