In a significant reform of the global tax framework, the Organisation for Economic Co-operation and Development (OECD) has introduced a two-pillar solution to address the tax challenges of the digital economy. At the heart of Pillar Two lies a groundbreaking concept — the introduction of a 15% Global Minimum Tax for large multinational enterprises (MNEs).
This development is reshaping how countries, including the United Arab Emirates (UAE), approach corporate taxation, especially for MNEs with substantial cross-border operations. In this blog, we will explore the mechanics, scope, and implications of the 15% minimum tax under OECD Pillar Two, and what UAE-based businesses need to prepare for.
Understanding the OECD Pillar Two Framework
Pillar Two of the OECD’s Global Anti-Base Erosion (GloBE) rules aims to ensure that large MNEs pay a minimum level of tax regardless of where they operate. The minimum tax rate is set at 15% and applies to each jurisdiction where the MNE operates, not on a consolidated global basis.
The GloBE rules form part of the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) and are expected to impact tax policies across more than 140 jurisdictions, including free zones and low-tax regimes.
Who Is Affected by Pillar Two?
The minimum tax rules primarily apply to MNEs that meet the following criteria:
- Annual consolidated group revenue exceeding EUR 750 million in at least two of the four preceding fiscal years.
- Presence in multiple jurisdictions, either through subsidiaries or permanent establishments.
Small and medium enterprises (SMEs) that fall below this threshold are excluded. However, the ripple effects may eventually impact the wider ecosystem through policy shifts and compliance requirements.
Key Components of the Pillar Two Rules
The GloBE framework operates through several interlocking mechanisms:
1. Income Inclusion Rule (IIR)
Parent entities must pay a top-up tax if their subsidiaries in other jurisdictions are taxed below 15%.
2. Undertaxed Payments Rule (UTPR)
This backstop rule allows countries to collect taxes from entities that make payments to related parties in low-tax jurisdictions if the IIR is not applied by the parent entity.
3. Qualified Domestic Minimum Top-Up Tax (QDMTT)
Allows a country to collect the top-up tax itself, preventing other countries from taxing its low-taxed income. The UAE is expected to implement a QDMTT to preserve tax revenues locally.
How Is the 15% Tax Calculated?
The effective tax rate (ETR) for each jurisdiction is determined by dividing the total covered taxes by the total GloBE income. If the ETR in a specific jurisdiction falls below 15%, a “top-up tax” is applied to bring it up to the minimum level.
Formula: Top-Up Tax = (15% – Jurisdictional ETR) x GloBE Income
Complex adjustments are made to financial accounts, deferred tax, and timing differences to calculate GloBE income and covered taxes.
Why This Matters for UAE-Based MNEs
Though the UAE introduced a 9% Corporate Tax in June 2023, many businesses — especially those in Free Zones — still enjoy preferential tax rates or exemptions. Under Pillar Two, if a UAE Free Zone entity’s effective tax rate is less than 15%, the parent company or other jurisdictions may be able to claim the shortfall as a top-up tax.
This could potentially reduce the competitive advantage of operating in low-tax zones unless the UAE enforces its own QDMTT to collect the tax locally.
PEAK Business Consultancy Services – Helping UAE Businesses Navigate Pillar Two
PEAK Business Consultancy Services offers expert guidance to MNEs operating in the UAE and the wider GCC to assess, plan, and comply with evolving international tax obligations under OECD Pillar Two. Our specialists provide:
- Global tax risk assessment
- Effective tax rate modeling
- GloBE income calculations
- Compliance and documentation assistance
Visit www.peakbcs.com to schedule a consultation and future-proof your tax strategy today.
Expected Impact on the UAE’s Tax Framework
As part of the OECD Inclusive Framework, the UAE has signaled its support for the global minimum tax. The Ministry of Finance has announced its intention to introduce a domestic minimum top-up tax to comply with Pillar Two while preserving its competitiveness.
Implications include:
- Increased compliance requirements for large Free Zone entities
- New reporting obligations under the GloBE information return
- Strategic restructuring for tax efficiency under the new rules
Planning Ahead: What Should MNEs Do Now?
Given that implementation is already underway across many countries, MNEs operating in or through the UAE should:
- Identify entities and jurisdictions subject to the rules
- Calculate jurisdictional effective tax rates
- Assess Free Zone operations and potential top-up exposure
- Model tax liabilities under different QDMTT and UTPR scenarios
- Develop a global compliance and reporting framework
Early action will minimize risks and offer more room for strategic adjustments.
Conclusion
The 15% minimum tax under OECD Pillar Two marks a major milestone in the evolution of global tax governance. While it targets large multinational groups, its implications extend to national tax policy, Free Zone benefits, and global investment strategies.
Businesses in the UAE, especially those benefiting from low-tax regimes, must now recalibrate their tax structures to stay compliant and competitive. PEAK Business Consultancy Services is here to help your enterprise navigate this complex transition with precision and foresight.
Click here to consult PEAK BCS and align your tax planning with the future of international taxation.
