The OECD published further details on the mechanics of the GloBE rules of Pillar Two. Important news is that – compared to the blueprint of October 2020 – certain deferred tax expenses are also to be classified as covered taxes when calculating the ETR for the minimum taxation of 15%.
Background: the two pillars
Earlier this year the member states of the Inclusive Framework signed a Statement on a Two Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy where a system based on two pillars was agreed on to tackle this issue. Whereas Pillar One is about allocating profits of large multinational enterprises (MNE) to market jurisdictions, Pillar Two is implementing a global minimum taxation of 15% by means of the Global Anti-Base Erosion (GloBE) rules. Such minimum tax will apply as from 2023 to MNEs with revenue above EUR 750 million.
A more detailed description of the two pillars can be found here and here. What these new provisions mean for Switzerland can be found here.
OECD publication in December 2021
On 20 December 2021, The OECD published the GloBE model rules detailing the scope and laying out the specific mechanics in order to assist in the domestic implementation of the 15% global minimum tax under Pillar Two. In particular, the GloBE model rules provide for a coordinated system of interlocking rules that:
- define whether an MNE falls within the scope of the minimum tax;
- set out the mechanics for calculating the effective tax rate (ETR) of an MNE on a jurisdictional basis as well as determining the amount of top-up tax payable; and
- impose the top-up tax on an entity of the MNE group considering the agreed rule order.
The most relevant update included in the December 2021 publication concerns the covered taxes, which should include the increase or decrease by the total deferred tax adjustment amount for the year to take temporary differences and prior-year losses into account. However, certain adjustments (safeguards) apply, including limiting the recognition of the deferred tax assets and liabilities to the minimum rate and a recapture rule to ensure that amounts claimed as covered taxes are actually paid within a set period of time.
Also, the model rules include transition rules, particularly for the moment when an MNE group enters within the scope of the GloBE rules.
In Switzerland, particular attention must be given to the amortization of deferred tax assets recognized in connection with the transitional measures regarding the recent corporate tax reform (“step-ups").
What happens next
The OECD plans for early 2022 to release a detailed commentary on these model rules. At the same time, the OECD intends to address the co-existence with the US Global Intangible Low-Taxed Income (GILTI) rules.
The Inclusive Framework is also developing the model treaty provision for the Subject to Tax Rule (STTR), together with a multilateral instrument for its implementation. Such documents shall be released in the early part of 2022.
A public consultation event on the so-called and yet to be published Implementation Framework (focused on administrative, compliance and co-ordination issues relating to Pillar Two) will be held in February and on the STTR in March 2022.
What can companies do now?
As the now released GloBE model rules provide for a detailed mechanism on how the global minimum tax is to be implemented – although the relevant interaction between the IIR and US GILTI is not yet fully clear – and given the very fast implementation, companies now need to understand if and how they will be impacted by the minimum taxation. Our dedicated group of specialists at KPMG Switzerland – together with KPMG Global – is analyzing the rules and is ready to support companies that are affected. In a first phase, a high-level and broad analysis (e.g. within a workshop) will be helpful to address the most immediate information needs which can be assisted with KPMG’s proprietary tools. Then, the analysis can be further refined, scenarios can be developed and potential needs for action can be determined.