Scope of the GloBE Rules: A Detailed Analysis of Article 1.1  

May 21, 2024

The Global Anti-Base Erosion (hereinafter “GloBE”) rules are part of Pillar 2 of the initiative led by the Organisation for Economic Co-operation and Development (OECD) to address the tax challenges arising from the digitalization of the economy and base erosion and profit shifting (BEPS). These rules are designed to ensure that large multinationals pay a minimum level of tax in all jurisdictions where they operate. GloBE rules and Transfer Pricing are interrelated in the fight against tax base erosion and profit shifting. Multinationals should consider both regulations in their tax planning and documentation preparation to ensure compliance and minimize the risk of tax adjustments and penalties.  

Article 1.1 of the consolidated commentary on the Pillar Two global minimum tax rules sets out the limits of application of the GloBE rules to Multinational Enterprise Groups (MNEs) whose annual consolidated revenues in at least two of the previous four tax years equal or exceed EUR 750 million. These scope rules ensure that smaller groups and purely domestic groups are not affected by the GloBE rules. In addition, it clarifies that Excluded Entities are not subject to the GloBE rules.  

Article 1.1: Limits and Exclusions

Application Limitations

Article 1.1 establishes a revenue threshold for determining the applicability of the GloBE rules, thereby protecting smaller groups and purely domestic groups. It also specifies that Excluded Entities are not subject to these rules.  

Article 1.1.1: Key Elements

Restrictions and Income Threshold

Article supplements this scope with two main elements. First, it restricts the application of the GloBE rules to Constituent Entities of an MNE Group. Second, it establishes a revenue threshold based on that used in the country-by-country filing rules (CbCR). This threshold limits the application of the rules to those MNE groups with consolidated revenues of at least EUR 750 million in at least two of the previous four fiscal years. This revenue threshold reflects cost/benefit considerations within the context of the overall tax policy rationale of the GloBE rules.  

Practical Application

Operationalization of the Revenue Threshold

The application of the revenue threshold is based on the revenue reported in the MNE Group’s consolidated financial statements. A two out of four year test is used to reduce volatility in the application of the rules. If the MNE Group has €750 million or more of reported revenue in at least two fiscal years in the four-year period immediately preceding the fiscal year tested, the Constituent Entities comprising the MNE Group will be within the scope of the GloBE rules.  

Special Cases and Additional Provisions

In limited cases where consolidated financial statements are not available for the four fiscal years immediately preceding the fiscal year tested, special provisions apply. If the Group Forming Entities were newly created, the third year is the first year in which the GloBE rules can be applied, provided that the revenue threshold for the previous two years is met.  

The revenue threshold applies to consolidated revenues as reported in the Group’s consolidated financial statements. When an Entity’s revenues are consolidated with those of the MNE Group, the threshold applies to the Entity’s total revenues as reflected in the Group’s consolidated financial statements, without reduction for the participation of minority interests.  

Although an Excluded Entity is not subject to the GloBE rules, it is considered a Group Entity for purposes of determining the revenue threshold, provided that its revenues are consolidated with the rest of the Group.  

In cases where the revenue threshold is set in a currency other than the Euro and such amount changes annually, the revenue threshold in effect at the beginning of the fiscal year is applied.  

Article 1.1.2: Non-Conventional Fiscal Year Adjustments

Consistency in the Application of the Threshold

This section addresses the adjustment needed when an MNE Group’s fiscal year does not coincide with a standard 12-month period, ensuring consistency in the application of the threshold for both GloBE and CbCR.  

Article 1.1.3: Exclusions and Threshold Calculation

Excluded Entity Considerations

Here we detail how Article 1.1.3 excludes certain Entities from the GloBE rules, taking into account only their revenues to calculate the threshold, thus ensuring the integrity of the evaluation process.  

In Summary

Impact and Objectives

Article 1.1 and its associated provisions establish a clear framework for the application of the GloBE rules, ensuring that MNE groups with global reach are subject to these rules, while minimizing administrative costs and maintaining overall tax benefits.