ARTICLE

Designing Domestic Minimum Taxes in Response to the

Global Minimum Tax

Noam Noked*

Countries may soon adopt domestic minimum taxes in response to the global minimum tax under the Global Anti-Base Erosion (GloBE) regime.
These taxes, which will have priority over the global minimum tax under GloBE, could become the primary measure of ensuring that multinational
enterprises (MNEs) pay a minimum level of tax. Despite their expected importance, the GloBE Model Rules and Commentary provide little
guidance on several important design and policy issues concerning domestic minimum taxes. This article analyses the relevant rules in the Model
Rules and the guidance in the Commentary. It also explores several questions that the OECD and the GloBE Implementation Framework should
consider regarding the design of domestic minimum taxes and related issues such as collateral benefits.
Keywords: Domestic minimum tax, global minimum tax, GloBE, pillar two, QDMTT.

1 INTRODUCTION income taxable under QDMTT. Moreover, the

Commentary, published in March 2022, provides that a
The introduction of the global minimum tax under the
domestic minimum tax that is not a QDMTT, but meets
Global Anti-Base Erosion (GloBE) regime will likely have a
the definition of a ‘Covered Tax’, should reduce the applic-
significant consequence that has attracted little attention
able GloBE top-up taxes in other countries because it
until recently: Countries would prefer to adopt domestic
would increase the effective tax rate (ETR) of Constituent
minimum taxes modelled after the GloBE Rules to collect
Entities (CEs) of in-scope multinational enterprises
revenues that other countries would otherwise collect.1 This
(MNEs).3 These rules create an incentive for countries to
policy response is supported by the Model Rules, published
adopt domestic minimum taxes (either QDMTTs or not) in
in December 2021, which provide that a Qualified
response to the global minimum tax.4
Domestic Minimum Top-up Tax (QDMTT) – a domestic
An increasing number of countries are now considering
minimum tax modelled after the GloBE Rules – will have
adopting QDMTTs, including the Member States of the
priority over the GloBE top-up taxes.2 The result is that
European Union (EU), Switzerland, the United Kingdom, and
other countries cannot impose GloBE top-up taxes on
other jurisdictions.5 If many countries adopt domestic

Notes
*
Assistant Professor, Faculty of Law, The Chinese University of Hong Kong. I thank Ana Paula Dourado, Paul-Emmanuel Chouc, Tsilly Dagan, Joachim Englisch, Jesse
Kavanagh, Michael Olesnicky, Leopoldo Parada, Susanna Schwaiger, Steve Towers, Kaushal Tikku, Jefferson VanderWolk, Heydon Wardell-Burrus, and the participants of
the Intertax & Cideeff Seminar on Pillar Two at the University of Lisbon for their helpful comments. Email: noam.noked@cuhk.edu.hk.
1
Prior to the publication of the Model Rules in Dec. 2021, the potential response of countries adopting domestic minimum taxes modelled after GloBE was mentioned briefly
in the OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Report on the Pillar Two Blueprint: Inclusive Framework on BEPS 131,
133, 141, 143 (2020), https://doi.org/10.1787/abb4c3d1-en (accessed 6 Aug. 2022) [hereinafter ‘Blueprint’]. For a discussion on this potential policy response, see Noam
Noked, Defense of Primary Taxing Rights, 40 Va. Tax Rev. 341 (2021); Noam Noked, Potential Response to GloBE: Domestic Minimum Taxes in Countries Affected by the Global
Minimum Tax, 102 Tax Notes Int’l 943 (2021).
2
OECD, Tax Challenges Arising from the Digitalisation of the Economy Global Anti-base Erosion Model Rules (Pillar Two) (20 Dec. 2021) [hereinafter ‘Model Rules’]. See also Michael
Devereux, John Vella & Heydon Wardell-Burrus, Pillar 2: Rule Order, Incentives, and Tax Competition (14 Jan. 2022); Noam Noked, The Case for Domestic Minimum Taxes on
Multinationals, 105 Tax Notes Int’l 667 (7 Feb. 2022); Brian J. Arnold, The Evolution of Controlled Foreign Corporation Rules and Beyond, 73 BULL. INTL. TAX’N. 12 (2019).
3
OECD, Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-base Erosion Model Rules (Pillar Two) (14 Mar. 2021) [hereinafter
‘Commentary’], Ch. 4, para. 38 (‘On the other hand, an ordinary domestic minimum tax that is not a Qualified Domestic Minimum Top-up Tax is a Covered Tax if it
otherwise meets the definition of a Covered Tax’).
4
See Devereux et al., supra n. 2; Noked, supra n. 2. For a different viewpoint, which suggests that some countries would not benefit from adopting domestic minimum taxes,
see Leopoldo Parada, Tailoring Developing Country Advice: A Response to Noam Noked, 105 Tax Notes Int’l 783–784 (14 Feb. 2022).
5
See European Commission, Proposal for a Council Directive on Ensuring a Global Minimum Level of Taxation for Multinational Groups in the Union, COM(2021) 823 final, 2021/
0433 (CNS) (2021); Big Swiss Companies to Pay Minimum 15 Percent Tax Rate From 2024 Under OECD Deal, NewsMax (13 Jan. 2022); HM Treasury, OECD Pillar 2:
Consultation on Implementation, 53–54 (Jan. 2022); Hong Kong Financial Secretary, Budget Speech 2022-23 (23 Feb. 2022), para. 188; Inland Revenue, OECD Pillar Two:
GloBE Rules for New Zealand (May 2022). The United States government has also proposed to adopt a QDMTT, but the status of this proposal is unclear following the
enactment of the Inflation Reduction Act of 2022, which includes a corporate alternative minimum tax.

INTERTAX, Volume 50, Issue 10

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© 2022 Kluwer Law International BV, The Netherlands
 Designing Domestic Minimum Taxes
minimum taxes on the income of MNEs’ domestic Low-Taxed
Constituent Entities (LTCEs), this would substantially affect the
distribution of the tax revenues in favour of source jurisdictions.6
This would also affect the legal instrument used to collect the
tax: Domestic minimum taxes would become the primary tax
measure imposing a minimum level of taxation on MNE
income, whereas the global minimum tax under the GloBE
regime would serve as a rarely used secondary rule.7
Despite their emerging importance, the Model Rules and
Commentary devote relatively little attention to domestic
minimum taxes and questions related to their design.8 This
is unsurprising: QDMTTs should follow the design of the
GloBE Rules. Thus, one would assume that by providing
detailed guidance on the GloBE Rules, countries should be
able to adopt similar rules in the design of their QDMTTs.
However, as shown in this article, domestic minimum taxes
raise important policy and design questions that are specific
to them, which require further consideration.9
This article focuses on three of these questions.10 First,
how should the QDMTT apply to an LTCE that is partially
owned by third-party minority shareholders? As discussed in
Part III, the GloBE top-up tax under the Income Inclusion
Rule (IIR) applies to the relevant parent entity based on its
ownership interest in the LTCE. In contrast, under the
Model Rules, the QDMTT applies to the LTCE’s income
without excluding income attributable to third-party min-
ority shareholders. As a result, for partially owned LTCEs,
the tax under the QDMTT would be higher than the IIR
top-up tax that would otherwise apply. This article contends
that countries should be allowed to adopt a QDMTT capped
at the amount that would otherwise apply under GloBE.11
Second, how closely should a domestic minimum tax follow
the GloBE Rules in order to be considered a QDMTT? As
discussed in Part IV, some countries may consider adopting
domestic minimum taxes that have some MNE-friendly devia-
tions from the Model Rules but are still considered as
QDMTTs. Other countries may wish to adopt domestic mini-
mum taxes largely similar to the GloBE Rules that qualify as
Covered Taxes (instead of QDMTTs) because these domestic
minimum taxes would have priority over other countries’ con-
trolled foreign corporation (CFC) taxes. It is unclear if, and to
what extent, a country can adopt rules somewhat different than
the GloBE Rules while still being considered ‘equivalent to the
GloBE Rules’ or ‘consistent with the outcomes provided for
under the GloBE Rules’. Further guidance is required on how
Notes
6
See Noked, Defense of Primary Taxing Rights, supra n. 1, at 366; Devereux et al., supra n. 2, at 4.
7
See Noked, supra n. 2.
8
See Mindy Herzfeld, How Does the Qualified Domestic Minimum Top-Up Tax Fit Into Pillar 2?, 106 Tax Notes Int’l 315, 316 (18 Apr. 2022).
9
See ibid., for a similar critique.
10
Ibid., raises additional questions concerning the QDMTTs and their interaction with the GloBE Rules: who gets to decide whether a domestic minimum tax is considered as
a QDMTT; can countries adopt only a QDMTT without adopting the GloBE Rules; and how to allocate the QDMTT among entities in the jurisdiction?
11
See the discussion in Part III infra.
12
The preference is also for other tax benefits (e.g., a reduction in indirect taxes, employment taxes, etc.) that do not reduce the jurisdictional corporate income ETR below 15%.
13
Model Rules, Art. 10.1.
679
closely domestic minimum taxes should follow the GloBE
Rules in order to be considered as QDMTTs. This question
arises, for example, in the context of the recently-enacted corpo-
rate alternative minimum tax in the United States.
Third, what benefits can countries provide to MNEs from
the funds raised from domestic minimum taxes? As dis-
cussed in Part V, the GloBE Rules create a preference for
non-tax subsidies over corporate income tax benefits.12
Countries’ reaction could be to replace corporate income
tax incentives with equivalent non-tax subsidies. These sub-
sidies could be funded (at least partially) by revenues raised
under domestic minimum taxes, including QDMTTs.
However, the Model Rules’ limitation on collateral benefits
imposes a constraint on using revenues raised under a
QDMTT to fund benefits to MNEs that pay the QDMTT.
It is unclear how broad this limitation is and what would be
considered a prohibited collateral benefit. Part V considers
three types of subsidies: those that mostly benefit MNEs but
are available to all corporate taxpayers with certain activities
and operations; those for substantial activities and expendi-
tures that are subject to a cap equal to the tax paid by the
MNE, and discretionary and selective subsidies where the tax
paid by the MNE is one of the factors considered by the
government when determining them. Guidance on the ben-
efits that would be considered collateral benefits is needed.
This article is organized as follows: Part II provides an
overview of the rules concerning domestic minimum taxes in
the Model Rules and the Commentary. Part III explores how
the QDMTT should apply to LTCEs partially owned by
third-party minority shareholders. Part IV considers the
implications of adopting domestic minimum taxes that
deviate from the GloBE Rules. Part V analyses subsidies to
determine those considered prohibited collateral benefits
related to the payment of QDMTT. Part VI concludes.
2 DOMESTIC MINIMUM TAXES IN THE MODEL
RULES AND COMMENTARY
2.1 Model Rules
2.1.1 QDMTT
The Model Rules provide that ‘Tax’ is ‘a compulsory
unrequited payment to General Government’.13 The
Model Rules define ‘QDMTT’ as:
 Intertax

a minimum tax that is included in the domestic law of (a) Taxes recorded in the financial accounts of a
a jurisdiction and that: Constituent Entity with respect to its income or profits
or its share of the income or profits of a Constituent
(a) determines the Excess Profits of the Constituent Entity in which it owns an Ownership Interest;
Entities located in the jurisdiction (domestic Excess
(b) Taxes on distributed profits, deemed profit distri-
Profits14) in a manner that is equivalent to the GloBE
butions, and non-business expenses imposed under an
Rules;
Eligible Distribution Tax System;
(b) operates to increase domestic tax liability with
(c) Taxes imposed in lieu of a generally applicable
respect to domestic Excess Profits to the Minimum
corporate income tax; and
Rate for the jurisdiction and Constituent Entities for
(d) Taxes levied by reference to retained earnings and
a Fiscal Year; and
corporate equity, including a Tax on multiple compo-
(c) is implemented and administered in a way that is
nents based on income and equity.
consistent with the outcomes provided for under the
GloBE Rules and the Commentary, provided that such Certain Covered Taxes can be allocated from one CE to
jurisdiction does not provide any benefits that are another.23 In particular, taxes on a parent company under
related to such rules.15 a CFC regime are attributed to the relevant subsidiary.24
After determining the Covered Taxes, several adjustments
The QDMTT is credited against the GloBE top-up tax
need to be made in order to calculate the Adjusted
liability that would apply in the absence of this tax.
Covered Taxes,25 which are then used as the numerator
Under the Model Rules, the jurisdictional top-up tax is
in the calculation of the ETR.26
calculated as follows16:
Jurisdictional Top up Tax = (Top up Tax Percentage17 x
Excess Profit) + Additional Current Top up Tax18 -
2.2 Commentary
Domestic Top up Tax19 2.2.1 QDMTT

This means that the QDMTT is ‘credited against any The Commentary dedicates a few paragraphs for guidance
Pillar Two minimum tax liability’.20 on QDMTT. The Commentary notes that:
[m]ost domestic income Taxes are Covered Taxes taken
2.1.2 Covered Taxes into account in the ETR computation and indirectly
reduce the amount of Top-up Tax computed under
QDMTT is excluded from the definition of ‘Covered Article 5.2. Under Article 5.2, however, tax arising
Taxes’.21 A domestic minimum tax that does not fall under a Qualified Domestic Minimum Top-up Tax
within the QDMTT definition may be a Covered Tax, directly reduces the amount of Top-up Tax arising
defined as follows22: under the GloBE Rules.27

Notes
14
Under the Model Rules, Art. 5.2.2, the ‘Excess Profit’ is the ‘Net GloBE Income’ minus the ‘Substance-based Income Exclusion’. Net GloBE Income is the aggregate GloBE
Income and losses of all the constituent entities in the relevant jurisdiction. Art. 5.1.2.
15
See the definition in the Model Rules, Art. 10.1.1. The Model Rules also note that ‘[a] Qualified Domestic Minimum Top-up Tax may compute domestic Excess Profits
based on an Acceptable Financial Accounting Standard permitted by the Authorised Accounting Body or an Authorised Financial Accounting Standard adjusted to prevent
any Material Competitive Distortions, rather than the financial accounting standard used in the Consolidated Financial Statements’.
16
Model Rules, Art. 5.2.3. A Jurisdictional Top-up Tax is imposed if the amount under this formula is positive.
17
Under the Model Rules, Art. 5.2.1, the ‘Top-up Tax Percentage’ is the minimum rate (15%) minus the ETR in the relevant jurisdiction. Under the Model Rules, Art. 5.1.1,
the ETR is ‘equal to the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction divided by the Net GloBE Income of the jurisdiction for
the Fiscal Year’.
18
Under the Model Rules, ‘Additional Current Top-up Tax’ is imposed in certain situations where the Adjusted Covered Taxes are less than zero and less than the Expected
Adjusted Covered Taxes Amount (Art. 4.1.5) or as a result of a recalculation for a prior year (Art. 5.4.1).
19
Under the Model Rules, Art. 5.2.3, ‘[t]he Domestic Top-up Tax is the amount payable under a Qualified Domestic Minimum Top-Up Tax of the jurisdiction for the Fiscal Year’.
20
OECD, The Pillar Two Rules in a Nutshell 4 (20 Dec. 2021) (‘Finally, if a jurisdiction has a domestic minimum tax that is consistent with the Pillar Two Model Rules, such
domestic tax is credited against any Pillar Two minimum tax liability’.).
21
Model Rules, Art. 4.2.2. GloBE top-up taxes are also excluded from the definition of ‘Covered Taxes’. Ibid.
22
Model Rules, Art. 4.2.1.
23
Model Rules, Art. 4.3.2.
24
Model Rules, Art. 4.3.2(c). There is a specific rule regarding the allocation of Covered Taxes in respect of CFC taxation of passive income. Model Rules, Art. 4.3.3.
25
The adjustments are detailed in Model Rules, Art. 4.1.
26
Model Rules, Art. 5.1.1. (‘The Effective Tax Rate of the MNE Group for a jurisdiction is equal to the sum of the Adjusted Covered Taxes of each Constituent Entity located
in the jurisdiction divided by the Net GloBE Income of the jurisdiction for the Fiscal Year’.).
27
Commentary, supra n. 3, Ch. 10, para. 115.

680
 Designing Domestic Minimum Taxes

The Commentary further notes that ‘a Parent Entity with
an Ownership Interest in what would otherwise be a
LTCE generally will not have any liability under the IIR
if that Constituent Entity is subject to a Qualified
Domestic Minimum Top-up Tax that imposes the same
amount of tax that would otherwise arise under the IIR’.28
The Commentary reiterates the QDMTT definition in the
Model Rules by noting that ‘Qualified Domestic Minimum
Top-up Tax means a tax that applies to Excess Profits of the
domestic Constituent Entities and operates to increase
domestic tax liability with respect to those profits to the
Minimum Rate’.29 The Commentary further states that:
[t]he tax must be implemented and administered in a
way that is consistent with the outcomes provided for
under the GloBE Rules and their Commentary, includ-
ing the prohibition against the implementing jurisdic-
tion providing any collateral or other benefits that are
related to such domestic tax as discussed further in the
Commentary to the definition of a Qualified IIR.30
Moreover, the Commentary clarifies that:
[t]his limitation on collateral benefits is not intended to
restrict the ability of a jurisdiction to make changes to the
design of its corporate tax system in light of the new
international tax architecture under the GloBE Rules.
Such changes to the domestic corporate tax rules conse-
quent on the introduction of a domestic minimum tax
should not be considered a benefit provided that they do
not result in MNE Groups achieving overall tax outcomes
that are inconsistent with the outcomes provided for
under the GloBE Rules and their Commentary.31
The Commentary also repeats the Model Rules’ statement
that the QDMTT can generally be based on an accounting
standard different than the standard used in the consoli-
dated financial statements.32
The Commentary provides that there will be a process
to determine whether a domestic minimum tax is a
QDMTT: the:
GloBE Implementation Framework will develop pro-
cesses and provide guidance to facilitate the co-ordinated
implementation of the GloBE Rules. This will include
implementing a process to assist tax administrations in
determining whether a minimum tax is considered as a
Qualified Domestic Minimum Top-up Tax. In order to
facilitate compliance by MNEs and administration by tax
authorities, the outcome of these determination would be
released and made publicly available.33
This process would increase the certainty regarding the
status of a domestic minimum tax as a QDMTT. It would
also increase the uniformity and consistency across juris-
dictions with respect to QDMTT design.
The Commentary’s discussion of ‘Qualified IIR’
includes guidance that also applies to QDMTT with
respect to the requirement that jurisdictions do not pro-
vide collateral benefits related to such taxes.34 The
Commentary notes that:
[t]his rule is intended to provide a level playing field
in all the jurisdictions that have adopted these rules.
The word “benefits” is comprehensive enough to cover
any kind of advantage provided by a jurisdiction,
including tax incentives, grants, and subsidies and
the phrase “related to such rules” is intentionally
drafted with broad language to take into account
different mechanisms through which the benefit is
provided.35
As an example of collateral benefits, the Commentary
describes a situation where ‘a jurisdiction has adopted all
of the provisions of the GloBE Rules in its
legislation … However, it provides a tax credit equivalent
to a portion of the tax paid under the IIR to be used
against other taxes. In this case, the jurisdiction has not
adopted a Qualified IIR’.36
The determination of whether a benefit relates to the
IIR or the QDMTT is ‘based on the facts and circum-
stances of each case. It has to take into account the under-
lying principle behind this condition, which is to provide
a level playing field among all jurisdictions and to avoid
inversions incentivized by differences in the implementa-
tion and application of the GloBE Rules’.37 Tax benefits
or grants that are given to all taxpayers are not related to

Notes
28
Ibid.
29
Ibid., para. 116.
30
Ibid.
31
Ibid.
32
Ibid., para. 117 (this rule applies ‘provided that the locally authorised accounting standard is either an Acceptable Financial Accounting Standard or has been adjusted to the
standard used by the MNE Group in respect of any Material Competitive Distortions’.).
33
Commentary, supra n. 3, Ch. 10, para. 118.
34
Such benefits are referred to as ‘collateral benefits’ in this article.
35
Commentary, supra n. 3, Ch. 10, para. 123.
36
Ibid., para. 124.
37
Ibid., para. 125.

681
 Intertax

the GloBE Rules.38 The Commentary notes that ‘[f]acts 3 PARTIALLY OWNED LTCES
that are relevant but not decisive include whether the tax
benefit or grant benefits only taxpayers subject to the How should a QDMTT be applied to LTCEs that are
GloBE Rules, whether the benefit is marketed as part of partially owned by third-party minority shareholders?45
the GloBE Rules and if the regime was introduced after For example, assume the following structure:
the OECD/G20 Inclusive Framework started discussing
the GloBE Rules’.39

2.2.2 Covered Taxes

The Commentary states that ‘an ordinary domestic mini-
mum tax that is not a Qualified Domestic Minimum Top-
up Tax is a Covered Tax if it otherwise meets the defini-
tion of a Covered Tax’.40 For example, a domestic mini-
mum tax that does not follow the design parameters of the
GloBE Rules could still be considered a Covered Tax if it
is a tax on corporate income or profits.41 This follows
prior statements in the Blueprint, which noted that ‘[a]
supplementary tax which applies a top-up tax to the net
income of domestic entities would also fall within the
definition of a covered tax’.42 The LTCE is resident in Country C. The ultimate
The Commentary also provides guidance that supports parent entity (UPE) is resident in Country A, which
the conclusion that a tax would not be considered a implements the IIR. Third-party minority shareholders
Covered Tax if the relevant government provides collat- hold the remaining 40% of the LTCE. Other third-party
eral benefits related to such tax. The Commentary notes minority shareholders hold 20% of Intermediate Holdco,
that: an intermediate holding company resident in Country B.
[t]he definition of Tax … is a compulsory unrequited Assume that the LTCE has Excess Profits of USD 1,000
payment to General Government … Taxes are subject to no tax (i.e., the ETR is 0%). Country C would
unrequited in the sense that any benefits provided by like to impose a QDMTT on domestic LTCEs to collect
government to the taxpayer are not in proportion to the tax that would otherwise be collected under other
their payments. Thus, fees and payments for privileges, countries’ GloBE top-up taxes.
services, property, or other benefits provided by gov- How much tax would apply under the GloBE Rules in
ernment do not qualify as Taxes.43 the absence of a QDMTT? In general, the parent entity’s
allocable share of the IIR top-up tax is the applicable top-
up tax for the relevant LTCE multiplied by the parent
This could imply that where a collateral benefit is granted
entity’s inclusion ratio, which reflects the parent entity’s
in relation to the payment of a tax, the relevant tax should
ownership interest.46 In this example, the UPE jurisdic-
not be considered as a ‘Tax’ for Pillar Two purposes
tion (Country A) will apply the IIR to the UPE with
because the government provides benefits in relation to
respect to the LTCE’s Excess Profits,47 but the IIR top-up
the tax.44
tax would be limited to the amount attributable to the

Notes
38
Ibid., para. 126.
39
Ibid., also notes that ‘[i]n this context, the term “jurisdiction” is not restricted to the national or central government of the jurisdiction. It includes any political subdivision,
local authority, or any other public entity or arrangement. For example, if a public development bank provides a particular benefit that is related to the application of the
IIR, then such rule is not a Qualified IIR’.
40
Commentary, supra n. 3, Ch. 4, para. 38.
41
Model Rules, Art. 4.2.1.
42
Blueprint, supra n. 1, at 47.
43
Commentary, supra n. 3, Ch. 4, para. 24.
44
Ibid., paras 22–61, elaborates on other matters involving Covered Taxes that are not directly relevant to the discussion here on domestic minimum taxes.
45
Questions concerning the application of domestic minimum taxes to partially owned LTCEs were previously analysed in Noked, Defense of Primary Taxing Rights, supra n. 1,
at 359–360; Noked, supra n. 2, 669–70. This part builds on the discussion in these publications.
46
Model Rules, Arts 2.2.1. and 2.2.2. The term ‘Ownership Interest’ is defined as ‘any equity interest that carries rights to the profits, capital or reserves of an Entity,
including the profits, capital or reserves of a Main Entity’s Permanent Establishment(s)’. Model Rules, Art. 10.1.1.
47
Note that if the UPE holds less than 80% of Intermediate Holdco, then the latter company will collect the IIR top-up tax from the LTCE. This is because the Intermediate
Company will be considered as a Partially-Owned Parent Entity. Model Rules, Arts 2.1.4., 10.1.1.

682
 Designing Domestic Minimum Taxes

UPE based on its ownership interest (48%=80%*60%).
The amount attributable to minority owners unrelated to
the MNE group will not be subject to GloBE top-up
taxes. Thus, the IIR top-up tax would be USD 72
(=USD 1,000*15%*80%*60%).
How should a QDMTT apply in this situation? Under
the Model Rules, the QDMTT should increase the domes-
tic tax liability with respect to the LTCE’s domestic
Excess Profits to the minimum rate of 15%.48 In this
example, the QDMTT should be USD 150 (=USD
1,000*15%). This QDMTT would operate ‘to increase
domestic tax liability with respect to domestic Excess
Profits’ to 15%, as required in the QDMTT definition
in the Model Rules.49 This QDMTT would reduce to zero
the jurisdictional top-up tax.50 No IIR top-up tax would
be imposed on the UPE. Thus, instead of the UPE paying
an IRR top-up tax of USD 72 as an IIR top-up tax with
respect to the LTCE’s Excess Profits, the LTCE would pay
a QDMTT of USD 150. This means that Country C
would impose the QDMTT on the domestic LTCE’s
income irrespective of the amount of GloBE top-up tax
that would otherwise apply in other jurisdictions.
This example demonstrates that, for partially owned
LTCEs, a QDMTT could result in a top-up tax substan-
tially higher than the top-up tax that would otherwise
apply under the IIR.51 The QDMTT would go beyond
collecting the revenues that would otherwise go to other
countries’ IIR top-up taxes.52 It is unclear whether this is
an intended outcome.53 The QDMTT definition in the
Model Rules requires the tax to be ‘implemented and
administered in a way that is consistent with the out-
comes provided for under the GloBE Rules and the
Commentary’.54 As the QDMTT is designed to achieve
the outcomes provided for under the GloBE Rules, it is
unclear why it should impose a tax liability higher than
the top-up tax that would otherwise apply under the IIR.
Furthermore, the Commentary also notes that ‘a Parent
Entity with an Ownership Interest in what would other-
wise be an LTCE generally will not have any liability under
the IIR if that Constituent Entity is subject to a Qualified
Domestic Minimum Top-up Tax that imposes the same
amount of tax that would otherwise arise under the IIR’.55
This statement implies that the same amount of tax would
generally arise under both IIR and QDMTT. This state-
ment is inconsistent with the application of QDMTT to
partially owned LTCEs, which results in a higher amount
of tax than the IIR top-up tax that would otherwise apply.
The Model Rules could have taken a different approach
that would result in a similar top-up tax on partially owned
LTCEs under the IIR and the QDMTT. One straightfor-
ward option would be to allow countries to cap the
QDMTT at the amount that would otherwise apply under
the GloBE Rules. Such a cap could be worded as follows:
Where all of the Ultimate Parent Entity’s Ownership
Interests in a Constituent Entity are held directly or
indirectly by one or more Parent Entities that are
required to apply a Qualified IIR in the jurisdiction
where they are located, any Qualified Domestic
Minimum Top-up Tax on that Constituent Entity
shall not exceed the aggregate amount of tax that
would otherwise arise under the Qualified IIR.56
In addition, this cap should apply after the calculation of the
jurisdictional top-up tax.57 Otherwise, the QDMTT would
not reduce the jurisdictional top-up tax by the amount
attributable to third-party minority shareholders, and
other jurisdictions would impose GloBE top-up taxes.58

Notes
48
Model Rules, Art. 10.1.1.
49
Ibid. If the domestic minimum tax on the Excess Profits would be USD 72, it would not increase the domestic tax liability with respect to Excess Profits to 15%, as required
in the QDMTT definition. In this example, it would only increase it to 7.2%.
50
Model Rules, Art. 5.2.3. If the domestic minimum tax on the Excess Profits would be USD 72, it would not reduce the jurisdictional top-up tax to zero. In this example, it
would decrease it to USD 78 (=USD 150 – USD 72). As a result, other jurisdictions (Country A in this example) would impose GloBE top-up taxes on the LTCE’s Excess
Profits.
51
In this example, a QDMTT (USD 150) would be 108% higher than the IIR top-up tax that would otherwise apply in Country A (USD 72).
52
Some countries may be interested in increasing the tax burden on domestic LTCEs beyond the tax that would otherwise apply under GloBE. Other countries, however, may
be interested in imposing QDMTTs that do not go beyond the tax liability under GloBE.
53
Notably, the UTPR would also apply to the LTCE’s Excess Profits without excluding any amount attributable to minority shareholders. This would be the result if
Countries A and B in this example do not implement IIR. While this would be the treatment under the UTPR (a secondary rule which only takes effect if the income is not
taxed under the IIR), it is unclear whether this is the intended policy outcome when assuming a wide adoption of the primary rule (IIR) and comparing the effects of IIR and
QDMTT.
54
Model Rules, Art. 10.1.1.
55
Ibid. Emphasis added.
56
This proposed language combines language from Model Rules, Art. 2.5.2 (‘The Top-up Tax calculated for a Low-Taxed Constituent Entity that is otherwise taken into
account under Article 2.5.1 shall be reduced to zero if all the Ultimate Parent Entity’s Ownership Interests in such Low-Taxed Constituent Entity are held directly or
indirectly by one or more Parent Entities that are required to apply a Qualified IIR in the jurisdictions they are located with respect to that Low-Taxed Constituent Entity
for the Fiscal Year’) and the Commentary (‘a Parent Entity with an Ownership Interest in what would otherwise be an LTCE generally will not have any liability under the
IIR if that Constituent Entity is subject to a Qualified Domestic Minimum Top-up Tax that imposes the same amount of tax that would otherwise arise under the IIR’.).
57
See the text accompanying supra n. 16 for the rules concerning the calculation of the jurisdictional top-up tax under Model Rules, Art. 5.2.3.
58
In the example above, the jurisdictional top-up tax before a QDMTT should be the Excess Profits (USD 1,000) multiplied by 15% (= USD 150). The QDMTT is applied to
reduce the jurisdictional top-up tax of USD 150. If the capped QDMTT (USD 72) is used to calculate the jurisdictional top-up tax, then there would be a jurisdictional top-
up tax of USD 78 (=USD 150 – USD 72), which would trigger an IIR top-up tax in Country A. If the pre-cap QDMTT (USD 150) is used to calculate the jurisdictional

683
 Intertax

Implementing this cap would require determining the IIR QDMTTs that follow this principle with respect to all
top-up tax that would apply in the absence of the QDMTT. LTCEs, including partially owned LTCEs. The OECD
This could involve some additional complexity when imple- and the GloBE Implementation Framework should con-
menting the QDMTT. However, the implementation of the sider issuing guidance on this issue.
QDMTT will already involve much of the complexity of the
GloBE regime, and the additional work of determining the
IIR top-up tax that would otherwise apply is unlikely to add 4 DOMESTIC MINIMUM TAXES THAT DEVIATE
substantial costs. MNEs and governments that do not wish to FROM THE GLOBE RULES
increase the tax burden on MNEs beyond the tax that would
The previous part discusses the possibility of recogniz-
otherwise apply under GloBE may prefer this approach,
ing a QDMTT with a cap that is consistent with the
despite some additional complexity.
outcomes provided for under the GloBE Rules but is
Ideally, the Model Rules could be amended to provide
not included in the Model Rules. This part explores a
that governments can include such a cap in their QDMTTs.
more general question: How closely should a domestic
Including this cap in the Model Rules would ensure cer-
minimum tax follow the GloBE Rules in order to
tainty and would address the relevant technical issues.
qualify as a QDMTT? Some countries may consider
However, even without amending the Model Rules, coun-
adopting domestic minimum taxes that have MNE-
tries may be able to include such a cap in their QDMTTs if
friendly deviations from the Model Rules but are still
the GloBE Implementation Framework supports it. As
considered as QDMTTs. This strategy could work if
noted, the GloBE Implementation Framework will be pub-
there is a safe harbour for entities in countries that
lishing guidance and ‘implementing a process to assist tax
implement QDMTTs.63 Without a safe harbour, if a
administrations in determining whether a minimum tax is
QDMTT does not decrease the LTCE’s jurisdictional
considered as a Qualified Domestic Minimum Top-up
top-up tax to zero, other countries would impose
Tax’.59 Additionally, the Commentary implies that the
GloBE top-up taxes. However, if there is a safe harbour
GloBE Implementation Framework could provide a safe
for entities in QDMTT-implementing jurisdictions,
harbour for entities in jurisdictions with QDMTTs.60
such GloBE top-up taxes would not apply.
Thus, even without any changes in the Model Rules,
This question would also arise when countries wish to
the GloBE Implementation Framework may be able to
adopt domestic minimum taxes largely similar to
recognize as QDMTT a domestic minimum tax that
QDMTTs that qualify as Covered Taxes, not as
adopts the cap proposed above or other measures that
QDMTTs. What would be the advantage of such taxes?
equate the tax liability under the QDMTT to the tax
They would have priority over other countries’ CFC
that would otherwise apply under GloBE.61 As noted,
regimes. In general, under the Model Rules, other juris-
this approach is ‘consistent with the outcomes provided
dictions’ CFC taxes on a subsidiary are considered as
for under the GloBE Rules and the Commentary’
Covered Taxes in the subsidiary’s jurisdiction,64 which
because it mirrors the tax treatment under the GloBE
means that they have priority over the QDMTT of the
Rules.62 As the QDMTT is intended to impose the
subsidiary’s jurisdiction.65 One analyst predicts that the
same top-up tax that would otherwise apply under the
likely adoption of QDMTTs by many source jurisdictions
GloBE Rules, countries should be permitted to adopt

Notes
top-up tax, there would be no jurisdictional top-up tax, and no country would apply any GloBE top-up tax. Alternatively, the Model Rules could be amended to apply the
QDMTT tax credit against the IIR top-up tax, not the jurisdictional top-up tax.
59
Commentary, supra n. 3, Ch. 10, para. 118.
60
Ibid., Ch. 8, para. 32.
61
As discussed in Part IV infra, this approach could work if there is a safe harbour for entities in QDMTT-implementing countries.
62
See ibid.
63
See Commentary, supra n. 3, Ch. 8, para. 32 (‘The GloBE Implementation Framework could also explore whether a GloBE Safe Harbour could cover the situations where no
Top-up Tax would be due (for instance, in respect of a jurisdiction where MNE Groups are subject to a Qualified Domestic Minimum Top-up Tax)’.). See also Noked, supra
n. 2, at 669 for a proposal for such safe harbour for entities in jurisdictions that implement QDMTTs. Jefferson VanderWolk, Implementation of GloBE Rules: A Sensible Safe
Harbor Is Needed, Bloomberg Law (11 Apr. 2022) proposes a safe harbour for entities in countries with statutory tax rate on in-scope MNEs that do not have preferential tax
regimes that the OECD classified as harmful.
64
See the text accompanying supra n. 24.
65
For example, assume that an LTCE in Country C has Excess Profits of USD 1,000 subject to zero tax; there is no substance based income exclusion (SBIE), and the UPE is
subject to CFC taxation at the rate of 10% on the subsidiary’s Excess Profits. Also assume that a domestic minimum tax that is not a QDMTT would reduce the CFC tax
liability. After GloBE is introduced, the UPE will be subject to tax on 15% of the LTCE’s Excess Profits under the IIR of the UPE jurisdiction. If Country C adopts a
QDMTT, it will collect a top-up tax of 5%. This tax is less likely to be creditable against the CFC tax liability. While this is not provided explicitly in the Model Rules or
the Commentary, the Commentary, supra n. 3, Ch. 4, para. 45, provides that domestic tax rules, including CFC regimes, ‘should not provide a foreign tax credit for any tax
imposed under a Qualified UTPR or IIR which is implemented in a foreign jurisdiction’ in order to preserve the rule order. Under the same rationale, a QDMTT could be
treated similarly. Further guidance on the question of the creditability of QDMTTs is needed. In contrast, if Country C adopts a domestic minimum tax that qualifies as a
Covered Tax but not as a QDMTT, and it is creditable against the CFC tax liability, then Country C will collect the full 15%, and the UPE jurisdiction will receive no top-
up tax under its IIR and CFC regime. For in-depth discussion on whether CFC regimes should grant a tax credit for QDMTTs, see Heydon Wardell-Burrus, Should CFC
Regimes Grant a Tax Credit For Qualified Domestic Minimum Top-up Taxes?, 106 Tax Notes Int’l 1649–1658 (27 Jun. 2022).

684
 Designing Domestic Minimum Taxes
may incentivize UPE jurisdictions to adopt new, or
expand existing, CFC regimes in order to get priority
over source jurisdictions’ QDMTTs.66 If this happens,
source jurisdictions may consider adopting domestic
minimum taxes that do not qualify as QDMTTs in
order to preserve their taxing rights over the income of
domestic entities. At the same time, these jurisdictions
might prefer to design the domestic minimum taxes to be
as similar as possible to QDMTTs.
Notably, adopting a domestic minimum tax that
does not qualify as a QDMTT would have additional
implications. Unlike a QDMTT that only applies to
Excess Profits which exclude the substance based
income exclusion (SBIE) amount, a domestic minimum
tax that is not a QDMTT would generally need to apply
a 15% tax rate to all of the LTCE’s Net GloBE Income
(including the SBIE) in order to increase the ETR to
15%.67 This means that if a country adopts a domestic
minimum tax that is not a QDMTT to increase domes-
tic entities’ ETR to 15%, such entities could pay a
higher tax than the tax that would otherwise apply to
them under a QDMTT or a GloBE top-up tax.68
Different countries may have different preferences
regarding the design of their domestic minimum taxes
and whether they prefer to adopt QDMTTs or other
domestic minimum taxes.
How closely should a domestic minimum tax follow
the GloBE Rules in order to be classified as a
QDMTT? As noted in Part II, a QDMTT needs to
meet the following requirements: (1) it determines the
Excess Profits ‘in a manner that is equivalent to the
Model Rules’, (2) it ‘operates to increase domestic tax
liability with respect to domestic Excess Profits’ to
15%, and (3) it is ‘implemented and administered a
way that is consistent with the outcomes’ of Pillar
Two, subject to the limitation on collateral benefits.69
Regarding the determination of the Excess Profits,
it is unclear whether a country can adopt rules some-
what different than the Model Rules while still being
considered as ‘equivalent to the GloBE Rules’.
Similarly, it is unclear whether and to what extent a
country can implement and administer a QDMTT that
has some deviations from the GloBE Rules while still
being regarded as ‘consistent with the outcomes pro-
vided for under the GloBE Rules’. This uncertainty
Notes
66
See Steve Towers, Will the GloBE Rules Cause the Expansion of CFC Regimes? (1 Apr. 2022), https://www.itbstevetowers.com/ (accessed 6 Aug. 2022).
67
See Model Rules, Art. 5.1 for the rules regarding the calculation of the ETR.
68
The quantum of this difference will depend on the amount of SBIE.
69
Model Rules, Art. 10.1.1.
70
See Reuven Avi-Yonah & Bret Wells, Pillar 2 and the Corporate AMT, 107 Tax Notes Int’l 693-697 (Aug. 8, 2022).
71
See Deloitte, Corporate AMT included in Inflation Reduction of 2022 (Aug. 11, 2022).
72
A discussion on whether the U.S. corporate alternative minimum tax should be considered as a QDMTT is outside the scope of this article.
73
Model Rules, Art. 6.1.
685
could have been avoided if the Model Rules and
Commentary provided that the QDMTT should
strictly follow the GloBE Rules’ determination of jur-
isdictional top-up tax. It is possible that the Model
Rules intentionally use somewhat vague and open-to-
interpretation terms (such as ‘equivalent’ and ‘consis-
tent with the outcomes’) to provide flexibility in case
some important countries (e.g., the United States)
adopt rules that somewhat deviate from them, which
could be recognized by the GloBE Implementation
Framework as sufficiently ‘equivalent’ and ‘consistent’
with the GloBE regime.70
This question arises in the context of the United
States’ newly-enacted alternative corporate income tax.
Reuven Avi-Yonah and Bret Wells argue that any por-
tion corporate alternative minimum tax which applies
to low-taxed U.S. domestic income should be consid-
ered as a QDMTT.71 Other analysts have noted that
this tax is unlikely to constitute a QDMTT because of
the significant differences between this tax and the
GloBE Rules.72 Further guidance by the GloBE
Implementation Framework is required on the extent
to which a domestic minimum tax must follow the
GloBE Rules in order to be considered a QDMT. For
example, assume that a country adopts a QDMTT that
does not include the rules concerning demergers. Under
the Model Rules on demergers, demerged groups may
still be subject to the GloBE regime for four years
following the demerger, even if the demerged groups’
revenue (taken separately) falls below the 750-million-
euro threshold.73 These rules would likely affect a small
minority of in-scope MNEs, but for these MNEs the
impact can be substantial. The QDMTT without the
rules on demergers would still apply to the vast major-
ity of MNEs ‘in a way that is consistent with the out-
comes’ of Pillar Two. Should this deviation result in the
relevant domestic minimum tax not being considered as
a QDMTT? If so, this tax would likely be considered as
a Covered Tax. Another approach would be to consider
this domestic minimum tax as a QDMTT despite this
deviation from the rules. If there is no safe harbour for
entities in QDMTT-implementing jurisdictions, MNEs
caught under the demerger rules would be subject to
other countries’ GloBE top-up taxes.
 Intertax

5 COLLATERAL BENEFITS V. PERMISSIBLE international tax architecture under the GloBE Rules’ and
sUBSIDIES that:

The GloBE regime will limit source jurisdictions’ ability
to use tax incentives to attract MNE investment.74 How
can countries respond? Instead of granting tax incentives,
countries can collect the tax by imposing a domestic
minimum tax and provide other benefits such as non-tax
subsidies.75 The literature has recognized that it is gen-
erally possible to design non-tax subsidy schemes that are
economically equivalent to tax incentive schemes and vice
versa.76 Yet the ability of governments to replace tax
benefits with equivalent subsidies might be limited due
to political, institutional, or other constraints.77 As a
result of the GloBE regime, even if perfect substitution
is impossible, countries will likely shift from tax competi-
tion to subsidy competition.78 In particular, financial
centres and jurisdictions that have relied on their attrac-
tive tax systems to attract MNE investment may consider
other ways to increase their competitiveness.79 This could
include using funds raised under QDMTTs to attract
investment by providing other benefits to MNEs.
However, such policies might clash with the Model Rules
and the Commentary, which impose constraints on each
country’s ability to use funds raised under QDMTTs and
IIR top-up taxes to offer benefits to the MNEs that pay these
taxes. As noted in Part II, the Model Rules’ QDMTT
definition requires that the jurisdiction which imposes a
QDMTT ‘does not provide any benefits that are related to
such rules’.80 In addition, based on the ‘Tax’ definition in the
Model Rule and the relevant guidance in the Commentary, it
appears that any tax (not only a QDMTT) would not be
considered as a ‘Tax’ for Pillar Two purposes if the relevant
government provides benefits related to such a tax.81 Yet the
Commentary notes that a jurisdiction can still ‘make changes
to the design of its corporate tax system in light of the new
[s]uch changes to the domestic corporate tax rules conse-
quent on the introduction of a domestic minimum tax
should not be considered a benefit provided that they do
not result in MNE Groups achieving overall tax outcomes
that are inconsistent with the outcomes provided for
under the GloBE Rules and their Commentary.82
Some collateral benefits would be easily identified. The only
example the Commentary provides regarding what would be
considered as a collateral benefit concerns a situation where ‘a
jurisdiction has adopted all of the provisions of the GloBE
Rules in its legislation … However, it provides a tax credit
equivalent to a portion of the tax paid under the IIR to be
used against other taxes’.83 Similarly, if a jurisdiction pro-
vides a tax credit to a portion of its domestic minimum tax,
this tax would not be considered a QDMTT, neither would
it likely to be considered a Covered Tax.84
However, there are numerous ways for governments to use
funds collected under a QDMTT in order to benefit MNEs
without a direct link between the benefits and the QDMTT.
As noted, the Model Rules and Commentary intentionally
adopt broad terms. The Commentary states that:
[t]he word “benefits” is comprehensive enough to cover
any kind of advantage provided by a jurisdiction,
including tax incentives, grants, and subsidies and the
phrase “related to such rules” is intentionally drafted
with broad language to take into account different
mechanisms through which the benefit is provided.85
These broadly defined rules and the limited guidance
result in uncertainty regarding what would be considered
as prohibited collateral benefits. The next sections discuss

Notes
74
See Noked, supra n. 2, at 672.
75
See Noam Noked, From Tax Competition to Subsidy Competition, 42 U. Pa. J. Int’l L. 445 (2020). In addition to non-tax subsidies, countries can replace corporate income tax
incentives with other tax incentives that are unaffected by the GloBE Rules and other international tax reforms (e.g., indirect taxes, employment taxes, etc.). In this article,
‘non-tax subsidies’ mean subsidies and incentives that are not corporate income tax benefits.
76
See David A. Weisbach & Jacob Nussim, The Integration of Tax and Spending Programs, 113 Yale L.J. 955, 961 (2004) (‘As Stanley Surrey noted in his tax expenditures
analysis, virtually any program can be implemented in at least two ways. It can be implemented through a direct spending program or through a tax program’.); Jacob
Nussim & Anat Sorek, Theorizing Tax Incentives for Innovation, 36 Va. Tax Rev. 25, 58 (2017); Noam Noked, Integrated Tax Policy Approach to Designing Research & Development
Tax Benefits, 34 Va. Tax Rev. 109, 143 (2014); Noam Noked, Designing R&D Incentives in Hong Kong, 14 U. Pa. Asian L. Rev. 41 (2019).
77
See Noked, supra n. 72, at 451–452.
78
See ibid. (arguing that the preference for non-tax subsidies is the result of several international tax reforms, including BEPS and Pillar Two).
79
For example, Hong Kong is considering adopting the GloBE Rules and QDMTT to safeguard its taxing rights, while at the same time stating, ‘we will keep up our efforts
in improving Hong Kong’s business environment and enhancing our competitiveness, with a view to attracting multinational corporations to invest and operate in Hong
Kong’. Financial Secretary, Budget Speech 2021-2022 64 (2021), https://www.budget.gov.hk/2021/eng/pdf/e_budget_speech_2021-22.pdf (accessed 6 Aug. 2022). See also
Herzfeld, supra n. 8, at 316 (‘Singapore – another country that has aggressively used tax incentives to compete – has made clear that countries will find other ways to
encourage investment, warning that competition for investments won’t disappear because of the two-pillar plan and will instead intensify in nontax areas’).
80
Model Rules, Art. 10.1.1.
81
See the discussion accompanying Commentary, supra n. 3, Ch. 4, para. 24.
82
Ibid., Ch. 10, para. 116.
83
Ibid., para. 124. The same would apply to QDMTT.
84
See the tax accompanying supra nn. 43–44.
85
Commentary, supra n. 3, Ch. 10, para. 123.

686
 Designing Domestic Minimum Taxes

situations where countries may try to use funds collected
through a QDMTT to finance subsidies to the MNEs that
pay the QDMTT.
5.1 Benefits that Target MNEs But Are
Available to More Taxpayers
The Commentary provides that a ‘tax benefit or grant
provided to all taxpayers is not related to the GloBE
Rules’.86 As noted, the Commentary also states that ‘[f]
acts that are relevant but not decisive include whether the
tax benefit or grant benefits only taxpayers subject to the
GloBE Rules, whether the benefit is marketed as part of
the GloBE Rules and if the regime was introduced after
the OECD/G20 Inclusive Framework started discussing
the GloBE Rules’.87 In light of this guidance, it is unli-
kely that any country will grant benefits limited only to
in-scope MNEs, or will market any benefits in connection
with the GloBE Rules. Instead, countries may adopt sub-
sidy schemes that are available to all corporate taxpayers
but mostly benefit in-scope MNEs.
For example, Hong Kong currently offers a tax incen-
tive scheme for corporate treasury centres of MNEs, under
which the profits of qualified corporate treasury centres
are taxed at a lower tax rate (8.25% instead of 16.5%).88
The current incentive scheme is not limited to in-scope
MNEs, but it is likely that the vast majority of businesses
which benefit from it are large MNE groups. This is
because small and medium businesses are unlikely to set
up a corporate treasury centre in Hong Kong to carry out
intra-group financing activities.89 The GloBE Rules will
reduce the attractiveness of this tax incentive scheme
because a top-up tax would apply if the jurisdictional
ETR is below 15%. In response, the Hong Kong govern-
ment can adopt a QDMTT and use some of the revenue to
offer subsidies to corporate treasury centres. Using infor-
mation about the beneficiaries of the existing scheme and
their activities, the Hong Kong government could try to
design the subsidy so that it would have a similar eco-
nomic effect to the current tax incentive scheme. After the
subsidy scheme and the QDMTT are implemented, the
government can periodically amend the terms of the sub-
sidy scheme to achieve the desired incentive level so that
the MNEs receive a subsidy that is generally similar to the
QDMTT they pay.
Would such a subsidy scheme be considered as a col-
lateral benefit? This subsidy would not be formally related
to the QDMTT nor formally limited to in-scope MNEs.
However, it would primarily benefit in-scope MNEs, and
it could effectively replace a tax incentive with an eco-
nomically equivalent subsidy, thereby effectively ‘refund-
ing’ the QDMTT paid. It is unclear whether the
prohibition on collateral benefits would take a formalistic
approach that only considers whether a scheme is limited
to in-scope MNEs and is directly tied to the payment of
QDMTT, or another approach that considers the eco-
nomic effect and actual beneficiaries of the relevant
scheme.
The latter approach would raise several challenges.
First, determining whether a subsidy scheme is a collateral
benefit would require information about the economic
effect of the subsidy and its actual beneficiaries, which
would probably be reviewed only several years after a
scheme is launched. If a scheme is then classified as a
collateral benefit, it is unclear whether this determination
would have adverse retroactive implications with respect
to the domestic minimum tax collected while the collat-
eral benefit was in place. In addition, line-drawing chal-
lenges would arise where a subsidy scheme benefits both
in-scope MNEs and other taxpayers.90 The ‘facts and
circumstances’ test offered in the Commentary would
create uncertainty regarding whether such subsidies
should be considered as collateral benefits. This approach
also raises concerns regarding countries’ sovereignty and
the extent to which the GloBE Implementation
Framework would need to get involved in reviewing and
approving countries’ fiscal policies. In light of these chal-
lenges, the OECD and the GloBE Implementation
Framework should consider adopting a narrow approach
with respect to collateral benefits: Only benefits that are
formally linked to the payment of QDMTT (and
Qualified IIR) should be prohibited.
5.2 Discretionary and Selective Subsidies
As governments and MNEs are repeat players, a govern-
ment may implement a discretionary and selective subsidy
scheme that effectively refunds (in full or in part) over
time the taxes MNEs pay.91 When determining the
amount of subsidy, the relevant government officials

Notes
86
Ibid., para. 126.
87
Ibid.
88
Inland Revenue Ordinance §§ 14C–14F.
89
Ibid.
90
For example, how should we treat a subsidy scheme in which only 50% of the benefits go to in-scope MNEs? Should we consider the number of beneficiaries of each group
(in-scope MNEs and other taxpayers) or only the dollar amount of benefits paid to each group?
91
See Noked, supra n. 72, at 453.

687
 Intertax
would consider the taxes that MNEs pay as one of the
relevant factors. It is unclear whether governments should
be prohibited from considering whether MNEs pay taxes
as good corporate citizens as a factor when deciding on
governmental benefits for such MNEs. Corporate tax
behaviour is increasingly being considered in the broader
context of corporate social responsibility (CSR) and envir-
onmental, social, and governance (ESG).92
Notably, such subsidies might not be transparent, and
other governments might not know about them if their
disclosure is not required under other laws.93 Even if other
countries know about these subsidies, there may be little
transparency about the way the relevant government
body’s discretion is exercised and how the past payment
of taxes are taken into account.94 If governments can use
discretionary and selective subsidies to avoid the prohibi-
tion on collateral benefits, the existing tax competition
might be replaced with less transparent subsidy
competition.
5.3 Substance-Based Subsidies Capped at the
Tax Paid
Should we classify non-tax subsidies with a cap set with
reference to the domestic tax liability as collateral bene-
fits? For example, assume that a jurisdiction grants a cash
subsidy for certain substantial activities and expenditures
(e.g., R&D expenditures or manufacturing activities), and
this subsidy is capped at the total amount of the domestic
tax paid by the relevant entity in that jurisdiction.95
The challenge here is that such subsidies are ‘related’
both to the tax paid (which could include a QDMTT) and
other factors such as the substantial activities and expen-
ditures the entities must carry out and incur in order to
receive the subsidies. These subsidies are ‘related’ to tax
because they cannot exceed the tax paid in the relevant
jurisdiction. Arguably, they could be considered as a
refund of the tax paid. If a country grants such subsidies,
one could argue that this country’s taxes should not be
considered as ‘Taxes’ for the purposes of Pillar Two
Notes
92
See e.g., William Morris & Edwin Visser, Tax Is a Crucial Part of the ESG Conversation, PwC, https://www.pwc.com/gx/en/services/tax/publications/tax-is-a-crucial-part-of-
esg-reporting.html (accessed 6 Aug. 2022).
93
See Noked, supra n. 72, at 474.
94
See ibid.
95
In addition to a cap at the total amount of tax paid, it is possible to set up other caps where the tax paid is one of the factors determining the maximum subsidy amount.
96
Commentary, supra n. 3, Ch. 4, para. 24, notes that ‘fees and payments for privileges, services, property, or other benefits provided by government do not qualify as Taxes’.
As discussed below, the taxes in this context are arguably not paid as payments for benefits. The subsidy grants are based on the relevant taxpayers performing certain
activities or incurring certain expenditures. Thus, arguably, the taxes should not be considered as payments for benefits.
97
See e.g., the questions discussed in Herzfeld, supra n. 8.
688
because the government provides benefits to the taxpayers
in proportion to the payment of these taxes.96
Nonetheless, these benefits are granted for carrying
out certain substantial activities and incurring certain
expenditures, not as a refund or benefit connected to the
payment of tax. An MNE that does not carry out the
relevant activities or incur the relevant expenditures will
not receive the subsidy. Thus, arguably, the subsidies
should be viewed as ‘related’ to the relevant substantial
activities and expenditures. If a subsidy does not raise
any concern without a cap, it is unclear why imposing a
cap would cause the subsidy to be considered as a pro-
hibited collateral benefit. Moreover, countries could
argue that limiting cash subsidies and other benefits to
the amount of taxes MNEs pay in the jurisdiction is
justified as an anti-avoidance measure to prevent MNEs
from benefiting from subsidies for carrying out profit-
producing activities without paying adequate taxes in
the relevant jurisdictions on the income these activities
generated. Further guidance is required on whether
countries may grant subsidies with a cap set in reference
to the tax paid by the relevant MNEs to the domestic tax
authority.
6 CONCLUSION
While the Model Rules and Commentary comprehen-
sively cover myriad aspects of the GloBE regime, this
article shows that more work is needed on domestic
minimum taxes and related issues such as collateral ben-
efits. This article focuses on three questions, but more
challenges will likely arise.97 Countries that wish to adopt
domestic minimum taxes should explore these issues and
raise unresolved questions with the OECD and the GloBE
Implementation Framework. As domestic minimum taxes
may be widely adopted and become the primary measure
to ensure that MNEs pay a minimum level of tax, atten-
tion should be given by policymakers, tax officials, aca-
demics, and practitioners to issues concerning their design
and implementation.