The Global Minimum Tax: A New Era for Developing Economies

The architecture of international taxation is undergoing its most profound transformation in over a century. For decades, developing nations actively deployed aggressive tax incentives—such as prolonged tax holidays, pioneering free-zone exemptions, and preferential corporate tax rates—to attract Foreign Direct Investment (FDI). However, the finalization of the OECD/G20 Inclusive Framework’s Pillar Two Model Rules introduces a structural floor to global tax competition: a 15% global minimum tax.

This new paradigm fundamentally alters the efficacy of traditional tax incentives and may, in many cases, transform what was once a tool for economic growth into a direct transfer of fiscal revenue from developing host states to developed residence states.

The Core Mechanics of the GloBE Rules

The Global Anti-Base Erosion (GloBE) rules apply to Multinational Enterprise (MNE) Groups with consolidated annual revenues of EUR 750 million or more in at least two of the four preceding fiscal years. The system operates through a strict hierarchy of charging provisions designed to ensure that excess profits are taxed at a minimum of 15% on a jurisdictional basis.

• Income Inclusion Rule (IIR): Think of the IIR as the main engine of the global minimum tax. It applies a “top-down” approach, which empowers the home country of the multinational\’s headquarters—the Ultimate Parent Entity (UPE)—to collect the Top-up Tax if its foreign subsidiaries are paying less than the 15% rate. Because of this top-down design, the country of the highest entity in the corporate chain gets the primary right to tax. However, if the UPE\’s home country has not adopted a Qualified IIR, this taxing right automatically cascades down the corporate ladder to the next Intermediate Parent Entity’s jurisdiction.
• Undertaxed Profits Rule (UTPR): This acts as the ultimate safety net, or backstop, to the IIR. If low-taxed profits escape the IIR because no country higher up the ownership chain applies the rules, the UTPR catches them. Instead of a direct tax, jurisdictions operating a Qualified UTPR will generally impose an additional tax charge through deduction denials (such as normal business expenses) or equivalent adjustments to force the company to pay the missing Top-up Tax locally. To determine the share of that each UTPR country gets from this revenue, the rules use a transparent, substance-based formula: the Top-up Tax is mathematically allocated by dividing the weight equally (50/50) between the relative number of employees and the net book value of physical, tangible assets in each operating country.
• Qualified Domestic Minimum Top-up Tax (QDMTT): The ultimate defense mechanism for developing economies. A QDMTT allows the host jurisdiction where the low-taxed economic activity occurs to claim the top-up tax first, effectively neutralizing the IIR or UTPR of foreign states and preserving local taxing rights.

The 2026 Guidelines: Embracing the Side-by-Side System

To evaluate the true impact on developing nations, tax professionals must understand the jurisdictional blending methodology used to calculate the Effective Tax Rate (ETR) under the GloBE Rules. Furthermore, the 2026 Side-by-Side package represents one of the most significant developments since the release of the original GloBE framework. Rather than merely providing administrative relief, the package establishes a framework for the coexistence of Pillar Two and certain qualifying investment incentives. It includes the Side-by-Side Safe Harbour, the UPE Safe Harbour, and the Substance-Based Tax Incentive (SBTI) Safe Harbour, while also interacting with the treatment of Qualified Refundable Tax Credits (QRTCs), Marketable Transferable Tax Credits (MTTCs), and other Qualified Tax Incentives (QTIs). Collectively, these measures seek to preserve the effectiveness of carefully designed investment incentives while reducing compliance burdens and increasing certainty for both tax administrations and multinational groups.

Added to the broader Safe Harbour framework, the Side-by-Side package introduces both the Side-by-Side Safe Harbour and the UPE Safe Harbour. In addition, the Permanent Safe Harbour framework now includes the Simplified ETR Safe Harbour and the Substance-Based Tax Incentive Safe Harbour. For developing economies with constrained administrative resources, these mechanisms may significantly reduce compliance burdens, provide greater certainty regarding the treatment regarding qualifying incentives, and simplify the administration of Pillar Two for both taxpayers and tax authorities.

The Formulaic Framework: Calculating the Top-up Tax

First, the Jurisdictional Effective Tax Rate (ETR) must be established:

If the calculated ETR falls below the 15% minimum rate, the Top-up Tax Percentage is triggered:

The Top-up Tax is not levied on Net GloBE Income, but rather on Excess Profit, which provides a crucial buffer for tangible economic substance:

In simplified terms, the Jurisdictional Top-up Tax can be expressed as follows:

While the actual GloBE computation may include additional adjustments and allocation mechanisms, this simplified formula captures the core economic effect of the rules.

Illustrative Case Study: The “Tax Holiday” Trap

Consider a practical scenario demonstrating how a traditional tax incentive backfires under the new rules if a developing country fails to adapt. Assuming the MNE Group is within the scope of the GloBE rules, we can evaluate the impact before starting to calculate the Top-up Tax.

The Setup

An MNE Group headquartered in a high-tax jurisdiction establishes an operating subsidiary (Constituent Entity) in a developing economy to construct a manufacturing plant.

• The host country has granted the subsidiary a 100% tax holiday, resulting in local taxes of 0.
• Net GloBE Income generated by the plant: EUR 100,000,000.
• Eligible Payroll Costs for local employees: EUR 20,000,000.
• Net Book Value of Eligible Tangible Assets (the factory): EUR 60,000,000.

Step 1: Compute the Substance-Based Income Exclusion (SBIE)

The rules provide a carve-out designed to protect genuine, asset-heavy operations. The SBIE is calculated as 5% of both the eligible payroll cost and the average value of eligible tangible assets. Using the standard 5% carve-out, the exclusion is calculated as follows (noting that EUR 60,000,000 is the average Net Book Value of the Eligible Tangible Assets):

• Payroll Carve-out = EUR 20,000,000 × 5% = EUR 1,000,000
• Tangible Asset Carve-out = EUR 60,000,000 × 5% = EUR 3,000,000
• Total SBIE = EUR 1,000,000 + EUR 3,000,000 = EUR 4,000,000

(Note: Under the transitional relief rules, the carve-out percentages initially exceed the permanent rates, beginning at 8% for eligible payroll costs and 10% for eligible tangible assets before gradually declining to the permanent 5% rates by 2033. This temporary enhancement provides additional protection for labour-intensive and asset-intensive investments during the transition period.)

Step 2: Determine Excess Profit and Top-up Tax

Because the local covered tax is zero, the ETR is 0%, triggering the maximum Top-up Tax Percentage of 15%.

• Excess Profit = EUR 100,000,000 − EUR 4,000,000 = EUR 96,000,000
• Jurisdictional Top-up Tax = EUR 96,000,000 × 15% = EUR 14,400,000

The Policy Dilemma

• Scenario A (No QDMTT): The host country collects EUR 0. The parent jurisdiction collects the EUR 14,400,000 via the IIR. The tax holiday largely fails to achieve its intended policy objective. Rather than reducing the group\’s overall tax burden, the forgone revenue is effectively recaptured by the parent jurisdiction through the IIR.
• Scenario B (With QDMTT): The host country enacts a QDMTT and collects the EUR 14,400,000 directly. The parent jurisdiction’s top-up tax is reduced to EUR 0, successfully preserving domestic taxing rights.

Strategic Realignment for Developing Economies

The implementation of Pillar Two means developing nations must rapidly transition away from traditional, substance-blind tax holidays and broad income exemptions that inadvertently trigger Top-up Taxes. To maintain competitiveness without ceding their tax base, policymakers and tax authorities must fundamentally restructure their investment promotion strategies.

1. Adoption of a Qualified Domestic Minimum Top-up Tax (QDMTT)

For many developing economies, the adoption of a Qualified Domestic Minimum Top-up Tax has become an increasingly important policy consideration. Without a QDMTT, Top-up Tax arising from low-taxed domestic profits may ultimately be collected by foreign jurisdictions under the IIR or UTPR. By implementing a qualified domestic regime, jurisdictions can preserve taxing rights over domestic economic activity and reduce the likelihood that Pillar Two revenues will be transferred abroad. To be considered qualified, the domestic minimum tax must determine the Top-up tax of domestic entities in a manner equivalent to the GloBE rules. It must determine and collect domestic Top-up Tax using a methodology that is consistent with the outcomes produced under the GloBE Rules. In other words, it must be implemented and administered consistently with GloBE outcomes, provided that the jurisdiction does not offer any benefits related to such rules. When a domestic minimum tax achieves this status, it generally reduces or eliminates the amount of Top-up Tax that would otherwise be collected by foreign jurisdictions under the IIR or UTPR.

2. Revolutionizing the Tax Incentive Landscape: QRTCs and MTTCs

Traditional tax incentives such as tax holidays, reduced corporate income tax rates, exemptions, and ordinary tax credits generally reduce Covered Taxes for GloBE purposes. As a result, they may lower the jurisdictional Effective Tax Rate (ETR) and increase the risk of Top-up Tax under the Pillar Two framework. Consequently, developing countries seeking to remain competitive in attracting foreign direct investment should increasingly consider incentive mechanisms that are more resilient under the GloBE rules.

• Qualified Refundable Tax Credits (QRTCs): Qualified Refundable Tax Credits (QRTCs) represent one of the most effective post-Pillar Two incentive tools. To qualify as a QRTC, the credit must be refundable in cash or cash equivalents within four years from the date on which the taxpayer satisfies the conditions for receiving the credit. Because of this legal obligation to provide a cash-equivalent benefit, QRTCs are generally treated as income for GloBE purposes rather than as a reduction of Covered Taxes. This treatment helps preserve the jurisdictional ETR while continuing to provide meaningful support for investment, innovation, research and development, and other targeted economic activities. To benefit from this treatment, the incentive must satisfy the substantive legal and economic requirements applicable to a QRTC rather than merely being labelled as refundable.
• Marketable Transferable Tax Credits (MTTCs): Marketable Transferable Tax Credits (MTTCs) provide another important policy option for developing countries. To qualify as an MTTC, the credit must satisfy both the transferability and marketability requirements established under the GloBE rules. In general terms, the credit must be legally transferable to an unrelated party within the prescribed timeframe and capable of being transferred at a market value that meets the applicable marketability thresholds. Similar to QRTCs, qualifying MTTCs receive favourable treatment under the GloBE framework and are designed to avoid the ETR reduction typically associated with conventional tax credits. As a result, MTTCs can enable governments to deliver targeted investment incentives while reducing the risk that the benefit will be neutralized by Pillar Two Top-up Taxes.
• Taken together, QRTCs and MTTCs signal a significant shift in the design of investment incentives. In the post-Pillar Two environment, developing countries may achieve greater policy effectiveness by moving away from traditional profit-based tax concessions and toward incentive mechanisms that reward substantive economic activity while remaining compatible with the GloBE framework.
• Qualified Tax Incentives (QTIs) and the Side-by-Side Framework: The 2026 Side-by-Side package further recognizes the role of certain Qualified Tax Incentives (QTIs) within the broader Pillar Two framework. This development reflects a growing recognition that carefully designed investment incentives can coexist with the objectives of the global minimum tax while maintaining the integrity of the GloBE system. Under this framework, jurisdictions may continue to pursue industrial, innovation, sustainability, and economic development policies through qualifying incentives without necessarily undermining the operation of the global minimum tax.

The significance of the QTI framework is particularly pronounced for developing economies. Historically, many countries relied heavily on broad tax holidays and reduced tax rates to attract investment. Under Pillar Two, however, such incentives often lose much of their intended benefit because any reduction in local taxation may simply be recaptured through Top-up Tax imposed elsewhere. The Side-by-Side framework seeks to address this challenge by providing mechanisms through which qualifying incentives may continue to achieve policy objectives while remaining compatible with the GloBE architecture. As a result, future investment promotion strategies are likely to shift away from broad profit-based tax concessions and toward targeted incentives linked to innovation, employment, research and development, sustainability objectives, and substantive economic activity.

3. Deploying Substance-Based Tax Incentives (SBTIs) and Non-Tax Subsidies

Developing economies should leverage the Substance-Based Income Exclusion (SBIE) by encouraging genuine investment in payroll and tangible assets. Incentives linked to substantive economic activity are generally more compatible with the Pillar Two framework because the SBIE reduces the amount of excess profit subject to Top-up Tax.

In addition, the 2026 Consolidated Commentary introduced a Substance-Based Tax Incentive (SBTI) Safe Harbour as part of the Side-by-Side package. Subject to the detailed eligibility conditions, this safe harbour provides simplified GloBE treatment for qualifying substance-based tax incentives and may reduce compliance burdens for in-scope MNEs.

Developing countries should also consider non-tax incentives such as direct cash grants, government-funded infrastructure and employment support programmes. Properly designed grants and refundable incentives generally have a less adverse impact on the jurisdictional GloBE ETR than traditional tax holidays, tax exemptions and reduced corporate income tax rates, making them more effective tools for attracting investment in the post-Pillar Two environment.