Top-Up Tax: The 15% Minimum Tax Charge

Definition

The top-up tax is the Pillar Two charge on the undertaxed profit — the tax imposed where an in-scope group entity’s jurisdictional ETR falls below the 15% floor: the difference between 15% and the ETR, applied to the adjusted covered income (the ACI) less the SBIE (the substance-based income exclusion). The top-up tax is the amount — the charge the IIR, the UTPR and the QDMTT mechanisms allocate and collect (the mechanisms are the chargers, the top-up tax is the amount).

Top-up tax = (15% − the jurisdictional ETR) × (the ACI − the SBIE)

The rate:  15% − ETR (the shortfall, the floor test failed)
The base:  the ACI − the SBIE (the adjusted covered income, the substance
           income excluded)
The amount: the rate × the base (the top-up tax, the charge)
       → allocated by the mechanisms (the IIR, the UTPR, the QDMTT —
         the chargers, the collection)

The element	The content
The trigger	The jurisdictional ETR below 15% (the floor test failed, the undertaxed profit) — the GloBE computation
The rate	15% − ETR (the shortfall — the difference between the floor and the actual ETR)
The base	The ACI − the SBIE (the adjusted covered income, the substance-based income exclusion — the payroll and the tangible assets’ substance income, excluded from the base)
The amount	The rate × the base (the top-up tax — the charge on the undertaxed profit, the substance excluded)
The allocation	The top-up tax allocated by the mechanisms — the IIR (the parent’s inclusion, the primary), the UTPR (the other in-scope jurisdictions, the secondary), the QDMTT (the domestic minimum, where enacted, the priority) — the IIR, UTPR & QDMTT guide

The working read (the GloBE rules guide and the ETR and SBIE guide): the top-up tax is the computation’s output — the amount the floor test produces (the ETR below 15%, the shortfall, the base, the charge). The SBIE (the substance-based income exclusion — the payroll credit, the tangible assets’ credit) is the base reduction (the substance income excluded from the top-up base, the computation’s relief for the real economy in the jurisdiction). The mechanisms (the IIR, the UTPR, the QDMTT) are the chargers — the top-up tax is the amount, the mechanisms are the collection. The transitional safe harbour (the CbCR-based ETR test, the 3-year fast-path) is the check that can avoid the top-up for the applicable years (the ETR within 5% of 15%, the scope conditions met).

Example

The in-scope group entity: the jurisdictional ACI is €40m, the covered taxes are €4m — the jurisdictional ETR is 4/40 = 10% (below the 15% floor). The top-up tax: the rate (15% − 10% = 5%), the base (the ACI − the SBIE — the SBIE, the payroll and the tangible assets’ substance income, say €8m — the base is €40m − €8m = €32m), the amount (5% × €32m = €1.6m). The top-up tax is €1.6m — the charge on the undertaxed profit, the substance excluded. The allocation: the IIR (the parent’s inclusion, where the parent jurisdiction has it), the UTPR (the other in-scope jurisdictions, where the IIR does not reach), the QDMTT (the domestic minimum, where enacted, the priority) — the mechanisms allocate and collect the €1.6m. The transitional safe harbour checked for the applicable years (the CbCR-based ETR, the 5% differential — where the CbCR ETR is within 5% of 15%, the top-up avoided for those years).

See also

• GloBE Rules: How the Calculation Works (the guide)
• ETR and SBIE: The Exclusions That Matter
• IIR · UTPR · QDMTT

FAQ

What is the difference between the top-up tax and the SBIE? The top-up tax is the charge (the amount — the (15% − ETR) × (ACI − SBIE), the tax on the undertaxed profit). The SBIE (the substance-based income exclusion) is the base reduction (the payroll and the tangible assets’ substance income, excluded from the top-up base — the ACI minus the SBIE). The SBIE is the input to the top-up computation (the base reduction, the substance relief); the top-up tax is the output (the charge, the amount). The ETR and SBIE guide has the SBIE’s mechanics (the payroll credit, the PP&E credit, the worked exclusion); the top-up tax is the computation on the SBIE-reduced base.

Does the top-up tax apply to all in-scope entities? No — only where the entity’s jurisdictional ETR is below 15% (the floor test failed). The entity with the ETR at or above 15% (the floor met) has no top-up tax (the undertaxed profit is nil, the charge is zero). The top-up tax is the shortfall charge — the difference between the floor and the actual ETR, on the SBIE-reduced base. The entity’s ETR (the jurisdictional computation, the covered taxes over the ACI) is the floor test — the GloBE rules guide has the computation, the Pillar Two for TP teams guide has the pricing-to-ETR chain (the intercompany price feeding the jurisdictional split, the split feeding the ETR).

How is the top-up tax allocated between the mechanisms? On the priority — the QDMTT (the domestic minimum, where enacted, the priority) first, the IIR (the primary, the parent’s inclusion) where the QDMTT does not cover, the UTPR (the secondary, the other in-scope jurisdictions) where the IIR does not reach. The top-up tax (the amount) is the same on any mechanism — the mechanisms are the chargers (the collection, the allocation to the jurisdictional shares). The IIR, UTPR & QDMTT guide has the allocation mechanics and the worked example. The transitional safe harbour (the CbCR-based ETR test) is the check that can avoid the top-up for the applicable years.