Global minimum tax

Also called: Pillar Two, GloBE rules · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Beyond NCERT

Meaning

The global minimum tax (also called Pillar Two or the GloBE rules) is an OECD/G20 Inclusive Framework agreement from October 2021. It says that large multinational groups, with €750 million or more in yearly revenue, must pay tax of at least 15% of their profits in each country where they operate. If a group pays less than 15% in any country, a top-up tax makes up the difference.

It matters because it puts a floor under corporate tax. Countries can no longer win investment simply by cutting tax rates towards zero, and firms gain much less by moving profits to tax havens.

• Effective tax rate (ETR) = covered taxes paid in a country ÷ profit earned in that country
• Top-up tax = (15% − ETR) × excess profit

Explanation

Why it was needed: BEPS and the "race to the bottom"

• Base Erosion and Profit Shifting (BEPS): tax planning that uses gaps between countries' tax rules to move profits to low-tax or no-tax places.
• "Base erosion" means the taxable profit reported in a country shrinks.

• "Profit shifting" means that profit is booked somewhere else, often in a tax haven (a place with very low or no tax and strict secrecy about who owns what).

• The OECD/G20 BEPS project (2013–2015) produced 15 actions. These did not stop countries from competing by offering very low tax rates.

• The chain:
• One country cuts its tax rate to attract firms.
• Other countries cut their rates too.

• Everyone collects less tax. This is the "race to the bottom".

• The Two-Pillar Solution (October 2021, about 136+ jurisdictions) was the answer. Pillar Two is the minimum-tax part of it.

• The Inclusive Framework now has 147 countries and jurisdictions working on the global minimum tax [1].

How the top-up tax is worked out

• Step 1: find the ETR in each country separately. This is called jurisdictional blending. A low rate in one country cannot be averaged away with a high rate in another.
• Step 2: if the ETR is below 15%, the gap is the top-up rate.
• Step 3: apply it to excess profit. Excess profit is profit minus a carve-out for real activity (payroll and tangible assets such as factories and machines). So firms with real workers and plants in a country face a smaller top-up.
• Worked example: a subsidiary earns €100 million in a haven and pays €5 million tax.
• ETR = 5 ÷ 100 = 5%
• Top-up rate = 15% − 5% = 10%

• Ignoring the carve-out, top-up tax = 10% × €100 million = €10 million

• Note: the 15% is an effective rate (tax actually paid ÷ profit). It is not the headline rate written in the law. A country with a high headline rate but generous tax holidays can still fall below 15%.

Who collects the top-up tax (the GloBE toolkit)

The rules follow an order of priority:

1. QDMTT (Qualified Domestic Minimum Top-up Tax): the low-tax country itself collects the top-up first, so the money stays at home.
2. IIR (Income Inclusion Rule): if the low-tax country does not collect it, the parent company's country does.
3. UTPR (Undertaxed Profits Rule): a backstop. If the parent's country does not apply the IIR, other countries where the group operates collect it. - STTR (Subject-to-Tax Rule): this is treaty-based, not part of the GloBE domestic rules. It lets source countries, mostly developing ones, tax certain related-party payments such as interest and royalties that are lightly taxed abroad. - The logic: if a country leaves profit taxed below 15%, it does not gain anything. Some other country simply collects the tax. So the best choice for a low-tax country is to collect the top-up itself through a QDMTT.

The US exit and the Side-by-Side package

• The US withdrew in January 2025. In June 2025 the G7 reached a "side-by-side" understanding to keep US-headquartered groups out of some Pillar Two rules.
• In January 2026 the Inclusive Framework agreed a package with three parts [1][2]:
• Material simplifications of the rules.
• Closer alignment of substance-based tax incentives (incentives linked to real investment and jobs) with qualified refundable tax credits.

• A Side-by-Side (SbS) system.

• How SbS works [2]:

• It has two safe harbours for MNE groups headquartered in jurisdictions recognised as having an eligible tax regime. This is the route that covers US groups.
• These groups are exempt from the IIR and UTPR in other jurisdictions.

• A separate UPE safe harbour (UPE means ultimate parent entity, the top company of the group) exempts only the parent's home country from the UTPR.

• Result: the 15% floor survives, but groups based in "eligible regime" countries are largely left to their home country's rules.

In India

• India's stance: India backed the Two-Pillar deal.
• Equalisation levy given up: India's own levy on payments to non-resident digital firms was dropped as part of moving to a multilateral system.
• It was 6% on online ads (Finance Act 2016) and 2% on e-commerce (Finance Act 2020).
• The 2% levy covered only supplies before 1 August 2024, and the levy provisions do not apply from 1 April 2025 [3].

• The US had also opened Section 301 trade investigations (a US law that allows trade retaliation) over the levy. India issued a formal response to the US Section 301 report [4].

• Tax incentives under pressure: India offers IFSC (International Financial Services Centre, e.g. GIFT City) and data-centre tax holidays.

• If these push a big MNE's ETR in India below 15%, another country could collect the top-up tax on the profit India left untaxed.

• India's options are to adopt a QDMTT, or to redesign incentives as substance-based ones or qualified refundable tax credits, in line with the 2026 package [1]. (Whether India has done this should be checked against current news.)

• SEP kept as a fallback: Significant Economic Presence (Finance Act 2018) treats a non-resident as taxable in India because of its digital users or payments (₹2 crore of payments or 3 lakh users, from 2021), even with no office here.

Don't confuse with

• Pillar One: gives market countries (where the users are) a share of taxing rights. It covers MNEs with over €20 billion revenue and over 10% margin, and reallocates 25% of residual profit (Amount A). Pillar Two sets a 15% floor for groups with €750 million+ revenue. Pillar One's convention has stalled. Pillar Two is being put into law in many countries.
• Equalisation levy: a unilateral Indian levy on the gross payment to digital firms, outside the Income-tax Act. The global minimum tax is multilateral and is charged on profit.
• STTR vs IIR/UTPR: the STTR is treaty-based and targets payments like interest and royalties. The IIR, UTPR and QDMTT are GloBE domestic rules that apply to a group's profits in each country.
• Statutory rate vs effective tax rate: the statutory rate is the headline rate in the law. Pillar Two tests the effective rate (covered taxes ÷ profit), country by country.

Prelims Hooks

• Pillar Two sets a 15% minimum effective tax rate, applied country by country, for MNE groups with €750 million+ revenue.
• Collection order: QDMTT → IIR → UTPR. The STTR is treaty-based and helps mainly developing source countries.
• Trap: the UTPR is the backstop, not the first rule. The QDMTT lets the low-tax country keep the revenue itself.
• The Two-Pillar deal was reached in October 2021 (about 136+ jurisdictions). 147 countries and jurisdictions now work on the global minimum tax [1].
• The Side-by-Side package (January 2026) exempts groups headquartered in "eligible regime" jurisdictions from the IIR and UTPR in other countries [1][2].
• Top-up tax = (15% − ETR) × excess profit. Excess profit = profit minus a substance carve-out for payroll and tangible assets.

Mains Points

• Tax sovereignty vs global coordination: India gave up its unilateral equalisation levy [3] in exchange for a multilateral deal.
• Pillar One, which would give market countries like India more taxing rights, has stalled.
• The Side-by-Side package has diluted Pillar Two for US groups [2].

• So India's gains are uncertain. This strengthens the case for the UN tax convention track and for keeping SEP.

• Incentives vs the 15% floor: tax holidays for IFSC and data centres may lose value, because another country can collect the top-up tax.

• A QDMTT keeps that revenue in India.

• Moving to substance-based incentives or qualified refundable tax credits keeps India attractive and stays within the 2026 rules [1].

• Fairness and revenue: a floor on tax competition protects the corporate tax base of developing countries and reduces profit shifting to havens.

• Carve-outs and safe harbours reduce how much it actually changes.
• India should push for simple rules and a stronger STTR, because source countries like India depend on it most.

Related concepts

• Tax haven
• Transfer pricing
• Double Taxation Avoidance Agreement
• Retrospective taxation
• Base Erosion and Profit Shifting
• Significant economic presence
• Equalisation levy
• Pillar One
• Automatic exchange of information

Read more

• International taxation: treaties, profit shifting and the global minimum tax