BDO Corporate Tax News

International - Additional administrative guidance published on the two-pillar solution

On 18 December 2023, the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) released additional technical guidance on the implementation of the global minimum tax under the GloBE rules (Pillar Two), as well as a statement updating the expected timeline for the Multilateral Convention (MLC) to implement Pillar One.
Pillar Two
Following previous sets of guidance released in February 2023 and July 2023, the new publication represents the third set of official Administrative Guidance issued (under article 8.3 of the GloBE Rules) by the IF (for prior coverage, see the tax alert dated 14 August 2023 and the article in the February 2023 issue of Corporate Tax News). As with the previous guidance, the December 2023 Administrative Guidance does not carry any legal force; it is merely intended to promote certainty by clarifying the IF’s common understanding of how the GloBE Rules should be interpreted, applied and operate.

It is worth noting that a revised version of the Commentary to the GloBE Model Rules published by the IF on 14 March 2022 is expected to be released in 2024 (for prior coverage, see the tax alert dated 15 March 2022). The revised Commentary will incorporate all three sets of Administrative Guidance.

With the GloBE Rules taking effect in some jurisdictions from 1 January 2024, the December 2023 Administrative Guidance is primarily focused on issues to assist in-scope multinational enterprise groups (MNE groups) transition into the GloBE Rules. The guidance covers six main issues:

1. Purchase price accounting (PPA) adjustments: Without further clarification, there was doubt as to whether the PPA adjustments needed to be unwound for purposes of applying the transitional CbCR safe harbour. The Administrative Guidance confirms that entities within the scope of the GloBE Rules can use financial accounts that include the effect of PPA adjustments, provided certain conditions are satisfied.

2. Transitional CbCR safe harbour: Additional clarification is provided on certain aspects of the transitional CbCR safe harbour. Issues addressed include:
  • The scope and application of tested jurisdictions;
  • The nature and purpose of qualified financial statements;
  • The definition of simplified covered taxes and the application of the simplified effective tax rate (ETR) computation;
  • The application of the substance-based income exclusion calculation for purposes of the routine profits test; and
  • An anti-avoidance measure concerning the treatment of hybrid arbitrage arrangements in calculating entitlement to the transitional CbCR safe harbour.
3. Administrative guidance on application of GloBE Rules: Additional clarity is provided on some of the more basic rules concerning the scope of the GloBE Rules, including:
  • The calculation of the consolidated EUR 750 million revenue threshold and its interaction with the CbCR rules (with which it is supposedly aligned);
  • Situations involving mismatches between fiscal years of the ultimate parent entity and another constituent entity (including joint ventures); and
  • Situations involving mismatches between the fiscal year and the tax year of constituent entities.
4. Further administrative guidance on the allocation of blended CFC taxes: For a limited period, controlled foreign company (CFC) tax incurred under a blended CFC tax regime is allocated to entities located in jurisdictions in which the GloBE ETR for a jurisdiction (the GloBE jurisdictional ETR) is below the applicable rate for the blended CFC tax regime. The calculations involved are complex.

Additional guidance is provided on the calculations required in the following three scenarios:
  • When computing a blended CFC allocation key of an entity, how to identify the appropriate GloBE jurisdictional ETR to be used if multiple GloBE jurisdictional ETRs have been computed for the jurisdiction;
  • Where an entity is located in a jurisdiction for which the MNE group does not otherwise need to compute an ETR, how to compute the appropriate GloBE jurisdictional ETR (for the blended CFC allocation key) of that constituent entity; and
  • Where multiple GloBE jurisdictional ETRs computed for entities in the jurisdiction, how to compute the appropriate GloBE jurisdictional ETR for the blended CFC allocation key of non-GloBE entities.

5. Transitional filing deadlines for MNE groups with short reporting fiscal years: The December 2023 Administrative Guidance extends administrative relief in respect of submissions of the GloBE Information Return (GIR). The guidance makes it clear that the due date for filing and notification obligations for any fiscal year must not be before 30 June 2026. That includes, in particular, MNE groups that have short reporting fiscal years ending before 31 March 2025.

6. Simplified calculation safe harbour for non-material constituent entities: The December 2023 Administrative Guidance clarifies how the GloBE Rules are intended to apply in cases where a MNE group includes “non-material subsidiaries.”

As a general rule, all subsidiaries of an ultimate parent entity are constituent entities of the MNE group for purposes of the GloBE Rules, including any subsidiaries excluded from consolidated financial statements under an applicable accounting standard on the basis of materiality. The simplified calculations safe harbour is intended to ease the complexity and compliance burden that arises when applying the GloBE Rules in such cases. As such, the December 2023 Administrative Guidance provides further clarification of the application of the simplified calculation safe harbour for non-material constituent entities (NMCE), including:

  • The definition of an NMCE;
  • The calculations required for, and the application of, the simplified income, revenue and tax calculations for NMCEs as part of the simplified calculations safe harbour; and
  • Confirmation that the simplified calculation safe harbour for NMCEs is not expected to undermine the GloBE Rules on the basis that it should result in a higher income (because it adopts a broader definition of income) and a lower ETR (because it adopts a narrower definition of taxes) than that provided under the main rules.
Pillar One
In addition to the above guidance on Pillar Two, the IF published a brief statement that provides an updated schedule for the completion of the MLC needed to implement Pillar One and an extension of the standstill on new Digital Service Taxes (and other relevant similar measures).

Despite reaffirming the IF’s political commitment to conclude work on Pillar One “as swiftly as possible,” the statement recognises that resolving outstanding issues will roll into 2024. The new timetable envisages a finalised MLC text by the end of March 2024 and an intention to hold a signing ceremony by the end of June 2024.

Getting Pillar One over the line is proving particularly challenging for the IF. The original text of the MLC was published on 11 October 2023 and was presented as reflecting the consensus of the IF “achieved so far” and representing outstanding issues to be relatively minor, “with different views on a handful of specific items…by a small number of jurisdictions.”
Although progress should be monitored closely, this further delay, along with the various complexities and hurdles to implementation (that essentially mean the U.S. will need to sign up to Pillar One), makes it difficult to see a clear path for the IF to meet even its revised timetable.
Key observations
While the additional guidance is welcome as it clarifies a number of issues, it does highlight the complexity of the GloBE Rules and companies within the scope of Pillar Two should consider taking steps now to evaluate the impact these announcements have on the Pillar Two position for their group. 

Further guidance is anticipated in 2024 from the OECD, along with a number of countries expected to enact legislation effective 1 January 2024 and, therefore, it will be important for companies to have a clear understanding of the impact of the rules and an ability to model any further OECD and country-specific developments as they arise. 

Matt Williams
BDO in United States
Robert O’Hare
BDO Global