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February 9, 2023

OECD's Pillar Two Administrative Guidance raises implications for US multinationals

  • The Administrative Guidance creates uncertainty for US companies following US Generally Accepted Accounting Principles (US GAAP) by not addressing how the Global Anti-Base Erosion (GloBE) Rules affect US buyers in an intercompany asset sale.
  • The Administrative Guidance provides helpful, but complex, relief in the very specific fact pattern of recaptures of overall domestic losses.
  • Under the Administrative Guidance, any tax on global intangible low-taxed income (GILTI) will generally be allocated to lower-taxed jurisdictions (i.e., below 13.125% as computed under Pillar Two rules) that have not adopted a qualified domestic minimum top-up tax (QDMTT), thereby potentially reducing dollar-for-dollar any income inclusion rule (IIR)/ undertaxed profits rule (UTPR) liability that could arise for those jurisdictions.
  • A new Equity Investment Inclusion Election introduced in the Administrative Guidance could have major implications for US companies, both favorable and unfavorable, by requiring companies that make the election to include in the GloBE tax base all categories of equity gains or losses that are normally excluded.
  • The Administrative Guidance provides some helpful relief but likely also increases compliance burdens by creating a complex mechanism of tracking and tracing of deferred tax assets (DTAs) that will exist purely for GloBE and not for accounting purposes.

On February 2, 2023, the Organisation for Economic Co-operation and Development (OECD) / G20 Inclusive Framework on Base Erosion and Profit Shifting released Administrative Guidance on the Pillar Two GloBE Rules (the Administrative Guidance or AG). The AG supplements the previously issued GloBE Model Rules (Model Rules or MR) and Commentary.1

This Alert focuses on the following provisions of the AG, as they particularly impact US multinational enterprises (MNEs) due to unique rules under US GAAP and the Internal Revenue Code (the IRC):2

  • US GAAP and common control transactions (AG Article 2.1)
  • Overall domestic loss (ODL) recapture and foreign tax credit (FTC) carryforwards resulting from US losses offsetting United States GILTI/subpart F income (AG Article 2.8)
  • "Push down" of GILTI taxes to Constituent Entities and interaction of GILTI with QDMTTs (AG Article 2.10 and 5.1.3)
  • Inclusion in GloBE of stock gains/losses — equity-investment-inclusion election (AG Article 2.9)
  • Tax equity investments — Qualified flow-through tax benefits (AG Article 2.9)
  • Treatment of pre-GloBE FTC and general business credit carryforwards (AG Article 4.1)
  • Application of intercompany transfer transition rule to US GAAP common control transactions (AG Article 4.3)

While formulated as revisions to the Pillar Two Commentary issued in March 2022 (Commentary), the Administrative Guidance includes numerous new substantive rules and certain wholesale changes to specific MR provisions. As such, it appears that substantive changes to the rules can be made through Administrative Guidance (in the form of revisions to the Commentary). Considering that the Inclusive Framework appears unwilling to change the MR, additional future modifications to the rules may occur through this process.

Detailed discussion

US GAAP and common control transactions (AG Article 2.1)

For a disposition or acquisition of assets and liabilities between Constituent Entities of the same financial reporting group, MR Article 6.3.1 provides that the selling Constituent Entity "will include" any gain or loss recognized on the disposition in its computation of GloBE Income or Loss. In contrast, the Model Rules provide that the acquiring Constituent Entity "will determine" its GloBE Income or Loss using the carrying value (i.e., book basis) of the acquired assets and liabilities as determined under the accounting standards used in preparing the Consolidated Financial Statement (CFS) of the Ultimate Parent Entity (UPE). This rule is consistent with how intercompany transactions are generally recorded under International Financial Reporting Standards (IFRS). In particular, the selling Constituent Entity includes any gain or loss from the disposition on its pre-consolidation financial statement based on the difference between its carrying value of the assets and liabilities disposed and the consideration received. The buying Constituent Entity in turn would record the asset purchased at a carrying value equal to the consideration transferred to acquire the assets and liabilities, resulting in no deferred tax asset (DTA) (assuming the consideration transferred and tax basis in the buyer jurisdiction is at fair market value (FMV)).

In contrast, under US GAAP, an intercompany sale generally does not give rise to gain or loss on the seller's pre-consolidation ?nancial statement. The buyer would record the assets and liabilities at the seller's carrying value. If, for local country tax purposes, the buyer adjusts the basis of the purchased assets such that the adjusted local tax basis is greater than the financial statement carrying value, a DTA would be established in the year of the asset transfer.3 Under the GloBE rules, this result would reduce the buyer's adjusted Covered Taxes and calculated effective tax rate (ETR).4

This leaves two unanswered questions for intercompany sales accounted for under US GAAP. First, does the seller have to record income from the sale for GloBE purposes (notwithstanding the lack of income from a US GAAP perspective) and second, how does the buyer account for the transaction?

For the first question, AG Article 2.1 requires the seller to record gain or loss for GloBE purposes, notwithstanding the lack of gain or loss recorded for financial statement purposes. The guidance maintains that MR Article 3.2.3 requires this outcome, as it generally requires intercompany transactions to be recorded at FMV.

However, the AG does not answer the second question on the GloBE treatment of the buyer. Instead, the guidance simply states that, "The Inclusive Framework will develop further guidance, including possible simplifications, for an acquiring Constituent Entity to avoid any possible double taxation attributable to the MNE Group's accounting for intra-group transactions."


Not addressing the buyer treatment raises significant uncertainty for US MNEs. In general, the Pillar Two rules seek to create a system that taxes gain on assets once, generally based on realization events, without imposing tax due to differences in timing between book and tax. This objective generally works under IFRS since adjustments to basis for intercompany transactions are consistent with income/loss being recorded for financial statement purposes. In contrast, the objective is less effective under US GAAP, which treats intercompany transactions like equity transactions. This unique aspect of US GAAP also features prominently in the new AG rules on the special transition rule in MR Article 9.1.3, which is discussed later in this Alert.

The AG creates a one-sided adjustment to the seller without a corresponding adjustment to the buyer to reflect the income inclusion in the GloBE base. By suggesting that new rules are needed to avoid "possible double taxation," the AG seems to imply that the normal Pillar Two rules on deferred tax assets/liabilities will apply, so there will not be a basis increase for GloBE purposes. Although reversing the DTA commensurate with any amortization of the asset would provide relief, the DTA's recording in the year bought would result in a reduction in the jurisdiction's ETR (which makes little sense given that nothing happened other than an asset acquisition). This would result in clear double taxation. Guidance will swiftly be needed to either allow companies to increase their basis in the asset solely for GloBE purposes or allow the deferred tax benefit resulting from the DTA's recording to be ignored.

If the latter option is chosen, disparities will continue between US GAAP and IFRS given that a DTA recorded in a jurisdiction with a tax rate below 15% will have a different impact under GloBE than having the FMV carrying value in the asset for GloBE purposes.

ODL recapture and FTC carryforwards resulting from US losses offsetting GILTI/subpart F income (AG Article 2.8)

For US federal tax purposes, a US shareholder combines a GILTI or subpart F income inclusion with any other items of income, loss, deduction or expense (domestic or foreign) recognized in the same tax year. As a result, a US entity's domestic loss can offset its GILTI or subpart F income inclusion. This offset would reduce the US entity's FTC limitation, and could create an FTC carryforward. Furthermore, offsetting a US domestic loss against foreign-source income (e.g., a subpart F income or GILTI inclusion) generally creates an ODL account that would recharacterize domestic taxable income earned in a future year in the same FTC limitation (e.g., general or GILTI) as the foreign-source income offset in the year in which the ODL account was created.

These provisions of US tax law create difficulties with the overall approach of the Model Rules, which generally presume that income and losses arising in different jurisdictions are not netted.5 For example, certain non-US jurisdictions "wall off" a domestic loss from a controlled foreign corporation (CFC) inclusion in the same year, such that the domestic loss gives rise to a net operating loss (NOL). Instead, the CFC inclusion is subject to tax and an FTC is allowed. This type of system is more compatible with the Model Rules because the NOL creates a DTA that reverses and results in an addition to Covered Taxes when the NOL is used in a subsequent year.

In contrast, under the U.S. tax system, no NOL is generated to the extent the domestic loss offsets foreign income, so no DTA is created. Instead, a DTA for an FTC carryforward may be created, but that DTA does not result in adjustments to Covered Taxes under MR Article 4.4.1(e) (which excludes the deferred tax expenses associated with tax credits, including FTCs for purposes of computing Covered Taxes). In addition, no DTA is created with respect to an ODL account. As a result, for a US entity that has a GILTI or subpart F income inclusion offset by a domestic loss, subsequent domestic income that results in an ODL recapture that allows for a utilization of FTC carryforwards will give rise to a reduced GloBE ETR in the United States. A similarly reduced GloBE ETR will result if the ODL recapture allows for additional cross crediting of current-year excess FTCs. This taxpayer-unfavorable result occurs notwithstanding the fact that the ODL recapture resulted from a timing item related to having a domestic loss in one year and domestic income in a subsequent year. This penalizes US companies relative to non-US companies that reside in jurisdictions with a "wall off" approach to domestic loss.

The AG states that it wants to ensure "functionally equivalent outcomes" between countries with a "wall off" approach versus those that do not. Specifically, the AG turns off the normal rule under Article 4.4.1(e) (which excludes deferred tax expenses from tax credits) and instead requires taxpayers to create a "Substitute Loss Carry-forward DTA," which arises if the following three conditions are met:

  1. The jurisdiction requires foreign-source income to offset domestic-source losses before FTCs may be applied against tax imposed on foreign-source income.6
  2. The Constituent Entity has a domestic tax loss that is fully or partially offset by foreign-source income
  3. The domestic tax regime allows FTCs to be used to offset a tax liability in a subsequent year in relation to income that is included in the computation of the Constituent Entity's GloBE Income or Loss

If a taxpayer satisfies these conditions, which appear to closely track ODL scenarios for subpart F income inclusions under US tax law, then any deferred tax expense attributed to the Substitute Loss Carry-forward DTA is included for purposes of computing Covered Taxes in the year the DTA reverses, but only to the extent that the FTC carryforward giving rise to the Substitute Loss Carry-forward DTA offsets tax on income included in the Constituent Entity's GloBE Income or Loss (e.g., domestic-source income that results in ODL recapture). The Substitute Loss Carry-forward DTA is subject to MR Article 4.4.1(a) (which excludes deferred tax expenses for items excluded from the computation of GloBE Income or Loss for purposes of computing Covered Taxes) and must be recast at 15% (see later discussion of pre-GloBE FTCs carryforwards for a description of how these amounts would be recast).

If a jurisdiction prohibits FTC carryforwards but permits excess FTCs in a subsequent year to offset tax on domestic-source income recharacterized as foreign-source income (i.e., the fact pattern when an ODL arises relative to a GILTI inclusion, for which FTC carryforwards are not allowed), the rule further requires "equivalent adjustments" under the Administrative Guidance. The adjustments, however, would only be made to the extent allowable FTCs are increased by reason of the recharacterization.

Two examples are provided, one involving FTC carryforwards that are utilized upon ODL recapture (i.e., ODL with subpart F inclusion), and another involving ODL recapture that allows for additional cross crediting (i.e., ODL with GILTI inclusion).


The new Substitute-Loss-Carry-forward-DTA rule provides helpful, but complex, relief in the very specific fact pattern involving ODL recapture. The examples in the AG assume that it is easy to determine the precise source and quantity of FTCs that are used in reference to ODL recapture and assume only one type of income (GILTI or subpart F income) and one basket of FTCs. The rules also do not appear to address when a separate limitation loss (SLL) (for example, a foreign-source passive-basket loss that offsets foreign-source general-basket income) exists under IRC Section 904(f)(5) and is recharacterized in a subsequent year, resulting in additional FTC usage.

Furthermore, the new guidance only addresses DTAs that result in adjustments to the Covered Taxes of the shareholder entity (i.e., the US entity in a CFC inclusion). However, the US tax rules' netting of domestic losses with CFC income inclusions also raise issues with the computation of taxes that can be "pushed down" to the CFC jurisdiction under Article 4.3.2. This issue is further discussed later in relation to the push down of GILTI taxes.

The AG further states that the Inclusive Framework will consider extending the Substitute Loss-Carry-forward-DTA mechanism in the context of permanent establishments, "recognizing that some differences in mechanisms may be necessary given certain differences between the two contexts." This suggests that the rule is limited only to ODLs arising from CFC inclusions, and not foreign-source income arising from a branch (or foreign-source income earned directly by the US entity). The title to the rule also references only CFC inclusions. The rule itself, however, is not clear on this point and does not appear to exclude application to non-CFC-regime fact patterns.

Push down of GILTI taxes to Constituent Entities and interaction of GILTI with QDMTTs (AG Articles 2.10 and 5.3)

MR Article 4.3.2 requires CFC taxes paid in an owner's jurisdiction to be allocated to the jurisdiction of its CFCs to properly match those taxes to the GloBE Income to which they relate. This means that CFC taxes (e.g., as a result of a GILTI or subpart F income inclusion) are included in the jurisdictional ETR of the CFC jurisdiction. It was unclear, however, whether this "push down" approach applies also to QDMTTs.

In an important and long-awaited clarification, the AG specifies that CFC regime taxes and taxes imposed on a permanent establishment by the head office are not pushed down for purposes of computing QDMTTs. The AG states that this will allow the QDMTT to "operate as a simple calculation" without requiring CFC tax allocations, and is "aimed at attributing primary taxing rights" to the QDMTT jurisdiction.

For GILTI purposes, this means that a QDMTT is analyzed like any other local foreign tax imposed on a CFC. This also means that allocating CFC taxes is irrelevant for purposes of computing QDMTT liability. It is also irrelevant to the extent that there is no remaining top-up tax under an IIR or UTPR for the QDMTT jurisdiction (or the QDMTT itself becomes a safe harbor that turns off any IIR/UTPR, an issue that the AG reserves). For jurisdictions that have not adopted a QDMTT, however, the allocation of CFC taxes remains relevant to the extent that an IIR or UTPR applies to those jurisdictions' profits.

The AG provides a simplified allocation methodology for a "Blended CFC Tax Regime." Such regimes must aggregate income, losses and foreign taxes of all relevant CFCs for purposes of computing the shareholder's CFC regime liability, and the "Applicable Rate" must be less than 15%. The Applicable Rate is defined as "the minimum rate at which foreign taxes on CFC income generally fully offsets [sic] the CFC tax." The AG specifically states that, "in the case of GILTI, the Applicable Rate is 13.125%." The AG does not state that this rate varies under any circumstances, including if the IRC Section 250(a)(2) limitation applies or the allocation of expenses under IRC Section 904 reduces creditable foreign taxes.

The following rules apply for purposes of allocating any GILTI tax paid by a US shareholder to its CFCs:

  1. Determine the GILTI tax paid by the US shareholder (Allocable Blended CFC Tax):
    1. This equals the GILTI inclusion amount multiplied by the IRC Section 250 deduction percentage multiplied by the 21% corporate tax rate, reduced by any allowed GILTI FTCs.
    2. According to the AG, these amounts should be based on the US shareholder's US tax return.
    3. In addition, the GILTI inclusion amount is determined in this manner "in the absence of a domestic loss."
  2. Determine each CFC's income that relates to the GILTI inclusion (Attributable Income)
    1. An entity's Attributable Income is the US shareholder's pro rata share of that entity's tested income, without regard to foreign income taxes
    2. This could be for a CFC or a "tested unit" (such as a disregarded entity or partnership held by a CFC)
  3. Compute a hypothetical ETR for each jurisdiction with entities subject to GILTI (GloBE Jurisdictional ETR)
    1. ETR for the jurisdiction is computed per MR Article 5.1, but without regard to any CFC Regime taxes
  4. Compute "Blended CFC Allocation Key"
    1. The allocation key equals the Attributable Income of each entity multiplied by 13.125% minus the GloBE Jurisdictional ETR
    2. This key appears to be a proxy for the hypothetical top-up tax that would be owed under the IIR/UTPR, absent taking into account GILTI taxes
    3. If GloBE Jurisdictional ETR is > 13.125%, the Blended CFC Allocation Key is zero
  5. Allocate GILTI tax to Constituent Entities ratably based on Blended CFC Allocation Key
    1. Amounts allocated to entities that are not Constituent Entities (for example, a CFC that the US shareholder does not consolidate for financial accounting purposes) are excluded

This methodology only applies for Fiscal Years (generally defined in the Model Rules as the UPE's fiscal year for consolidated financial statement purposes) that begin on or before December 31, 2025 (e.g., calendar years 2024 and 2025) but not including a Fiscal Year ending after June 30, 2027 (which is relevant only for fiscal years exceeding 12 months). It is unclear what methodology would apply for years after this period. Even if this methodology were extended, it would not appear to be available for GILTI to the extent that the IRC Section 250 deduction for GILTI income decreases to 37.5% (resulting in an Applicable Rate of 16.4%, which is greater than the 15% rate that is allowed for a CFC regime to be a Blended CFC Tax Regime).


Under the allocation rule for Blended CFC Tax regimes, it appears that any GILTI tax will generally be allocated to lower-taxed jurisdictions (i.e., below 13.125% as computed under Pillar Two rules) that have not adopted a QDMTT, thereby potentially reducing dollar-for-dollar any IIR/UTPR liability that could arise with respect to those jurisdictions. This is true even when GILTI tax arises due to the allocation of US expenses to higher-tax CFCs — any resulting GILTI tax is allocated to lower-taxed entities and not the higher-tax entities that attracted the US expense. No GILTI tax will generally be allocated to QDMTT-adopting jurisdictions since their GloBE Jurisdictional ETR is expected to be 13.125% or higher (as computed under GloBE rules).

The AG apparently does not address the interaction between the GILTI tax allocation rule and the transitional country-by-country reporting (CbCR) safe harbor rules that were issued in December 2022.7 For example, it is unclear whether the transitional CbCR ETR calculations can be used for computing the GloBE Jurisdictional ETR, instead of using the Model Rules, for purposes of applying the GILTI tax allocation rule. Given that the safe harbor rules are elective, clarification on this issue is needed to allow companies to analyze whether a safe harbor election makes sense. Companies will also need to carefully consider the impact of electing (or not electing) the GILTI high-tax election on the allocation of GILTI taxes.

The AG states that the Attributable Income of each "tested unit" (generally a concept used for purposes of the GILTI high-tax election) can be determined based on the US shareholder's US federal income tax return. Presumably, this could include income reported on a Form 5471 and accompanying Schedule Q. Companies will need to carefully review their Form 5471 filings to determine the interaction with the GILTI allocation rules.

The rules do not cover other US tax provisions that tax foreign income on a blended basis — including US taxation of multiple foreign branches (for which losses and FTCs are computed for branches together) as well as the corporate alternative minimum tax (CAMT), which taxes CFC income at a 15% rate with blending of losses and FTCs. In fact, the AG appears to explicitly exclude CAMT from the Blended CFC Tax Regime because the rule applies only if the CFC regime rate is "less than 15%" and does not apply if the regime "takes into account a group's domestic income."

The AG does not specify whether countries are expected to give an FTC for QDMTTs. Clarity from US Treasury and IRS on this point would be welcome. The AG does state, though, that QDMTTs are included in the GloBE Jurisdictional ETR computation (similar to a Covered Tax) only if they are allowed as an FTC under the CFC regime. Covered Taxes that are not allowed as an FTC under US rules (e.g., taxes that do not satisfy the attribution requirement in Treas. Reg. Section 1.901-2), however, are still included in the GloBE Jurisdictional ETR computation. Therefore, these taxes will affect the allocation of GILTI tax in the same way as creditable taxes.

When a QDMTT applies to multiple Constituent Entities in a jurisdiction, the AG permits countries to decide how to allocate the tax liability to particular Constituent Entities. The AG also states that the Inclusive Framework will consider providing further guidance on this matter "where this is necessary for the proper functioning of the GloBE Rules." The specific entity that is legally liable for the tax will raise additional questions about which legal entity (from a US tax perspective) is legally liable for the QDMTT for US FTC purposes under Treas. Reg. Section 1.901-2(f). Additional guidance on applying Treas. Reg. Section 1.901-2(f)(3) (relating to the imposition of tax on combined income of two or more persons) may be needed to account for the unique features of the QDMTT.

Taken all together, the Pillar Two rules could result in at least four different ETR calculations for GloBE purposes for any given jurisdiction, each of which could trigger different reporting requirements. These calculations include:

  • The transitional CbCR ETR safe harbor
  • The ETR for QDMTT purposes (which does not include CFC regime allocation and could be based on local statutory accounting rather than the UPE's financial accounting standard)
  • A hypothetical GloBE Jurisdictional ETR for purposes of the GILTI allocation
  • The actual ETR under the Model Rules (taking the push down of GILTI taxes into account) for purposes of determining any top-up tax imposed under an IIR or UTPR

Inclusion in GloBE of stock gains/losses — equity-investment-inclusion election

The Model Rules exclude three categories of income/loss from equity investments from the GloBE tax base. These three categories, collectively called "Excluded Equity Gain or Loss," generally consist of:

  • Gains and losses from changes in fair value of an equity interest in an entity, other than portfolio interests
  • Profit or loss from an equity interest accounted for under the equity method of accounting
  • Gains and losses from disposition of an equity interest, except for a disposition of a portfolio interest

The exclusion of the first and third categories generally reflects an approach to the GloBE rules whereby gain/loss on outside stock interests are ignored. In addition, the second exclusion seems to reflect a broader policy to exclude non-controlled entities from the scope of GloBE.

MR Article 4.1.3(a) requires tax expense to be excluded from Covered Taxes to the extent the tax is imposed on income that is excluded from the GloBE tax base, including Excluded Equity Gain or Loss. The Commentary provides, as an example, a situation in which a partner's distributive share of income from a tax-transparent entity is excluded from the GloBE tax base as Excluded Equity Gain or Loss due to the entity being accounted for under the equity method of accounting. The taxes paid on the partner's distributive share of that income is commensurately excluded under MR Article 4.1.3(a). A similar situation arises for stock gains — for example, if a US company's gain from the sale of CFC stock gives rise to US tax, the gain is excluded from the GloBE ETR denominator, while any US tax is excluded from the numerator.

This Excluded-Equity-Gain-or-Loss rule, however, raises the question of what happens when an excluded amount is a loss that gives rise to a tax benefit (e.g., in the form of a tax deduction). It was unclear whether MR Article 4.1.3(a) could be interpreted to allow for an increase to Covered Taxes to reflect the elimination of a tax benefit from an excluded loss. Absent such an increase to Covered Taxes, there would be asymmetric treatment of the excluded loss for purposes of the numerator versus the denominator of the ETR calculation. This situation could arise if the MNE were a partner in a partnership accounted for under the equity method and the partnership had a loss. It could also arise if a shareholder recognized a loss on a stock sale or claimed a worthless stock deduction (or participation impairment, as is available in certain countries like Switzerland).

The AG resolves this issue first by not allowing an increase to Covered Taxes for the elimination of a tax benefit from an excluded loss. Instead, the AG seeks to create symmetry by allowing companies to make a five-year election (called an "Equity Investment Inclusion Election"), on a per-jurisdiction basis, not to apply the exclusion rule in MR Article 3.2.1(c) for the following three categories of Excluded Equity Gains or Losses:

  • Fair value gains and losses and impairments on an Ownership Interest where the owner is taxable on a mark-to-market basis, or the owner is taxable on a realization basis and the income tax expense includes deferred tax expense from the mark to market movements
  • Any income or loss attributable to a tax-transparent entity that is accounted for under the equity method
  • Dispositions of an Ownership Interest that give rise to gains or losses that are "included in the owner's domestic taxable income," but exclude any gain that is reduced by "deductions or other similar relief" such as a participation exemption

At the same time, all taxes (including deferred taxes) on these three categories must be reflected in Covered Taxes (essentially turning off MR Article 4.1.3(a), as well as MR Article 4.4.1(a), which normally excludes deferred tax adjustments related to excluded amounts). This election, once made, applies to all Ownership Interests held for that jurisdiction.

According to the AG, "[t]he Inclusive Framework will also consider providing further guidance on the application of the Model Rules that would prevent artificial structuring that generates or shifts artificial losses among or to Constituent Entities of an MNE Group, including exploring rules to prevent an MNE Group from using a reorganisation to shift artificial losses into a jurisdiction to shelter low-taxed income."


The Equity Investment Inclusion Election is a significant change from the existing Model Rules and could have major implications, both favorable and unfavorable. For example, it appears that, if made, the election applies to all three categories of Excluded Equity Gains or Losses. As a result, a taxpayer cannot, for example, include stock gains but exclude gains from a partnership accounted for under the equity method.

For US taxpayers, making the election raises numerous questions with respect to the US tax treatment of stock gains. For example, CFC stock gain can be recharacterized in part or whole under IRC Section 1248 as a dividend that is potentially eligible for a dividends-received deduction under IRC Section 245A. An IRC Section 338(g) election may also result in stock gain being treated as a sale of operating assets that generates GILTI income for US tax purposes (and potentially eligible for an IRC Section 250 deduction) even if stock gain is recognized for financial statement (and presumably GloBE) purposes. IRC Section 961 applies to adjust the basis of CFC stock to the extent the CFC gives rise to GILTI or subpart F inclusions. The interaction of these US rules and the new Equity Investment Inclusion Election will raise numerous questions, particularly on determining how to match GloBE income or loss (which is generally determined under financial accounting concepts) with the relevant US tax gain/loss. In addition, the absence in the GloBE rules of a provision similar to IRC Section 1248 means that disparate treatment will arise from stock gains versus dividend income, which remains excluded under MR Article 3.2.1(b) and is not covered by the Equity Investment Inclusion Election. Similarly, it appears that local taxes imposed on stock gains will be allocated to the shareholder jurisdiction, which differs from taxes on dividends, which are generally allocated to the payor jurisdiction under MR Article 4.3.2.

Moreover, it appears that the Equity Investment Inclusion Election applies to a Constituent Entity that is consolidated line by line (and not accounted for under the equity method), even if that entity is tax transparent. As a result, gains (and relevant US taxes) as well as losses from the sale of a partnership interest will be included in GloBE income and Covered Taxes. The inclusion of these amounts and how they interact with the existing subchapter K rules may raise significant complexity.

Furthermore, under US GAAP, the book basis in a consolidated entity increases or decreases by its current-year income or loss, respectively. These book basis adjustments will further exacerbate the potential differences between stock basis as determined under US tax law versus the GloBE rules. The Equity Investment Inclusion Election appears to contemplate that the amount of gains or losses from stock sales will closely match for book and tax purposes; it is unclear how the rules will apply when these amounts vary. Careful consideration will be needed when this new election interacts with US rules on stock sales and IRC Sections 245A, 961, 1248, and 964(e), among others.

Furthermore, differences in the book basis versus the tax basis of stock can give rise to deferred tax consequences. Under ASC 740-30-25, there are certain exceptions to recording deferred tax liabilities (DTLs) related to book/tax basis differences in consolidated entities, including where a company can assert an intent and ability to indefinitely reinvest the earnings of a foreign subsidiary, and to recording DTAs for basis differences that are not expected to be realized in the foreseeable future. A company can generally no longer apply these exceptions when a sale is contemplated. Thus, there generally would be deferred taxes to include in Covered Taxes at the time management can no longer assert the intent to reinvest undistributed earnings indefinitely and a DTL is recorded (or a DTA is recorded because it is expected to reverse in the foreseeable future), and again when the sale is completed and the existing deferred tax balances are reversed. The interaction of US GAAP for stock ownership with the new Equity Investment Inclusion Election raises numerous questions that will require further analysis and potentially additional guidance.8

The AG's reference to "artificial structuring that generates or shifts artificial losses among or to Constituent Entities of an MNE Group" is unclear. It could be the IF is considering rules similar to IRC Sections 1059 or 961(d) for purposes of limiting deductions for stock losses.

Tax equity investments — Qualified flow-through tax benefits

In the United States, it is common for certain companies to participate in "tax equity investments" to obtain the benefit of certain US tax credit incentives. These investors typically invest cash into a US partnership that has an unrelated "sponsor" as one of its partners. The sponsor manages and controls the partnership, which invests in certain activities (e.g., low-income housing or generation of renewable energy) giving rise to non-refundable US tax credits. These non-refundable tax credits are monetized through tax equity investments, which are allowed under rules promulgated by the IRS.9 A disproportionate amount of the tax credits and tax benefits (in the form of US tax losses from depreciation) are allocated to the investor.

Because these investments are accounted for under the equity method (or in some cases, other methods may be applied, such as proportional amortization or hypothetical liquidation at book value), any income/loss from the investment is excluded from GloBE income under MR Article 3.2.1(c). Losses, which generally result from these tax equity investments, are excluded from GloBE and increase the GloBE ETR denominator. Absent an adjustment to the GloBE ETR numerator to increase Covered Taxes to back out tax benefits (in the form of both credits and tax-deductible losses) from these investments, the investor's GloBE ETR could be significantly negatively impacted by these investments, making them potentially economically infeasible.

As the AG prohibits upward adjustments to Covered Taxes under MR Article 4.1.3(a), the new Equity Investment Inclusion Election would not address the issues raised by tax equity investments which depend heavily on tax credits.

Instead, the AG introduces special rules that apply to a "Qualified Ownership Interest" for which an Equity Investment Inclusion Election is made. A Qualified Ownership Interest, which is governed under a separate rule for "Qualified Flow-Through Tax Benefits," means an Ownership Interest in a transparent entity that is:

  • Consolidated on a line-by-line basis in the investor's financial statements
  • Expected to have a total return (including distributions and benefits of tax losses, but excluding nonrefundable tax credits) that is less than the total amount invested by the owner of the Ownership Interest, such that a portion of the investment will be returned in the form of nonrefundable tax credits

The reference to any interest that is not consolidated appears to be designed to confirm that investors accounting for a tax equity investment under methods such as proportional amortization or hypothetical liquidation at book value still meet the requirements for a Qualified Ownership Interest.

When tax benefits (including both tax loss deductions and tax credits) reduce Covered Taxes, the AG generally permits an upward adjustment to Covered Taxes for Qualified Flow-through Tax Benefits. The Qualified-Flow-through-Tax-Benefits rule permits an upward adjustment only to the extent the tax benefits are treated as reducing an owner's investment in the partnership, after also taking into account cash distributions and any residual value from the investment. The rule effectively allows tax benefits (which, as an initial matter, reduce the tax expense included in Covered Taxes) to be added back to Covered Taxes, up to the amount of the investor's investment (taking into account any cash and residual value) in the tax equity investment.


The effect of the Qualified-Flow-through-Tax-Benefits rule bears some conceptual similarities to the "proportional amortization" method allowed under US GAAP for tax equity investments that generate low-income housing tax credits. The guidance is silent, however, on the exact timing of when the Qualified Flow-Through Tax Benefits apply to tax equity investments, which are typically long-term investments spanning many years. The AG states that this question will be addressed in further guidance. It also states that further guidance will be provided on the following other issues: (1) how to account for tax equity investments that generate refundable (instead of non-refundable) tax credits (which could be relevant to certain credits that are allowed under the Inflation Reduction Act of 2022 and are eligible for "direct pay" treatment and therefore treated as refundable), (2) how to account for investments that generate taxable income in certain years (which can arise towards the end of certain renewable energy investments), (3) how to take into account "the applicable accounting treatment applied to the tax benefits," which appears to acknowledge that GAAP currently allows different methods to account for various types of tax equity investments, and (4) providing consistent treatment of Qualified Flow-through Tax Benefits by other parties to the tax equity investment structures, i.e., the sponsor.

The new guidance does not address the question of transferable tax credits, which could affect many of the energy-related tax credits in the Inflation Reduction Act. To the extent these credits are not generated through tax equity investments, they would not qualify for Qualified-Flow-Through-Tax-Benefit treatment.

Treatment of pre-GloBE FTCs and general business credit carryforwards (AG Article 4.1)

Under MR Article 9.1.1, all DTAs and DTLs reflected or disclosed in an MNE's financial accounts at the beginning of its first GloBE year are taken into account for purposes of computing the MNE's ETR in that first GloBE year and in all subsequent years. This rule is intended to be a simplified transition rule that allows MNEs to rely on existing deferred tax balances on their financial accounts to smooth out timing differences that cross between pre- and post-GloBE years. DTAs must be recast to the lower of 15% or the applicable tax rate.

MR Article 4.4 provides the general rules for how to take into account DTAs and DTLs under GloBE for purposes of adjusting Covered Taxes. MR Article 4.4.1 provides that certain DTAs or DTLs are not taken into account under GloBE; in particular, MR Article 4.4.1(e) excludes deferred tax expenses from the generation and use of tax credits. The Commentary to this article further clarifies that DTAs from FTC carryforwards are encompassed within the MR Article 4.4.1(e) exclusion.

In the context of MR Article 9.1.1, it was unclear whether the Article 4.4.1(e) exclusion applied to pre-GloBE DTAs that were reflected in the Constituent Entity's first GloBE year. Furthermore, to the extent that a DTA is allowed under MR Article 9.1.1, it was unclear how this DTA should be recast to 15% (if at all), given that the DTA is recorded based on the actual amount of the tax credit rather than the statutory tax rate.

AG Article 4.1 clarifies that MR Article 4.4.1(e) does not apply, so pre-GloBE DTAs arising from tax credits can be taken into account in post-GloBE years. However, the guidance further requires the DTA to be recast to 15% when the jurisdiction has a statutory rate above 15%. The recast is computed by multiplying the DTA by 15% and dividing by the jurisdiction's statutory tax rate. The justification behind the formula is that dividing the DTA by the statutory rate represents the amount of domestic taxable income for which the tax liability will be completely sheltered by the tax credit. Multiplying this amount by 15% represents the amount of the DTA that is therefore allowed to shelter only 15% of the deemed domestic taxable income.

For DTAs from tax credits arising in the United States, the formula should generally result in a 6/21 (the numerator being the difference between the 21% statutory rate and 15%, and the denominator being the statutory rate) = 28.57% haircut on the DTA.


The clarification in AG Article 4.1 is welcome news to US taxpayers with significant FTC or general business credit carryforwards. The rule also applies to credit carryforwards arising from the CAMT under IRC Section 53. These CAMT credits would generally give rise to DTAs. Absent the clarification in AG 4.1, using these credit carryforwards (to the extent generated in 2023 and potentially 2024, depending on when the US entity first became subject to GloBE) in post-GloBE years could have reduced Covered Taxes and potentially created top-up tax.

The rule, however, only applies to DTAs arising in pre-GloBE years. For DTAs arising in post-GloBE years, MR Article 4.4.1(e) continues to apply. Excluding DTAs means that Covered Taxes do not decrease in the year a tax credit carryforward is generated (and a DTA is created), but do decrease when the tax benefit from the credit is utilized. Thus, the MR Article 4.4.1(e) rule could be favorable or unfavorable to taxpayers, depending on a taxpayer's particular facts. This is particularly true for CAMT credits, given the complex interaction between the CAMT base (applicable financial statement income or AFSI) and the GloBE base, taking into account the limitation on CAMT credits in IRC Section 53(c).

The rule described previously for parent losses that offset GILTI or subpart F inclusions ameliorates some of the impact of the MR Article 4.4.1(e) in that particular circumstance by providing a GloBE-specific Substitute-Loss-Carry-forward DTA in lieu of the actual DTA recorded for an FTC carryforward.

Application of intercompany-transfer-transition rule to US GAAP common control transactions (AG Article 4.3)

MR Article 9.1.3 does not allow a basis step-up under GloBE for an intergroup transfer of assets (other than inventory) performed after November 30, 2021, and before an entity's first GloBE year. Instead, the basis in the acquired assets is determined using the seller's carrying value, "with the deferred tax assets and liabilities brought into GloBE determined on that basis." The rule is apparently intended to prevent MNEs from benefiting from amortization deductions for basis step-ups on assets for which any built-in gain was triggered after November 30, 2021 (which was the date that the Model Rules became publicly available to some, although they were not published until several weeks later).

As noted in the context of the discussion above relating to AG Article 2.1, an intercompany sale generally does not give rise under US GAAP to income or loss on the seller's pre-consolidation ?nancial statements. If the buyer records a step-up in basis for local country tax, however, a DTA is recorded at the buyer level in the year of the acquisition.10

Like MR Article 6.3.1 (discussed previously), MR Article 9.1.3 appears designed for the IFRS method of accounting for intergroup sales, whereby the buyer will record the asset's carrying value at FMV. Therefore, it was unclear how MR Article 9.1.3 would apply to US GAAP common control transactions given that US GAAP does not allow basis step-ups.

AG Article 4.3.3 directly addresses this question and clarifies that a DTA created in connection with an intercompany sale would "affect the applicability of the GloBE Rules in much the same way as allowing the step-up in carrying value of the asset for GloBE purposes." In other words, the rules treat a DTA as giving rise to GloBE tax benefits in the same way as a basis step-up would. As a result, the AG disallows any corresponding DTA or DTL created as a result of a transaction covered under MR Article At the same time, however, DTAs and DTLs that "existed in the financial accounts of the MNE Group prior to the [MR Article 9.1.3] transaction" are not excluded under the rule.

Separately, taxpayers had criticized MR Article 9.1.3 for being overly mechanical and applying to transactions in which gain was subject to significant local tax. Disallowing basis (and subsequent amortization benefits) to the buyer under GloBE would arguably result in double tax on the same built-in gain that had already been taxed to the seller, to the extent that the local tax amortization reduced the buyer's future ETR below 15%.

AG Article 4.3.3 responds to this criticism by providing relief in the form of a "deemed" DTA that exists purely for GloBE purposes and is recorded based on the rate of tax imposed on the intercompany sale (but not higher than 15%). For example, if the seller paid 21% tax on $100 of gain from an asset, the buyer could record a DTA equal to $15, even if a DTA is not otherwise recorded on the buyer's books (because, for example, the buyer is in a jurisdiction with a 0% tax rate). Furthermore, the guidance clarifies that recording this GloBE-specific DTA does not reduce Covered Taxes (which would normally be the case when there is a deferred tax benefit).

This new rule also allows a favorable deemed DTA to be created at the buyer level when the seller does not pay cash tax but has instead either (1) utilized a DTA that would have been allowed under Article 9.1.1 but was reversed by the gain, or (2) hypothetically would have created a DTA but for the asset sale. For example, a deemed DTA is allowed at the buyer level if the seller sells the asset in a year in which it had (1) a preexisting NOL carryforward (which was also recorded as a DTA), or (2) separate loss items that offset the gain on the sale (but would have otherwise resulted in an NOL and DTA had the sale not occurred). This fact pattern could also result when the seller does not pay cash tax on the sale due to the use of current-year or carryforward FTCs.

The AG allows this deemed DTA even when tax is not paid by the seller but is paid by a shareholder on income that would normally be "pushed down" under MR Article 4.3. As a result, GILTI or subpart F tax paid by a US shareholder on an asset transfer of a CFC could give rise to a deemed DTA at the buyer level, subject to the MNE having the burden of proving that such tax was "attributable" to the transaction and would have been allocated to the seller under the "principles of [MR] Article 4.3."


The AG's clarification that MR 9.1.3 does not allow a DTA created in connection with a US GAAP common control transaction was expected and had been referenced in OECD Secretariat comments at an April 2022 public consultation.12 Furthermore, the additional rules providing deemed DTA treatment in connection with local taxable gain (including when preexisting DTAs offset that gain ) provide welcome relief to taxpayers with taxable intercompany transactions during the transition period, which are common as part of post-integration transactions.

However, the rules create a complex mechanism of tracking and tracing of DTAs that will exist purely for GloBE and not for accounting purposes. In particular, an example in the AG clarifies that MR 9.1.3 requires two separate steps in a US GAAP common control transaction where the seller has taxable gain and the buyer records a DTA under US GAAP due to a local tax step-up. First, the DTA that is actually recorded for US GAAP purposes is disallowed. Second, a new (and purely GloBE-specific DTA) is created instead. The new GloBE DTA is recorded based on the rate of tax imposed in the seller jurisdiction, not on the buyer's statutory rate (as would be the case with the DTA that is actually recorded at the buyer level). Tracking these GloBE-specific DTA accounts as they reverse will require significant work by taxpayers. In particular, the AG requires the deemed DTAs created at the buyer level to be adjusted annually in proportion to any decrease in the carrying value due, for example, to depreciation, amortization or impairment. It is unclear, however, how this rule will apply in the US GAAP context since the buyer records the asset at cost and therefore may have little to no depreciation/amortization of the asset. Under AG Example 9.1.3-2, it appears that the rule is intended to reverse the deemed DTA based on the reversal of the actual DTA that was recorded in the buyer's books (but was disallowed under MR Article 9.1.3).

In addition, the AG does not clarify whether the GloBE-specific adjustments to carrying values or DTA/DTLs that are required under Article 9.1.3 are maintained when the Constituent Entity holding the asset is subsequently sold to an unrelated MNE group that is subject to GloBE.


The AG provides welcome answers on numerous areas important to US MNEs, but still leaves many questions unaddressed. The AG itself references the need for further work, noting that "the Inclusive Framework will continue to consider Administrative Guidance priorities on an ongoing basis, where more clarity is required, with the aim of releasing guidance throughout the year as soon as it is agreed so that the Inclusive Framework members can meet their implementation schedule."

In addition, guidance from US Treasury and the IRS on the US law interactions with Pillar Two will be needed, particularly as related to GILTI and CAMT, as well as the FTC rules more generally.

Ultimately, though, implementation and enforcement of a global minimum tax will rest with foreign countries that are implementing Pillar Two. Companies will need to also closely follow the domestic law implementation of the Pillar Two rules to confirm that the rules are adopted consistently and incorporate the new AG.


Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young LLP (United States), International Tax and Transaction Services
   • Craig Hillier (
   • Jason Yen, Washington, DC (
   • David Wachutka, San Jose, CA (
   • Jeshua Wright, Washington, DC (
   • Bona Chung, Washington, DC (
   • Shivani Mehra, Washington, DC (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor



1 Any capitalized terms that are not defined in this alert has the same meaning as the terms defined in the MR, Commentary, or AG.

2 For a more general overview of all aspects of the Administrative Guidance, see Tax Alert 2023-0206.

3 See ASC 805-50-30-5.

4 See Angela Evans, Colleen O'Neill, and Jason Yen, Mind the GAAP! U.S. Multinationals May Struggle With Pillar Two Treatment of Intercompany IP Transfers, 51 Tax Mgmt. Int'l J. No. 7 (July 1, 2022).

5 One exception is MR Article 4.3.4, which provides special rules for netting a loss of a permanent establishment with the income of the head office in jurisdictions that tax branch income on a worldwide basis.

6 It appears that the references to "domestic" versus "foreign source" are meant to distinguish between income/loss attributable to the shareholder versus income/loss attributable to another Constituent Entity (i.e., income generated by a CFC that is included in the shareholder's income), rather than IRC Section 861 sourcing concepts.

7 See Tax Alert 2022-1928.

8 In the context of dividends, MR Article 4.4.6(b) disallows deferred tax expenses from distributions from a Constituent Entity on the grounds that an MNE Group generally decides the timing of such distributions.

9 The IRS has promulgated safe harbors for how to structure these transactions (see, e.g., Revenue Procedure 2007-65, which is the safe harbor for tax equity transactions involving wind farms, and Revenue Procedure 2014-12, which is the safe harbor for tax equity transactions involving the rehabilitation of historic structures). It also generally provided comfort to these transactions by including them on the "Angel's List" exclusions to the Reportable Transaction rules as part of Revenue Procedure 2004-66.

10 See ASC 805-50-30-5.

11 AG Article 4.2 also significantly expands the scope of transfers and other "similar" transactions that are subject to Article 9.1.3.

12 See Tax Alert 2022-0696.