On 17 July 2023, the Organisation for Economic Co-operation and Development (OECD) made an announcement unveiling a second set of Administrative Guidance providing further comprehensive clarifications on the Global Anti-Base Erosion rules (Pillar Two). Alongside this, they released the finalised version of the GloBE Information Return (GIR), incorporating insights and feedback from stakeholders. In our previous newsletter, you will find insights into the initial developments concerning the GloBE rules as well as information on the initial GIR.
The second set of Administrative Guidance (“2nd Admin Guidance”) comprises important clarifications on various aspects, such as the currency conversion rules, tax credits, Substance-based Income Exclusion and Qualified Domestic Minimum Top-up Tax (“QDMTT”). Additionally, the 2nd Admin Guidance introduces two new Safe Harbours: QDMTT and the Transitional Undertaxed Payments Rule (“UTPR”) Safe Harbour.
Currency Conversion Rules
One of the key takeaways from the section on currency conversion rules is the requirement for MNE Groups to prepare their GloBE calculations and GIR disclosures for each relevant jurisdiction in the presentation currency. The presentation currency is the currency in which the consolidated financial statements of the MNG Groups are prepared, regardless of the local currency used in the relevant jurisdiction. Once the top-up tax liability allocable to a Constituent Entity has been determined in the presentation currency, local jurisdictions can then convert the top-up tax liability into their respective local currencies using the applicable exchange translation rules. This ensures consistency and transparency in the GloBE tax calculation process across different jurisdictions.
Tax Credits
The 2nd Admin Guidance also introduces important provisions regarding tax credits, specifically concerning the mandatory GloBE treatment applicable to the Constituent Entity. Under these guidelines, Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs) will be factored as income when computing GloBE Income or Loss. Conversely, Non-QRTCs, non-MTTCs and all other tax credits will be utilised to reduce the Covered Taxes calculation.
A tax credit will be deemed a QRTC when it fulfills the refundability criteria, irrespective of its transferability at a marketable price. On the other hand, if a tax credit does not qualify as a QRTC, it will be considered an MTTC as long as it meets the refundability criteria. These provisions ensure a standardised and consistent treatment of tax credits across regions, promoting clarity and fairness in the GloBE tax calculation process for all Constituent Entities.
Substance-based Income Exclusion
Another important aspect clarified in the 2nd Admin Guidance pertains to the Substance-based Income Exclusion, which allows for an exclusion from the GloBE Income calculation based on a fixed return derived from Eligible Payroll Costs and Eligible Tangible Assets within a specific jurisdiction. This exclusion effectively reduces the top-up tax liability under the GloBE rules for that jurisdiction.
A simplified guidance is that if the eligible employee’s work time is more than 50% or if the eligible tangible asset is owned more than 50% of the time within a jurisdiction, these costs become eligible for claim by the Constituent Entity. However, if the presence of the eligible employee or tangible asset falls below the 50% threshold, the Constituent Entity will only be entitled to claim a proportionate share.
Furthermore, the 2nd Admin Guidance also offers guidance on the treatment of stock-based compensation, lease arrangements and impairment losses. Moreover, it provides instructions related to making corresponding adjustments in situations where income is excluded from GloBE Income due to a deductible dividend regime.
QDMTT
In addition, the 2nd Admin Guidance offers detailed clarifications on the application of the QDMTT, specifically limiting its scope to wholly owned Constituent Entities while excluding joint ventures and subsidiaries. The calculation of QDMTT is based on the jurisdictional top-up tax, independent of the ownership interests. Moreover, the guidance provides insights into blending income and taxes, whereby the tax liability under the QDMTT is determined through sub-national jurisdictional blending. The 2nd Admin Guidance also includes instructions on the allocation of QDMTT liability among Constituent Entities and Hybrid Entities and outlines the treatment of Stateless Constituent Entities. These comprehensive guidelines aim to streamline and facilitate the implementation of QDMTT provisions effectively.
Safe Harbours
Finally, the 2nd Admin Guidance includes standards and requirements for two new Safe Harbour rules. The first one is the QDMTT Safe Harbour, which stipulates that a QDMTT is in compliance if the QDMTT Accounting Standard, the Consistency Standard, and the Administration Standard are fulfilled.
The second Safe Harbour rule is the Transitional UTPR Safe Harbour, which defines the transition period as the fiscal years no longer than 12 months starting on or before 31 December 2025 and ending before 31 December 2026. During this period, the UTPR Top-up Tax amount calculated for the Ultimate Parent Entity (“UPE”) jurisdiction is considered as zero, assuming the Corporate Income Tax rate in the UPE jurisdiction is at least 20%.
In conclusion, the 2nd Admin Guidance offers valuable insights providing clarity on various aspects of GloBE rules. These ensure consistency, transparency and ease of compliance, benefiting both multinational enterprises and tax jurisdictions seeking to implement the GloBE framework effectively.