February 2, 2023
OECD releases Pillar Two guidance
The OECD released on February 2, 2023, a long-awaited package of additional administrative guidance under Pillar Two. The guidance will be incorporated into a revised version of the Commentary to be issued later this year, replacing the original Commentary released in March 2022. In releasing this guidance, the OECD noted the additional guidance, together with the December 2022 releases (i.e., safe harbors, penalty relief, information return and tax certainty), finalizes the Implementation Framework set out in October of 2021. The Executive Summary acknowledges further guidance will be needed, on an ongoing basis, as countries implement the Pillar Two rules and issues arise after the rules are legislated into their domestic laws. The release explains the items addressed are those most in need of immediate clarification and simplification.
As expected, this first tranche of additional guidance addresses key issues around the implementation of Pillar Two. Possibly the most significant areas covered by the guidance include the treatment of certain non-refundable tax credits that flow through a tax-transparent entity and arise from an equity method investment, including:
The guidance sets out minimum standards for the QDMTT and makes clear that the tax base and the rate for QDMTTs can differ from the rules governing IIRs. QDMTTs can deviate from the GloBE rules but generally must produce a tax rate that equals or exceeds the GloBE's 15% minimum rate. As expected, a QDMTT must exclude tax paid or accrued by domestic constituent entities from the income of foreign constituent entities under its own CFC or taxable branch regimes. Therefore, GILTI and Subpart F taxes cannot be pushed down to impact the ETR of QDMTTs.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor