February 10, 2023 OECD/G20 Inclusive Framework releases Administrative Guidance under Pillar Two GloBE Rules: Detailed Review
Executive summary On 2 February 2023, the OECD released Administrative Guidance on the Pillar Two GloBE Rules, as approved by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). This document provides additional guidance on a series of issues arising under the GloBE Model Rules and related Commentary. The guidance is in the form of additions and other modifications to the Commentary, which will be incorporated in a revised version of the Commentary to be released later this year. The GloBE Model Rules and Commentary are intended to be used by jurisdictions in incorporating the Pillar Two global minimum tax rules into their domestic tax legislation. The Inclusive Framework member jurisdictions have agreed that jurisdictions will apply the GloBE Rules consistent with agreed administrative guidance, subject to any requirements of domestic law. The document further indicates that the Inclusive Framework will continue to consider administrative guidance priorities on an ongoing basis and will release additional guidance as it is agreed. Detailed discussion Background The GloBE Model Rules were released on 20 December 20211 and the related Commentary was released on 14 March 2022.2 Article 8.3 of the GloBE Model Rules provides that jurisdictions implementing the GloBE Rules, shall, subject to any domestic law requirements, apply the GloBE Rules in accordance with any Agreed Administrative Guidance (which is defined as "guidance on the interpretation or administration of the GloBE Rules issued by the Inclusive Framework"). The Commentary includes numerous references to issues on which further guidance may be provided through such agreed administrative guidance. On the same date as the release of the Commentary, the OECD announced a public consultation in connection with the work to be undertaken by the Inclusive Framework on the implementation framework for Pillar Two. One focus of discussion during the 25 April 2022 public consultation meeting was the critical need for administrative guidance to provide greater clarity on the GloBE Rules.3 On 20 December 2022, the OECD released three documents providing additional information with respect to Pillar Two. One document, which has been agreed by the Inclusive Framework, provides guidance on safe harbors and penalty relief, including the terms of a transitional country-by-country reporting safe harbor.4 The other two documents are in the form of public consultation documents, seeking input from stakeholders on areas where work is ongoing in the Inclusive Framework but consensus has not yet been reached: these consultation documents cover the ongoing work on development of a standardized GloBE Information Return5 and potential dispute prevention and resolution mechanisms to be explored by the Inclusive Framework to provide tax certainty for the GloBE Rules.6 Overview The document released on 2 February 2023 contains administrative guidance approved by the Inclusive Framework that addresses issues under the GloBE Model Rules and Commentary that the Inclusive Framework identified as most in need of immediate clarification. The guidance is presented in the form of additions and other modifications to the Commentary, which will be incorporated in a revised version of the Commentary to be released later this year. The guidance also includes examples, which will be incorporated in a revised set of detailed examples to be released at the same time as the revised version of the Commentary. The Inclusive Framework member jurisdictions have agreed that an implementing jurisdiction will apply the GloBE Rules consistent with agreed administrative guidance, subject to any requirements of domestic law. The document notes that administrative guidance is expected to play an important role in providing certainty with respect to the GloBE Rules and ensuring coordinated outcomes under the GloBE Rules. The document further indicates that the Inclusive Framework is continuing to consider issues to be addressed through guidance and that additional administrative guidance will be released as it is agreed. In this regard, the document notes that the nature and type of guidance that may be required may not be known until Inclusive Framework jurisdictions have begun the implementation process and that the need for further guidance on the application of the GloBE Rules may only emerge only after the rules are in effect, which means that administrative guidance will be needed on an ongoing basis to address issues as they arise. In addition, the document indicates that administrative guidance encompasses both interpretive guidance and operational guidance setting out administrative procedures and potentially administrative simplifications. The Administrative Guidance covers a range of technical issues and is divided into the following sections:
Section 1 — Scope This section of the Administrative Guidance covers several aspects of Chapter 1 (Scope) of the GloBE Model Rules. 1.1. Rebasing monetary thresholds in the GloBE Rules Various monetary thresholds (e.g., the consolidated revenue threshold) in the GloBE Rules are expressed in Euros. If jurisdictions implement the GloBE Rules in their domestic legislation with these thresholds in a different currency, this could result in inconsistent monetary thresholds across jurisdictions due to foreign exchange differences. To ensure consistency in the monetary thresholds used by different jurisdictions, the Administrative Guidance provides for annual rebasing of the non-Euro denominated thresholds based on the average foreign exchange rate for the month of December. The rebased thresholds will apply to any Fiscal Year that starts on (or by reference to) any day of the following calendar year. The foreign exchange reference rates will be as quoted by the European Central Bank (ECB). Where an ECB exchange rate is not available or the jurisdiction faces legal or practical impediments to using such exchange rate, the jurisdiction should rely on the average exchange rate quoted by its central bank. Where the monetary threshold makes references to multiple Fiscal Years (e.g., Article 1.1.1 of the GloBE Model Rules), the translation into local currency should be made in respect of each Fiscal Year using the average foreign exchange rate for December of the calendar year immediately preceding the calendar year in which such Fiscal Year starts (and not a single average foreign exchange rate for all the Fiscal Years). These rules in the Administrative Guidance are strictly for translation of non-Euro denominated monetary thresholds. Subsequent guidance will deal with foreign currency translation for the purposes of calculations as part of compliance with the GloBE Rules. 1.2. Deemed consolidation test The GloBE Model Rules rely on consolidation accounting principles in several areas, including determination of the composition of a Group and identification of the Ultimate Parent Entity (UPE). Even if the local statute or regulation does not require Consolidated Financial Statements to be prepared in accordance with an Authorised Financial Accounting Standard, the deemed consolidation test under GloBE Rules requires the preparation of a set of Consolidated Financial Statements based on an Authorized Financial Accounting Standard in the UPE's location. The Multinational Enterprise (MNE) Group may choose among the Authorised Financial Accounting Standards applicable for the UPE's location. The Administrative Guidance makes clear that the deemed consolidation test does not modify the accounting standards or alter the outcomes that are provided for under the relevant accounting standard. The Guidance provides four new examples, particularly drawing out the point that if an accounting standard such as International Financial Reporting Standards (IFRS) 10 does not or would not require line-by-line consolidation, then the GloBE deemed consolidation requirement would not over-ride that. Under IFRS 10, an investment entity meeting certain conditions would not be required to consolidate its investee subsidiaries line-by-line, but rather to include them at fair value. The Administrative Guidance further provides that the definition of Entity under Article 10.1 of the GloBE Model Rules does not include central, state, or local governments or their administration or agencies that carry out government functions. 1.3. Consolidated deferred tax amounts The GloBE Income or Loss and Covered Taxes of each Constituent Entity are generally computed based on the financial accounts used in the preparation of the UPE's Consolidated Financial Statements. However, Article 4.4.1 of the GloBE Model Rules relating to the computation of the Total Deferred Tax Adjustment makes reference to the "deferred tax expense accrued in the financial accounts of a Constituent Entity." Stakeholders have identified a practical challenge in that mechanical accounting consolidation procedures may commonly not "push down" to Constituent Entities deferred tax calculated at the consolidated level in accordance with the accounting standard used in the preparation of Consolidated Financial Statements; rather, these may be held as adjustments arising only on consolidation. This may be because the financial accounts of the Constituent Entity are prepared initially under a different accounting standard or because the deferred tax calculation may differ when taking a consolidated view. The Administrative Guidance clarifies that the deferred tax expense accrued in the UPE's Consolidated Financial Statements for a Constituent Entity (instead of that from the Constituent Entity's individual financial accounts) should be used (i.e., that the "push down" of consolidated deferred tax amounts to Constituent Entities is required). This includes deferred tax expenses reflected only in the UPE's Consolidated Financial Statements but not in the individual financial accounts of the Constituent Entity, provided that such deferred tax expenses are not attributable to purchase accounting or to items of income or expenses excluded from the GloBE Income or Loss calculation. The Administrative Guidance also states that Adjusted Covered Taxes and GloBE Income or Loss should be calculated consistently using the same accounting standard. 1.4. Sovereign wealth funds and the definition of Ultimate Parent Entity Sovereign wealth funds (SWFs) are commonly established to hold and manage investment assets on behalf of a government or jurisdiction. As discussed earlier, the GloBE Rules rely on the consolidation accounting principles to determine the UPE of a Group. Consequently, different groups of companies invested in by an SWF (qualifying as a Governmental Entity) could possibly be treated as part of a single MNE Group if the SWF is required to consolidate its investments. An inconsistent outcome could arise for another SWF that adopts a different approach to consolidation or for a government that invests directly without going through an SWF. The Administrative Guidance addresses this potential inconsistency by providing that an SWF that meets the definition of a Governmental Entity in Article 10.1 of the GloBE Model Rules will not be considered a UPE and will not be considered part of an MNE Group. In addition, such an SWF will not be considered to own a Controlling Interest in any Entity in which it has an Ownership Interest, and accordingly whether any such Entity is the UPE of an MNE Group is determined without regard to any Ownership Interest held by the SWF. 1.5. Clarifying the definition of "Excluded Entity" (Article 1.5.2) Entities that meet the definition of Excluded Entities are excluded from the GloBE Rules. Article 1.5.2 of the GloBE Model Rules extends the definition of an Excluded Entity to cover certain Entities owned by an Excluded Entity or Entities. Stakeholders have requested clarity, including with regard to the treatment of an Excluded Entity's permanent establishment (PE), which is treated as a separate Constituent Entity. The Administrative Guidance clarifies that whether an Entity meets the definition of an Excluded Entity should be based on a holistic view of the activities carried out by the Entity, including the activities undertaken through all of its PEs. Where the Entity meets the definition of an Excluded Entity, this status extends to all of its PEs. Article 1.5.2(a) of the GloBE Model Rules provides that an entity that is at least 95% owned (either directly or indirectly) by an Excluded Entity or Entities will also be considered an Excluded Entity, if that entity:
The Administrative Guidance clarifies that an Entity that undertakes activities in both of these categories would likewise qualify as an Excluded Entity. In addition, the Administrative Guidance clarifies that the act of borrowing funds and making direct acquisitions of assets falls within the meaning of "holding of assets or investment of funds" and so must be "for the benefit of" the Excluded Entity or Entities. 1.6. Meaning of "ancillary" for Non-Profit Organisations Non-Profit Organisations are Excluded Entities under Article 1.5.1(c) of the GloBE Model Rules. Non-Profit Organisations may set up wholly-owned subsidiaries to undertake certain commercial activities to raise funds for their charitable activities. In many jurisdictions, the profit of such subsidiaries is not subject to tax. Under the GloBE Rules, such subsidiaries are generally not considered Excluded Entities, regardless of the size of such commercial activities. To reduce the administrative burden on Non-Profit Organisations and avoid unintentional top-up taxes, the Administrative Guidance provides a new bright-line test: where the aggregate revenue of all Group Entities (excluding revenue derived by the Non-Profit Organisation or by an Excluded Entity under Article 1.5.2 of the GloBE Model Rules) is less than €750m or 25% of the revenue of the MNE Group to which the Non-Profit Organisation belongs (if lower), the activities of the wholly-owned subsidiaries undertaking commercial activities would be deemed to be ancillary and those entities would be treated as Excluded Entities. Section 2 - Income & taxes This section of the Administrative Guidance covers several aspects of Chapter 3 (GloBE Income or Loss) and Chapter 4 (Computation of Accrued Covered Taxes) of the GloBE Model Rules. 2.1. Intra-group transactions accounted at cost Under US Generally Accepted Accounting Principles (GAAP), on pre-consolidation ?nancial statements, for an intra-group sale the selling entity does not record income and the buying entity records a Deferred Tax Asset (DTA) to the extent there is a basis step up for local tax purposes. This treatment under US GAAP has raised questions as to how these transactions are treated under Article 6.3.1 of the GloBE Model Rules, which provides that a disposing Constituent Entity "will include" the gain or loss on disposition in the computation of its GloBE income or loss, and that an acquiring Constituent Entity "will determine" its GloBE Income or Loss using the acquiring Constituent Entity's carrying value of the acquired assets and liabilities determined under the accounting standard used in preparing the Consolidated Financial Statements of the UPE. The Administrative Guidance addresses this scenario by providing that intra-group transfers of assets and liabilities under Article 6.3.1 must be treated for GloBE purposes in accordance with Article 3.2.3 of the GloBE Model Rules. Consequently, in cross-border intra-group transactions the Arm's-Length Principle applies, and the transaction must be reflected at fair value for GloBE purposes regardless of whether the MNE Group accounted for the transaction at the carrying value of the disposing Constituent Entity. However, the guidance explicitly does not address the treatment of the buying entity, stating that "[t]he 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." This leaves it unclear whether the buying entity will also take into account a fair market value basis in the asset for GloBE purposes or will reflect a DTA under Article 4.4.1 of the GloBE Model Rules. In many cases, the recording of the DTA by the buying entity in the year of acquisition could lead to Top-up Tax (which arguably would give rise to double taxation). Additional guidance is needed to address this. 2.2. Excluded Equity Gains or Loss and hedges of investments in foreign operations Article 3.2 of the GloBE Model Rules sets out adjustments required to be made to Financial Accounting Net Income or Loss in computing GloBE Income or Loss. One such adjustment is for the amount of Excluded Equity Gain or Loss. The Commentary released in March 2022 notes that the Inclusive Framework will consider providing agreed administrative guidance on the extent to which gains or losses on hedging instruments may be treated as Excluded Equity Gains or Losses. A concern has been raised that foreign currency movements in a Constituent Entity's stand-alone accounts can give rise to significant volatility in the GloBE jurisdictional effective tax rate (ETR), particularly where under the domestic law such movements would not be taxable. That might be the case where the Constituent Entity is a holding company and the foreign exchange movement arises on an instrument (e.g., a foreign currency loan or a currency derivative) that is hedging an investment in a subsidiary, where the accounting treatment may be to recognize foreign exchange gains or losses on the hedging instrument in Financial Accounting Net Income. For GloBE purposes, any equal and opposite currency loss or gain on the hedged investment may constitute an Excluded Equity Gain or Loss. The Administrative Guidance notes that jurisdictions often have rules that eliminate tax volatility by matching the treatment of the foreign exchange movement on the hedging instrument with the treatment of foreign exchange movements on the underlying investment in the subsidiary, resulting in neither amount being taxable for local tax purposes. In these circumstances, the consolidated accounting treatment of the foreign exchange movement may be to recognize a net investment hedge, with movements recognized in Other Comprehensive Income. However, this is not necessarily relevant to the GloBE Income calculation, which must be done based on the Constituent Entity's own accounts. This gives rise to the possibility of an untaxed foreign exchange gain reducing the GloBE jurisdictional ETR, potentially resulting in a top-up tax. The Administrative Guidance provides for a Five-Year Election to treat foreign exchange gains or losses on a hedging instrument as an Excluded Equity Gain or Loss to the extent that the following three conditions are met:
These conditions represent a tightly prescribed set of circumstances. Where a jurisdiction applies tax-hedging rules in broader circumstances than these (for example, where such rules do not depend upon the treatment in the consolidated accounts or on hedge effectiveness or where such rules could apply to less than 10% shareholdings), the potential for GloBE jurisdictional ETR volatility from foreign exchange movements may remain. 2.3. Excluded Dividends — Asymmetric treatment of dividends and distributions The Administrative Guidance states that stakeholders have raised concerns that an MNE Group may attempt to rely on the accounting treatment of certain financial instruments to artificially increase its GloBE jurisdictional ETR. The Administrative Guidance provides two illustrations of this potential:
In both examples, the asymmetric accounting treatment would produce, in effect, a Deduction/No Inclusion outcome under the GloBE Rules, thus reducing GloBE Income and increasing the GloBE jurisdictional ETR. In response, the Administrative Guidance provides that to the extent Constituent Entities in the same MNE Group classify a financial instrument differently under the relevant accounting standard(s), the classification adopted by the issuer applies to both the issuer and the holder for GloBE purposes. Further, with respect to compound instruments, only the amounts received that relate to the equity portion of the instrument are treated as Excluded Dividends under Article 3.2.1(b) of the GloBE Model Rules. 2.4. Treatment of debt releases The release of a debt occurs commonly in financial restructurings, in particular in cases where a borrower finds itself unable to commercially support its level of indebtedness. Commonly the accounting treatment for the borrower would be to recognize the amount of the release as income in its Financial Accounting Net Income or Loss. However, the jurisdiction where the borrower is resident may not tax such income. The Administrative Guidance recognizes the possibility of debt releases increasing GloBE Income without increasing Adjusted Covered Taxes, thereby eroding the GloBE jurisdictional ETR and potentially leading to top-up tax. The Administrative Guidance therefore provides an elective solution, permitting income from a debt release to be excluded from GloBE Income or Loss (and if there is associated current or deferred tax, for that to be excluded from Adjusted Covered Taxes), but only in the following three specific debtor distress circumstances:
The exclusion under the third scenario would only apply to third-party debt, whereas the exclusion under the first two scenarios would apply to both third-party and related-party debt. The election for this exclusion from GloBE Income applies only to the debtor. At present no mirroring rules are provided for a creditor in such circumstances, meaning that an accounting loss recognized by a lender on releasing a borrower from their obligation would continue to reduce GloBE Income (and any associated tax relief, current or deferred, would reduce Adjusted Covered Taxes). The Administrative Guidance indicates that the Inclusive Framework will consider whether further guidance in relation to the creditor is necessary. 2.5. Accrued Pension Expenses Article 3.2.1(i) of the GloBE Model Rules adjusts a Constituent Entity's Financial Accounting Net Income or Loss for Accrued Pension Expense. Accrued Pension Expense is defined as the difference between the amount of pension liability expense included in the Financial Accounting Net Income or Loss and the amount contributed to a Pension Fund for the Fiscal Year. The Administrative Guidance indicates that stakeholders have requested clarification on whether Article 3.2.1(i) applies to company pension schemes wherein payments are made directly to pension recipients, rather than to a Pension Fund and whether an Adjustment under Article 3.2.1(i) is necessary in cases of pension income or surplus (i.e., where the earnings of the pension fund for the period exceed the accrued pension expense for the period and the net earnings are included in the profit and loss statements). The Administrative Guidance provides that Article 3.2.1(i) only applies in the case of pension expenses that are provided through a Pension Fund. Thus, pension expenses that are accrued for direct pension payments to former employees are not subject to Article 3.2.1(i) and should be taken into account under the GloBE Rules at the same time and in the same amount as they are accrued as an expense in the computation of Financial Accounting Net Income or Loss. Further, the Administrative Guidance provides that a pension surplus or pension income recognized in the Financial Accounting Net Income or Loss should be excluded from the GloBE Income or Loss computation to the extent that it is retained by the Pension Fund. A surplus included as income in the profit and loss statement of a Constituent Entity would arise in situations where the Pension Fund earnings exceed the pension expense for the Fiscal Year. Conversely, in cases where the surplus is distributed to the MNE Group, it should be added back to the GloBE Income or Loss computation in the Fiscal Year of the distribution. The Administrative Guidance further notes that stakeholders have requested clarification on the treatment of a DTA or Deferred Tax Liability (DTL) associated with pension expenses. While the revised wording of the Commentary contained in the Administrative Guidance does not provide any further clarification on this issue, the example included in the Guidance suggests that movements in a DTA or DTL associated with pension expense should be ignored for the computation of the GloBE Covered Tax Expense of a Constituent Entity. 2.6. Covered Taxes on deemed distributions The Administrative Guidance clarifies that taxes (other than controlled foreign company (CFC) taxes) on deemed distributions, where the underlying ownership interest is treated as an equity interest for tax in the jurisdiction imposing the tax and for financial accounting purposes, fall within the scope of Article 4.3.2(e) of the GloBE Model Rules and are, therefore, allocated to the Covered Taxes of the distributing Constituent Entity. 2.7. Excess Negative Tax Carryforward guidance The Administrative Guidance indicates that the GloBE Rules have two features that are intended to counteract instances in which deferred tax expense can shield permanent differences from GloBE tax liability. The first feature is included in Article 4.1.5 of the GloBE Model Rules, which imposes a current Additional Top-up Tax equal to the portion of the loss carryforward DTA attributable to a permanent difference. Such Additional Top-up Tax amount is the maximum amount that the permanent difference could reduce the Top-up Tax in a subsequent year. However, the DTA attributable to the permanent difference may actually result in a much smaller reduction or no reduction at all in the Top-up Tax determined in a subsequent year, depending upon the amount of income in the subsequent year and the rate at which that income is taxed. The second feature is included in Article 5.2.1 of the GloBE Model Rules. If there is GloBE Income in a jurisdiction, the interaction of a permanent difference with deferred tax accounting may cause the GloBE jurisdictional ETR to be a negative percentage. When that negative percentage is subtracted from the Minimum Rate of 15%, the Top-up Tax Percentage will be an amount in excess of 15%. The effect of multiplying the excess percentage over the Minimum Rate by the GloBE Income is similar to the effect of Article 4.1.5, meaning that it would result in an additional amount of Top-up Tax equal to the maximum amount that the permanent difference could reduce the Top-up Tax in another Fiscal Year. To prevent such results, the Administrative Guidance provides a generally elective administrative procedure for an Excess Negative Tax Expense Carryforward in cases where Article 4.1.5 applies. In cases where the Top-up Tax Percentages are in excess of the Minimum Rate under Article 5.2.1, an MNE Group must apply this Excess Negative Tax Expense administrative procedure. An MNE Group that elects or is required to apply this administrative procedure excludes the Excess Negative Tax Expense from its aggregate Adjusted Covered Taxes computed for the Fiscal Year and establishes an Excess Negative Tax Expense Carryforward. The Excess Negative Tax Expense for a Fiscal Year in which the MNE Group realizes no GloBE Income for the jurisdiction is equal to the amount calculated under Article 4.1.5. The Excess Negative Tax Expense for a Fiscal Year in which the MNE Group realizes positive GloBE Income for the jurisdiction is equal to the negative Adjusted Covered Taxes for that Fiscal Year. In each subsequent Fiscal Year in which the MNE Group has positive GloBE Income and Adjusted Covered Taxes for the jurisdiction, the MNE Group reduces the balance of the Excess Negative Tax Expense Carryforward by the same amount. Use of the Excess Negative Tax Expense administrative procedure under Article 4.1.5 for a jurisdiction is an annual election. When elected, the Excess Negative Tax Expense Carryforward must be used in all relevant subsequent computations of the GloBE Jurisdictional ETR. In addition, the Excess Negative Tax Expense Carryforward is a jurisdictional attribute, meaning that in cases where an MNE Group disposes one or more Constituent Entities in a jurisdiction, the Negative Tax Expense Carryforward remains an attribute of the transferor group. 2.8. Loss-making Parent Entities of CFCs In some countries, if there is a domestic source loss and foreign source income in the same year, tax on foreign source income is offset by foreign tax credits (FTCs) and the loss is generally carried forward under domestic rules. Under Article 4.4 of the GloBE Model Rules, DTAs associated with this loss are carried forward and used as an addition to Adjusted Covered Taxes when the loss is used to offset domestic source income in a later year. In contrast, in jurisdictions (for example, the United States (US)) in which the domestic loss is required to be first offset by foreign source income before FTCs apply, no loss is generated. Instead, such jurisdictions will generally permit future domestic source income to be recharacterized as foreign source income, such that FTCs, as opposed to the domestic source loss, can be used to offset such future income. The FTCs to be used to offset future domestic source income in this case can be FTCs carried forward from the loss-generating year or, if no FTC carryforwards are allowed, excess FTCs created in a subsequent year (e.g., in the case of the US global intangible low-taxed income (GILTI) regime). This scenario can give rise to essentially the same result as the one in which a domestic source loss is carried forward. However, the GloBE Rules provide that DTAs associated with tax credits (including FTC carryforwards) are not taken into account for purposes of computing Adjusted Covered Taxes, leading to more top-up tax in a jurisdiction offsetting future income with FTCs than in a jurisdiction carrying forward losses. The Administrative Guidance seeks to ensure "functionally equivalent outcomes" between the above two scenarios under the GloBE Rules. Specifically, the Guidance provides that Article 4.4.1(e) (which excludes the amount of deferred tax expenses associated with FTCs from the computation of the Total Deferred Tax Adjustment Amount) shall not apply in the case of a "Substitute Loss Carry-forward DTA," which arises if the following three conditions are met:
Under the Administrative Guidance, if the above requirements are satisfied, the deferred tax expense attributed to the Substitute Loss Carryforward DTA is included in the Constituent Entity's Total Deferred Tax Adjustment Amount in the Fiscal Year that it arises and in the Fiscal Year(s) it reverses, but only to the extent the FTC that gave rise to the Substitute Loss Carryforward DTA is used to offset tax liability on income included in the Constituent Entity's GloBE Income or Loss. The Substitute Loss Carryforward DTA is subject to the exclusion in Article 4.4.1(a) and must be recast at the Minimum Rate. In the event a jurisdiction does not allow FTC carryforwards but provides a loss recapture mechanism that permits any excess FTCs in a subsequent year to be used to offset tax on domestic source income recharacterized as foreign source income, equivalent adjustments would be made under the Administrative Guidance, but only to the extent the recapture mechanism increases the FTCs used to offset tax on income included in the Constituent Entity's GloBE Income or Loss. 2.9. Equity Gain or loss inclusion election and Qualified Flow-Through tax benefits Under Article 3.2.1(c) of the GloBE Model Rules, three types of income or loss related to equity investments are excluded from the GloBE tax base. These three amounts, called "Excluded Equity Gain or Loss," generally consist of:
Under Article 4.1.3(a) of the Model GloBE Rules, Covered Taxes are commensurately reduced when the tax is with respect to income excluded under GloBE, including Excluded Equity Gain or Loss. The Commentary describes, as an example, a situation in which income from a flow-through entity is excluded because it is accounted for under the equity method of accounting, and therefore the tax expense of the owner of the entity is also commensurately reduced. This rule, however, raised the question as to what happens in situations in which the excluded amount relates to a tax loss that gives rise to a tax benefit, rather than income that gives rise to tax expense. It was unclear whether Article 4.1.3(a) could be interpreted to allow for upward adjustments in Covered Tax to reflect the elimination of a tax benefit related to an excluded loss. Absent such an adjustment, there would be asymmetric treatment of a loss for purposes of the numerator versus the denominator of the ETR calculation. The Administrative Guidance provides that no such upward increase to Covered Tax is allowed. Instead, the Guidance seeks to create symmetry by allowing companies to make a Five-Year Election, on a per jurisdiction basis, to turn off the exclusion in Article 3.2.1(c) with respect to Excluded Equity Gains or Losses, to the extent those gains or losses are generally included in domestic taxable income. At the same time, all taxes (including deferred taxes) related to those amounts will be reflected in Covered Taxes (essentially turning off Article 4.1.3(a)). The Administrative Guidance also provides special rules for investments in a "Qualified Ownership Interest," which is an interest in a tax transparent entity that is not accounted for on a line-by-line basis (e.g., it is accounted for under the equity method of accounting or something similar). This rule is intended to provide special treatment for certain structures where an investor invests in a partnership (without having control that would trigger line-by-line consolidation) that generates non-refundable tax credits and tax losses that are specially allocated to the investor. The Guidance provides that, in general, to the extent that these credits and losses, plus certain other items, can be treated as reducing an owner's investment in the partnership, the effect of these tax benefits can be reversed out of the Covered Tax computation. The effect of this rule bears similarities to the "proportional amortization" method that is allowed under US GAAP in accounting for some (although not all) of these types of investments. The Administrative Guidance also indicates that the Inclusive Framework will provide additional guidance regarding Qualified Flow-through Tax Benefits and Qualified Ownership Interests. 2.10. Allocation of taxes arising under a Blended CFC Tax Regime Article 4.3.2 of the GloBE Model Rules requires that CFC taxes paid in a Constituent Entity-owner's jurisdiction are allocated to the jurisdiction of the Constituent Entity CFC to match such taxes to the GloBE Income to which they relate. The Administrative Guidance confirms that the US GILTI regime, in its current form, is a CFC tax regime under the GloBE Rules. The Guidance provides a limited time, simplified allocation approach for allocating CFC taxes levied under GILTI and other Blended CFC Tax Regimes. This approach is applicable for Fiscal Years beginning on or before 31 December 2025 (but not including a Fiscal Year that ends after 30 June 2027). The Administrative Guidance provides that the blended CFC taxes are allocated among Constituent Entities and Non-Constituent Entities using an ETR-weighted income allocation mechanism: Blended CFC Tax Allocated to an Entity:
Blended CFC Allocation Key: Attributable Income of Entity ×(Applicable Rate-GloBE Jurisidictional ETR) In this regard, the Administrative Guidance provides that in the case of GILTI, Allocable Blended CFC Tax is, in the absence of a loss, computed as: ((GILTI Inclusion-GILTI Deduction)× 21%)-GILTI FTC The Administrative Guidance further provides that, for GILTI, Attributable Income is equal to a US shareholder's share of the "tested income" of the Constituent Entity, and the Applicable Rate is the threshold for low taxation under the Blended CFC Tax Regime. Under the GILTI regime, the Guidance provides that the Applicable Rate is 13.125%. If the GloBE jurisdictional ETR equals or exceeds the Applicable Rate (or the 15% GloBE Minimum Rate), the Blended CFC Allocation Key for the Constituent Entity will be treated as zero. The intended effect of the allocation formula is that Constituent Entities with lower ETRs under the GloBE Rules and larger amounts of income as computed under the Blended CFC Tax Regime will attract the largest amount of Blended CFC Tax Regime taxes. For GILTI, this means GILTI taxes are only allocated to jurisdictions with an ETR of less than 13.125% (as computed under the GloBE rules), with a higher allocation to Constituent Entities with greater amounts of attributable income. The Administrative Guidance also clarifies that the GloBE jurisdictional ETR will include Qualified Domestic Top-up Taxes (QDMTTs) only if the CFC Tax Regime allows an FTC for the QDMTT "on the same terms as any other creditable Covered Tax." This ties into the clarification elsewhere in the Administrative Guidance that a QDMTT is computed without regard to CFC taxes. As a result, QDMTT applies first and (assuming it is eligible for an FTC under the CFC regime) would be expected to preclude any allocation of CFC taxes to the QDMTT jurisdiction (because its GloBE jurisdictional ETR would be 15% or greater). Section 3 - Application of GloBE Rules to insurance companies This section of the Administrative Guidance clarifies application of provisions in the GloBE Model Rules and Commentary that could lead to unintended results for insurance groups. The clarifications provide specific guidance on how these provisions are to be applied in the insurance context. 3.1 Application of Article 7.6 to Insurance Investment Entities Article 7.6 of the GloBE Model Rules provides an election under which a Constituent Entity-owner that is not an Investment Entity may apply the Taxable Distribution Method with respect to ownership interests it holds in a Constituent Entity that is an Investment Entity when specified conditions are met. This election is a Five-Year Election. The Administration Guidance extends this Taxable Distribution Method election to Insurance Investment Entities. This election is available if the Constituent Entity-owner can be reasonably expected to be taxable on distributions at an ETR of at least 15%. Under this election, to the extent that an Insurance Investment Entity makes distributions or deemed distributions within a four-year period, the income and taxes related to such distributions or deemed distributions are treated as income and taxes of the Constituent Entity (or Entities) that own such Insurance Investment Entity, and such entity itself is excluded from top-up tax calculations. However, the owner's share of any undistributed income from the preceding three years would be subject to top-up tax at the level of the Insurance Investment Entity itself in the fourth year. The Administrative Guidance further clarifies that the ETR measurement for purposes of this election includes taxes arising on distributions as well as taxes incurred by the Investment Entity or Insurance Investment Entity itself in respect of distributions. The Administrative Guidance further indicates that the Inclusive Framework will further consider the treatment of Investment Entities and Insurance Investment Entities under this election, including considering simplifications and further clarifications in the rules regarding the election. Note that, as discussed below, the Administrative Guidance also provides further clarifications regarding an alternative election that may be used by a mutual insurance company that owns an Investment Entity or Insurance Investment entity. 3.2 Exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity The definition of Intermediate Parent Entity in the Model GloBE Rules provides a series of exclusions for categories of entities that are not treated as Intermediate Parent Entities, including an exclusion for Investment Entities. The same is true of the definition of Partially-Owned Parent Entity in the Model GloBE Rules. These exclusions are intended to preserve the tax-neutrality of Investment Entities for any minority-interest holders. The Administrative Guidance brings the treatment of Insurance Investments Entities more in line with the treatment of Investment Entities by adding an explicit exclusion for Insurance Investment Entities to the definitions of Intermediate Parent Entity and Partially-Owned Parent Entity. 3.3 Restricted Tier One Capital Article 3.2.10 of the GloBE Model Rules provides a set of rules that generally treat Additional Tier One Capital (which regulators require banks to issue) in the same manner as a debt instrument. The Administrative Guidance extends this treatment to Restricted Tier One Capital instruments issued by insurance companies. The Guidance defines these instruments as instruments issued by a Constituent Entity pursuant to prudential regulation applicable to the insurance sector that is convertible to equity or is written down if a specified trigger event occurs and that has other features designed to aid loss absorbency in the event of a financial crisis. This treatment means that movements in equity due to distributions on Restricted Tier One Capital instruments will be treated as being within GloBE Income or Loss, effectively treating such instruments as debt notwithstanding their equity accounting treatment. 3.4 Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders The Administration Guidance provides new rules regarding certain insurance contracts in which the insurance company invests in equities on behalf of policyholders, where the insurance company is obligated to pay all earnings from the investments to the policy holders less a management fee. The new rules are designed to eliminate what is described as a potential mismatch under the GloBE rules between the treatment of income on such investments and the treatment of the insurance liability. Under the Administrative Guidance, a movement in insurance reserves related to Excluded Dividends (net of investment management fees) or Excluded Equity Gains or Losses from securities held on behalf of policyholders (e.g., unit linked insurance) is not allowed as an expense or deduction in the computation of GloBE Income or Loss. 3.5 Simplification for Short-term Portfolio Shareholdings The GloBE Model Rules provide an exception from the rules for Excluded Dividends for dividends from Short-term Portfolio Shareholdings (defined as those that have been held for less than one year at the time of the dividend distribution). Such dividends are included in the computation of GloBE Income or Loss. In response to concerns from the insurance sector that differentiating between Short-term Portfolio Shareholdings and Portfolio Shareholdings that are held for a longer period would be burdensome, the Administrative Guidance provides a new election as a matter of administrative convenience. Under this new election, which is available to all entities and not just to insurance companies, an MNE Group could elect, for any Constituent Entity, to include dividends from all such entity's Portfolio Shareholdings in the computation of its GloBE Income or Loss. This is a Five-Year Election and is to be made at the level of the Constituent Entity. Specifically in the case of insurance companies, an MNE Group that makes the election would not need to adjust for movements in insurance reserves that are related to securities held on behalf of policyholders. 3.6 Application of Article 7.5 to mutual insurance companies Article 7.5 of the GloBE Model Rules provides an Investment Transparency Election pursuant to which, if specified conditions are met, a Constituent Entity-owner can elect to treat an Investment Entity or Insurance Investment Entity as a Tax Transparent Entity for purposes of the GloBE Rules and thus have the financial accounting net income or loss of such entity allocated to the electing Constituent Entity-owner. The conditions for this election are that: (i) the Constituent Entity-owner is subject to tax under a mark-to-market or similar regime based on the annual changes in the value of its ownership interests in the Investment Entity or Insurance Investment Entity; and (ii) such tax is imposed at a rate that equals or exceeds the 15% minimum rate. Because of uncertainty regarding whether a mutual insurance company would meet the conditions for this election, the Administrative Guidance provides specific rules regarding the application of this election to regulated mutual insurance companies. The Guidance specifies that a Constituent Entity that is a policyholder-owned regulated insurance Entity is considered to be subject to tax under a mark-to-market or similar regime based on the annual changes in the fair value of its ownership interests in an Investment Entity or Insurance Investment Entity. The Guidance also includes an example illustrating the effect of this election as made by a regulated mutual insurance company that is wholly policyholder owned. Section 4 - Transition This section of the Administrative Guidance covers several aspects of Chapter 9 (Transition Rules) of the GloBE Model Rules. 4.1. Deferred tax assets with respect to tax credits under Article 9.1.1 The transition rule included in Article 9.1.1 of the GloBE Model Rules allows pre-existing tax attributes to be used when assessing the GloBE ETR of an MNE Group in a jurisdiction. Under this rule, an MNE Group takes into account all DTAs and DTLs reflected or disclosed in the financial accounts of all the Constituent Entities in a jurisdiction for the first year in scope of the GloBE Rules for that jurisdiction (the "Transition Year"), at the lower of the Minimum Rate or the applicable domestic tax rate. The Commentary clarifies that where deferred tax attributes pre-existing the entry into effect of the GloBE Rules are used for financial accounting purposes in a Fiscal Year in which the GloBE Rules apply, such attribute is available for use in the application of Article 4.4 of the GloBE Model Rules — and thus considered when assessing the GloBE jurisdictional ETR. Article 4.4 however provides a series of adjustments. One of these adjustments, included in Article 4.4.1(e), excludes the deferred tax expense with respect to the generation of tax credits as well as the deferred tax expense with respect to the use of tax credits. The Administrative Guidance indicates that stakeholders have asked whether Article 9.1.1 permits the pre-existing DTAs relating to tax credits to be utilized in calculating the ETR for a jurisdiction in the Transition Year and subsequent years. It further indicates that delegates have also asked whether other adjustments set forth in Article 4.4 (in addition to Article 4.4.1(e)) must be considered for purposes of determining the amount of pre-existing deferred tax accounting attributes. The Administrative Guidance clarifies that DTAs on tax credit carryforwards are taken into account in computing Adjusted Covered Taxes for GloBE purposes. To avoid complexity, a simplified approach of recasting DTAs with respect to tax credits, including FTCs, is included where the applicable domestic tax rate is equal to or higher than the Minimum Rate. The recast is not permitted where the applicable domestic tax rate is lower than the Minimum Rate. The recast amount for such DTAs shall be determined in accordance with the following formula:
The applicable domestic rate is the rate applicable in the Fiscal Year preceding the Transition Year, but the outstanding balance of the tax credit must be recalculated in case of tax rate changes in subsequent years. The Administrative Guidance also provides additional clarity on what happens when such pre-existing tax credits are settled or used. It states that:
The Administrative Guidance includes illustrative examples. 4.2. Applicability of Article 9.1.3 to transactions similar to asset transfers Based on Article 9.1.3 of the GloBE Model Rules, in the case of a transfer of assets between Constituent Entities after 30 November 2021 and before the commencement of a Transition Year, the basis in the acquired assets (other than inventory) is to be based upon the disposing Entity's carrying value of the transferred assets upon disposition with the DTAs and DTLs brought into GloBE determined on that basis. The Administrative Guidance states that all transactions and corporate restructurings that are recorded in a similar manner as an asset transfer (i.e., where the MNE Group creates or increases the carrying value of an asset), regardless of their form and whether they take place within an Entity or among Entities, should be viewed as a transfer of asset for purposes of Article 9.1.3. The Administrative Guidance provides that the term "transfer of assets" includes any transfer in which the acquiring Entity creates or increases the carrying value of an asset in its financial accounts and the disposing Entity recognizes the corresponding amount of income in the pre-GloBE Period. The rule also applies where the MNE Group records intra-group transactions at cost and a DTA based on the difference between book and tax basis under the domestic law is created, and to a transfer or deemed transfer within the same Entity. The Administrative Guidance provides a series of examples of situations where Article 9.1.3 should apply:
4.3. Asset carrying value and deferred taxes under 9.1.3 This section provides additional guidance on Article 9.1.3 of the GloBE Model Rules, which prevents MNE Groups from recording a step-up value on their assets transferred after 30 November 2021 and before the Transition Year, without including the resulting gain in the computation of GloBE income. The Administrative Guidance provides that the carrying value that should be used for GloBE purposes at the beginning of the Transition Year is the carrying value upon disposition of the transferred asset on the day of transfer, and adjusted for capital expenditures, amortization or depreciation after the transaction and before the acquiring entity becomes subject to the GloBE Rules. For transactions recorded at cost, the additional guidance makes it explicit that the scope of this article also prevents an MNE Group to consider DTAs created in connection with the transfer of assets, based on a difference between the carrying value of the transferor and the tax basis of the acquiring entity. DTAs and DTLs that already existed at the time of the transfer, adjusted for the effects of subsequent capitalized expenditures, amortization and depreciation and re-cast at the Minimum Rate, shall be considered under Article 9.1.1 in the Transition Year and subsequent years. The Administrative Guidance further clarifies that a DTA may be taken into account to the extent that that the transferring entity has paid tax in respect of the transaction because the gain from the disposition was included in the taxable income of the disposing Entity. This also applies to the extent of any DTA that would have been taken into account under Article 9.1.1 but was reversed or was not created by the disposing Entity (Other Tax Effects). An example of this would be where no tax was paid because the gain was offset against carryforward losses. The Administrative Guidance states that the burden of proof is on the MNE Group to prove:
As a simplification measure, instead of calculating the DTA as described above, the Administrative Guidance also provides that if an acquirer recorded a transaction at fair value in its financial accounts, it may use the carrying value of that asset as reflected in its financial accounts for GloBE purposes if it would otherwise have been entitled to take into account a DTA equal to the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset determined under Article 9.1.3. The Administrative Guidance includes illustrative examples. Section 5 - Qualified Domestic Minimum Top-up Taxes This section of the Administrative Guidance sets out the general principles for determining whether a domestic minimum tax is "functionally equivalent" to the GloBE Rules and therefore constitutes a QDMTT. The recognition of a domestic minimum tax as a QDMTT for GloBE purposes is an important issue for MNE Groups, because tax payable under a QDMTT can be fully credited against the Top-up Tax otherwise determined under the GloBE Rules. On the other hand, tax payable under a non-qualifying domestic minimum tax is treated as a Covered Tax and can only be included in the GloBE jurisdictional ETR calculation (at the numerator level), which is less advantageous. The Administrative Guidance provides that the Inclusive Framework will develop a multilateral review process in 2023 to assess whether the domestic minimum tax of a jurisdiction should be treated as a QDMTT. The new guidance on functional equivalence with the GloBE Rules is intended to be used in the development and application of that process. The Administrative Guidance indicates that the Inclusive Framework will undertake further work on the development of a QDMTT Safe Harbor. The Administrative Guidance notes that certain aspects of the QDMTT are not covered in this document. In particular, the Inclusive Framework will consider providing further guidance regarding the design and operation of a QDMTT, including guidance on blending of income and taxes under a QDMTT in light of a jurisdiction's domestic legal framework and the treatment of tax neutrality and distribution regimes, including flow-through entities and investment entities, and the treatment of Stateless Constituent Entities. The Administrative Guidance replaces paragraph 118 of the Commentary to Article 10.1 (definition of QDMTT) with new paragraphs 118.1 to 118.53, which explain what "functional equivalence with the GloBE Rules" means in the context of a QDMTT. The stated principle in the new paragraphs is that to be considered functionally equivalent, a domestic minimum tax must be designed, implemented and administered so that its design is consistent with the design of the GloBE Rules, and so that it reliably produces outcomes that are consistent with the outcomes for the jurisdiction that are produced under the GloBE Rules. Specifically, a minimum tax must be structured so that it is in line with the architecture of the GloBE Rules and does not systematically result in an incremental top-up tax for the jurisdiction that is less than what would have been determined under the GloBE Rules. As such, variations in outcomes between the domestic minimum tax and GloBE Rules should not prevent that tax from being treated as a QDMTT if those variations systemically produce a greater incremental tax liability or do not systematically produce lower tax liability than would be expected under the GloBE Model Rules and Commentary. The new paragraphs also discuss the extent to which a QDMTT needs to conform to each chapter of the GloBE Model Rules to produce functionally equivalent outcomes. Chapter 1. Scope A QDMTT must apply to domestic Constituent Entities of MNE Groups that meet the €750 million threshold in Article 1.1 of the GloBE Model Rules in order to be functionally equivalent to the GloBE Rules. However, the application of a QDMTT can be extended to MNE Groups that do not meet the €750 million threshold as well as purely domestic groups with no foreign entities without producing outcomes that would cause the QDMTT to fail functional equivalence for GloBE purposes. The new Commentary set out in the Administrative Guidance as relevant to the definition of QDMTT also contains the specific directions regarding the application of a QDMTT to Constituent Entities, Minority-Owned CEs (MOCEs) and Joint Ventures (JVs):
Chapter 2. Charging provisions The new Commentary to the definition of QDMTT indicates that unlike the Income Inclusion Rule (IIR) and Under-Taxed Payments Rule (UTPR), which primarily apply with respect to the income of foreign Constituent Entities, a QDMTT applies exclusively with respect to domestic Constituent Entities. As such, the charging provisions in Article 2 of the GloBE Model Rules are not considered to be suited to a QDMTT. Therefore, in lieu of the Article 2 charging provisions, a QDMTT should impose a Top-up Tax on one or more domestic Constituent Entities with respect to the Excess Profits of all domestic Constituent Entities, including the domestic Parent Entity. The Top-up Tax imposed under the QDMTT should be based on the whole amount of the Jurisdictional Top-up Tax computed under Article 5.2.3 of the GloBE Model Rules, irrespective of the Ownership Interests held in Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group. In some situations, the QDMTT will therefore result in a greater tax liability than the liability that would otherwise have been imposed under the GloBE Model Rules. If this outcome is considered undesirable, jurisdictions may alternatively choose to apply their QDMTT only to the MNE Groups where all of the Constituent Entities located in that jurisdiction are wholly owned by the UPE or a Partially Owned Parent Entity (POPE) for the entire Fiscal Year. The new Commentary contained in the Administrative Guidance prohibits the provision of benefits that are related to the QDMTT or the GloBE Model Rules by any jurisdiction (i.e., a QDMTT cannot be directly or indirectly refunded to the MNE Group). The new Commentary indicates that the Inclusive Framework will consider providing further guidance with respect to the specification of what type of benefits may be deemed related to a QDMTT. Chapter 3. GloBE income or loss The new Commentary specifies the following regarding the application of the functional equivalence test under a QDMTT:
Chapter 4. Adjusted Covered Taxes To pass the functional equivalency test, the determination of Adjusted Covered Taxes under a QDMTT must be the same or more restrictive than that under the GloBE Model Rules. At the same time, a QDMTT does not need to provide for a GloBE Loss Election contained in Article 4.5 of the GloBE Model Rules. In addition, the new Commentary to the definition of QDMTT specifies the following regarding the determination of Adjusted Covered Taxes under a QDMTT:
Chapter 5. Computing the Top-up Tax The new Commentary to the definition of QDMTT addresses the following design elements regarding the computation of Top-up Tax under a QDMTT:
Chapter 6. Corporate restructurings and holding structures These rules are intended to harmonize the GloBE Model Rules with common tax reorganization rules. To be considered functionally equivalent, a QDMTT needs to include these rules to the extent necessary to conform to the tax reorganization rules in the jurisdiction. Chapter 8. Administration A jurisdiction implementing a QDMTT will need to calibrate the filing deadline for the QDMTT to facilitate the correct reporting of Top-up Tax liability on the GloBE Information Return, which is required to be filed no later than 15 months after the last day of the Reporting Fiscal Year for the MNE Group (except in respect of a Transitional Year, where the deadline is extended to 18 months). In general, because the QDMTT is designed to impose Top-up Tax where there would otherwise be a Top-up Tax liability under the GloBE Model Rules, a QDMTT should contain safe harbours that align with the safe harbours agreed under the GloBE Model Rules, including the transitional safe harbours. The Administrative Guidance indicates that the Inclusive Framework will undertake further work on the development of a QDMTT Safe Harbour to provide compliance simplifications for MNE Groups operating in a jurisdiction that has adopted a QDMTT satisfying certain conditions to be developed in future work. The QDMTT Safe Harbour could, for example, exempt an MNE Group from the requirements to perform additional GloBE calculations with respect to Constituent Entities located in a jurisdiction that qualifies for the Safe Harbour. Chapter 9. Transition rules A jurisdiction adopting a QDMTT must adopt the GloBE transition rules set out in Articles 9.1.1 to 9.1.3 to ensure that the outcomes are consistent with the GloBE Model Rules and that the same starting point is taken into account for deferred tax items, covered taxes and the carrying value of assets for the QDMTT calculations as for the GloBE calculations. Other transition rules in Article 9 of the GloBE Model Rules, such as the transition relief for the SBIE, the transition relief for filing obligations and the exclusion from the UTPR in the initial phase of international activity need not be adopted under a QDMTT. Elections Where the GloBE Model Rules permit an election, a QDMTT generally must also provide for the election and require the MNE Group to make the same election under the QDMTT as is made under the GloBE Model Rules. However, a QDMTT that does not provide for certain elections, for example the GloBE Loss Election, may be functionally equivalent. Implications The Administrative Guidance provides significant additional information relevant to the interpretation and operation of the GloBE Model Rules, making it an essential component of the global minimum tax package. The Administrative Guidance thus requires close attention. In this regard, it is important to note that the Administrative Guidance on transition rules has implications for transactions that take place after 30 November 2021 and before the GloBE Rules take effect. The Administrative Guidance indicates that additional guidance will be developed and released as it is agreed. Indeed, the Administrative Guidance includes numerous references to areas that will or may be addressed through additional guidance. Given the significant changes that could be made with such guidance, companies should make a point of reviewing additional guidance releases to identify the new rules and clarifications that are relevant to them. Jurisdictions are expected to use the GloBE Model Rules and Commentary, including the Administrative Guidance, in incorporating Pillar Two rules into their domestic law, which means it will be important to monitor how these agreed documents are reflected by relevant jurisdictions in the domestic Pillar Two legislation they develop and enact over the coming months. ____________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young Tax Co., Japan
Ernst & Young Belastingadviseurs LLP, Netherlands
Ernst & Young Limited, New Zealand
Ernst & Young Solutions LLP, Singapore
Ernst & Young Ltd, Switzerland
Ernst & Young LLP, United Kingdom
Ernst & Young LLP, United States
____________________________ ENDNOTES 1 See EY Global Tax Alert, OECD releases Model Rules on Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021. 2 See EY Global Tax Alert, OECD releases Commentary and illustrative examples on Pillar Two Model Rules, dated 21 March 2022. 3 See EY Global Tax Alert, OECD holds public consultation meeting on Implementation Framework for Pillar Two GloBE Rules, dated 29 April 2022. 4 See EY Global Tax Alert, OECD/G20 Inclusive Framework releases document on safe harbors and penalty relief under Pillar Two GloBE rules, dated 21 December 2022. 5 SeeEY Global Tax Alert, OECD releases consultation document on Pillar Two GloBE Information Return, dated 21 December 2022. 6 See EY Global Tax Alert, OECD releases consultation document on tax certainty for the Pillar Two GloBE rules, dated 22 December 2022. | |||||||
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