Corporate Tax News Issue 65 - February 2023

OECD releases additional Pillar Two Guidance

The Organization for Economic Cooperation and Development (OECD) on February 2, 2023, released additional technical guidance for the implementation of the Pillar Two global anti-base erosion (GloBE) minimum tax model rules.

The 111-page document includes guidance on the recognition of the U.S. minimum tax -- the global intangible low-taxed income, or GILTI rules -- under the GloBE rules and on the design of qualified domestic minimum top-up taxes (QDMTTs). It also includes general guidance on the scope, operation and transitional elements of the GloBE rules to allow Inclusive Framework members that are in the process of implementing the rules to reflect this guidance in their domestic legislation in a coordinated manner. 


The new guidance is the latest release in a series that began with the issuance of Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS -- the GloBE model rules – in December 2021 and the Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two) -- the commentary – released in March 2022.

The GloBE rules consist of an interlocking and coordinated system of rules designed to be implemented into the domestic law of each jurisdiction and operate together to ensure large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on any excess profits arising in each jurisdiction where they operate.

New Guidance

The administrative guidance addresses a broad range of issues that Inclusive Framework members had identified as most in need of immediate clarification and simplification. The approximately two dozen topics discussed are grouped into five chapters:

  • Scope
  • Income and taxes
  • Application of GloBE rules to insurance companies
  • Transition
  • Qualified domestic minimum top-up taxes

GILTI and Pillar Two

The administrative guidance confirms that GILTI will be considered a qualifying controlled foreign company (CFC) tax regime under the Pillar Two rules. Specifically, the guidance provides that GILTI is an example of a “blended CFC tax regime.” 

A blended CFC tax regime is a CFC tax regime that aggregates income, losses and creditable taxes of all CFCs for purposes of calculating the shareholder’s tax liability and that has an applicable rate of less than 15%. A blended CFC tax regime may allow losses incurred by a domestic shareholder of the CFC to reduce or offset its CFC income inclusion; however, a blended CFC tax regime does not include a tax regime that takes into account the group’s domestic income. 

The OECD guidance also provides how taxes under a blended CFC tax regime, such as GILTI (and Subpart F), are allocated for purposes of the Pillar Two GloBE rules. The blended CFC allocation key permits taxes under GILTI (and Subpart F) to be allocated to low-taxed jurisdictions based on each CFC’s relative income and taxes paid. The GILTI tax that may be allocated is generally the U.S. shareholder’s tax liability after the Section 250 deduction and foreign tax credits. Overall, the guidance generally allows U.S. tax on GILTI (and Subpart F) income to be allocated to low-taxed jurisdictions, which will ultimately result in less top-up tax imposed under the Pillar Two rules. These blended CFC allocation rules are intended to sunset in 2027.


Another important aspect of the Pillar Two administrative guidance covers the interaction between the blended CFC allocation rules and QDMTTs. A QDMTT is a rule that low-tax jurisdictions may enact to ensure local country income is subject to an effective tax rate of at least 15%. 

The guidance provides that a QDMTT would apply before the blended CFC allocation rules, requiring U.S. multinationals to perform a Pillar Two calculation in advance of the GILTI calculation. CFC taxes are not considered covered taxes for purposes of a QDMTT, and the OECD expects that any taxes imposed under a QDMTT would be creditable against any CFC taxes. To the extent the Treasury Department does not provide that a QDMTT is creditable against GILTI (and Subpart F), U.S. multinationals may be subject to additional taxation on their foreign income.

The OECD’s implementation guidance on the interaction of blended CFC tax regimes and Pillar Two provides much-needed clarity regarding the interaction of GILTI and the GloBE rules. U.S. multinationals that fall within the scope of the GloBE regime should analyze their structure to determine the path forward under Pillar Two.

Next steps

The administrative guidance will be incorporated into a revised version of the commentary that will be released later this year and will replace the original version of the Commentary issued in March 2022. 

Grace Perez-Navarro, director of the OECD Centre for Tax Policy and Administration, said the release of the administrative guidance represents “the final but significant piece” of GloBE rules guidance, the Inclusive Framework is expected to continue to release further guidance on an ongoing basis to ensure that the GloBE rules are implemented and applied in a coordinated manner.

Tiffany Ippolito
Wilson Brakefield