Volume 9 • 2022 • Number transnational corporations investment and development

3. Treatment of incentives
As mentioned above, the GloBE Rules do not directly and expressly prohibit 
jurisdictions to adopt tax incentives or reduced rates within the CIT system. 
However, based on how the GloBE Rules are intended to operate, their effects 
might be undermined and risk being impacted by the charging of the top-
up tax by the UPE jurisdiction. If that happens, the jurisdiction granting the 
incentive would eventually give up taxing rights not in exchange for offering 
more favourable business environment but to the benefit of the tax revenue of 
the “topping-up” jurisdiction.
Notwithstanding this, the GloBE Rules and the Commentary explicitly determine 
that some untaxed (or undertaxed) income are not computed as part of the GloBE 
Income of a constituent entity, and that some types of tax benefits will not reduce 
the amount of adjusted covered taxes for GloBE purposes. This means that these 
income streams can be excluded from the denominator of the formula (the net 
GloBE income), and that these tax benefits will be included in the numerator 
(adjusted covered taxes), resulting in a higher ETR for the jurisdiction and therefore 
reducing the risk of application of the top-up tax by the UPE jurisdiction.
In essence, some tax benefits can be upheld by countries because they are not 
affected by the GloBE Rules, as they do not reduce the ETR for that location. Other 
types of incentives that have not been expressly mentioned in the Rules, however, 
do not share the same fate and may be undermined by the top-up tax.
The scope of this contribution is not to deplete the analysis of the impact of the 
GloBE Rules on each and every tax “incentive”
adopted by jurisdictions around the 
world, but to conceptually understand which incentives will be affected to a lesser 
extent by the GloBE Rules because their impact on the ETR calculation is somehow 
neutralized as a result of the operation of these rules and the express mention of 
them in the Model and its Commentary. Some other incentives that are commonly 
adopted by countries to attract FDI are also analysed in order to establish whether 
these will have their effects minimized by the application of the top-up tax.

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The treatment of tax incentives under Pillar Two
For this reason, the term “incentive” is used hereinafter in a broad sense, relating 
to the tax benefits granted by jurisdictions (especially to foreign investors) to attract 
FDI into their territories. The discussion on the meaning of the term “incentive” is 
not raised in this article (e.g. whether it means a more favourable tax treatment 
than the accounting treatment, or than what other countries normally adopt in their 
tax systems, or than other similar domestic situations, etc.). This is particularly 
due to the fact that each jurisdiction may define “taxable income” differently and 
deviations on its meaning would undermine a possible universal definition of the 
term “incentive”. Therefore, it is not the intention of this contribution to delve into 
dogmatic discussions about the use of the term “incentives”, as it could not be 
meaningfully defined in the abstract.
In addition, for the sake of simplicity, the present analysis focus only on CIT-related 
incentives, since the definition of covered taxes under the GloBE Rules includes 
basically taxes on corporate income. However, it is relevant to note that there is 
whole range of other tax incentives in the domestic tax systems of countries that 
are not affected by the GloBE Rules as they fall outside their scope.
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Thus, in light of the limitations set out above, when hereinafter we determine that an 
incentive is “impacted” by the GloBE Rules, we examine whether its effects would 
be affected by the top-up tax. This, naturally, presupposes the assumption that the 
circumstances fall within the scope of the GloBE Rules and that there is an excess 
profit beyond the standard return under the substance carve-out. Moreover, the 
analysis naturally presupposes that the application of the incentive leads to an ETR 
below 15 per cent: nothing in the rules, as they currently stand, suggests that an 
incentive that reduces the ETR from 25 to 20 per cent would be in any way affected.