OECD/G20 Inclusive Framework releases Administrative Guidance under Pillar Two GloBE rules: First Impressions

Executive summary

On 2 February 2023, the Organisation for Economic Co-operation and Development (OECD) released Administrative Guidance (pdf) on the Pillar Two Global Anti-Base Erosion (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. As noted in the document, 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.

This EY Global Tax Alert provides an overview of the Administrative Guidance. A more detailed EY Global Tax Alert on the issues addressed in the administrative guidance will be issued shortly.

Detailed discussion

Background

The GloBE Model Rules were released on 20 December 20211 and the related Commentary was released on 14 March 2022.2 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 need for agreed administrative guidance to provide greater clarity on the GloBE Model 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

Administrative guidance

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 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.

The Administrative Guidance covers a range of technical issues in the following areas:

• Scope

• Income & taxes

• Application of GloBE Rules to insurance companies

• Transition

• Qualified Domestic Minimum Top-up Taxes

With respect to the scope of the GloBE Rules, issues addressed in the Administrative Guidance include technical aspects of the applicable thresholds and clarifications on the deemed consolidation test, which are particularly relevant for identifying the Ultimate Parent Entity and determining the boundaries of the multinational enterprise (MNE) Group.

With respect to GloBE Income or Loss, issues addressed in the Administrative Guidance include the treatment of intra-group transactions recorded at cost, hedges of investments in foreign operations, debt releases and accrued pension expenses. With respect to Adjusted Covered Taxes, matters covered include the introduction of an administrative procedure for a carryforward mechanism in situations in which a GloBE Loss is incurred or the top-up tax percentage is higher than 15%; one of the effects of this new procedure is that no top-up tax would have to be paid in a year with a net operating loss. The Administrative Guidance also specifically addresses the treatment of the United States Global Intangible Low-Taxed Income (GILTI) rules under the Pillar Two GloBE rules, making clear that GILTI in its current form meets the definition of a controlled foreign company (CFC) tax regime under the GloBE Rules and introducing a simplified allocation approach for taxes under GILTI and other blended CFC tax regimes.

With respect to the GloBE transition rules, the Administrative Guidance includes changes to the existing Commentary that will have immediate implications. It addresses concerns that have been raised regarding the treatment of pre-existing deferred tax assets (DTAs) related to tax credits and adjustments related to temporary differences. It provides a simplified method for recasting DTAs. It also clarifies the concept of "transfer of assets" during the transition period and how to handle a difference between the local tax basis and the accounting value of assets transferred during the transition period.

The Administrative Guidance also provides the first detailed information regarding what qualifies as a Qualified Domestic Minimum Top-up Tax (QDMTT), including specific rules for QDMTT purposes on scope, mechanics for imposition, computation of effective tax rate, calculation of the amount of top-up tax, administration and transition. The Administrative Guidance provides that taxes paid by a Constituent Entity-owner under a CFC tax regime that can be allocated to a domestic Constituent Entity and taxes paid by a Main Entity that are allocable to a Permanent Establishment are not treated as covered taxes for purposes of a QDMTT. In this regard, the Guidance notes that this ordering rule is aimed at assigning primary taxing rights to the jurisdiction applying the QDMTT with respect to its Constituent Entities.

A detailed technical discussion of these and other issues addressed in the Administrative Guidance will be provided in the additional EY Global Tax Alert that will be issued shortly.

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.

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 Belastingadviseurs LLP (Netherlands)

• Ronald van den Brekel

Ernst & Young LLP (United States)

• Barbara M. Angus

• Jose A. (Jano) Bustos

• Margo Shulman

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.