Pillar 2 update - Transitional Qualified Status

Jersey and the Isle of Man marked another significant milestone in global tax reform recently as they joined Guernsey on the OECD’s updated list of jurisdictions that have been granted Transitional Qualified Status for the local implementation of the Income Inclusion Rule (“IIR”) as part of the Pillar 2 framework. Thus, affording local in-scope multinational enterprises with an increased measure of certainty and clarity regarding their tax compliance obligations both locally and internationally (pending completion of the comprehensive OECD peer review).

Background

The need for qualified status and resultantly transitional qualified status, can be traced to the peculiarity of the GloBE rules whereby the operation of the framework is based upon a system of interlocking and coordinated domestic rules, which ensure a minimum rate of tax is paid by each in-scope multinational group in each relevant jurisdiction. Specifically, the assessment as to whether any top-up tax is due in accordance with Pillar 2 principles is calculated after credit is given for any domestic top up tax due in accordance with a Qualifying Domestic Minimum Top-up Tax (“QDMTT”) or Qualifying IIR. It is therefore necessary to be able to readily discern which jurisdictions have introduced “qualifying” provisions. While the GloBE framework does provide for a comprehensive peer review of each jurisdiction, it would not be possible to complete this process in advance of the rules coming into effect in each jurisdiction and therefore an interim mechanism, being the Transitional Qualified Status, was introduced to provide certainty in the interim.

This mechanism operates by way of a self-certification made by an implementing jurisdiction that their legislation (or draft legislation) achieves outcomes consistent with the GloBE Model Rules, the commentary, and safe harbours. This certification is then circulated for comment to other implementing jurisdictions, where no comments are received, or all comments are resolved, the jurisdiction shall be recorded as having Transitional Qualified Status. Thereby, ensuring that the relevant benefits and administrative easements enshrined within the Pillar 2 framework shall be available in the interim.

Notably, the OECD maintains two separate Transitional Approval lists in respect of the Qualifying IIR and QDMTT, this is reflective of the fact that each jurisdiction is permitted to adopt all, some or none of the proposals detailed within the GloBE rules. Of particular note in this regard is the fact that Jersey introduced the Multinational Corporate Income Tax (Jersey) Law 2025 (“MCIT”) and not a Domestic Minimum Top-up Tax (“DMTT”).

What are the benefits of attaining Transitional Qualified Status?

• Prevents top-up taxes being imposed by other countries on local profits, thus avoiding double taxation during the transitional period.
• Increased flexibility for jurisdictions through the provision of additional time to fully enact IIR compliant legislation.
• Increased legal certainty through a reduction in ambiguity for MNEs during transition. This is particularly notable given the fact that any future changes in a jurisdiction’s qualified status are not retrospective.
• Enhanced jurisdictional credibility.

At a Glance

A Strong Signal to the Global Market

This collective achievement sends a clear message the Crown Dependencies are committed partners in global tax reform. By attaining Transitional Qualified Status Jersey, Guernsey, and the Isle of Man are reinforcing their reputations as transparent, well-regulated, and forward-looking international finance centres.