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CA Final · Direct Tax Laws & International Taxation · Latest Developments in International Taxation

Under the Pillar Two design, a parent entity in Country A applies a rule requiring it to pay top-up tax on the low-taxed income of its foreign subsidiary in Country B. What is this primary rule called?

The rule is the Income Inclusion Rule. It is the primary GloBE mechanism, under which the parent entity pays top-up tax on the low-taxed profits of its foreign constituent entities. The Undertaxed Payments Rule is only a backstop when the IIR does not fully apply.

  1. AUndertaxed Payments Rule (UTPR)
  2. BSubject to Tax Rule (STTR)
  3. CIncome Inclusion Rule (IIR)Correct
  4. DSwitch-over Rule

Explanation

The Income Inclusion Rule is the primary GloBE rule: the parent entity brings into charge top-up tax on the low-taxed income of its constituent entities. The UTPR is a backstop that applies by denying deductions or adjustments where IIR does not fully apply. The STTR is a treaty-based rule on certain payments, and switch-over is a different mechanism.

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