OECD technical guidance for implementation of the global minimum tax

The Agreed Administrative Guidance for the Pillar Two GloBE Rules was published by the OECD on 2 February 2023.

Guidance published on 2 February 2023

On 2 February 2023, the OECD/G20 Inclusive Framework on BEPS released technical guidance to assist governments with implementation of the Pillar Two global anti-base erosion (GloBE) rules, which will ensure multinational enterprises (MNEs) with revenues above €750 million will be subject to a 15 percent effective minimum tax rate. Critical to the effectiveness of Pillar Two is tax certainty and simplicity of administration. To this end, the OECD has published its first Administrative Guidance addressing a wide range of concerns identified by stakeholders as posing a risk to the effective implementation of the new rules. The Guidance here is welcome, as is the OECD’s commitment to considering further Guidance as additional issues are identified. Other implementation items are currently subject to consultation and are expected to complement this Guidance when finalised.

The new Guidance forms part of the OECD’s implementation framework for the GloBE rules, alongside the Pillar Two implementation package published in December 2022. The OECD intends to incorporate the examples into a new version of the official Commentary to the GloBE Model Rules originally issued in March 2022. Together with the December 2022 publication of the guidance on safe harbours and penalty relief, as well as the public consultation document on the GloBE information return and public consultation document on tax certainty for the GloBE rules, the Guidance is notable in that it finalises the implementation framework as set out in the October 2021 Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.

The new Guidance covers a variety of specific circumstances generally not foreseen or discussed in detail at the time the original Model Rules, as well as Commentary and Examples, were published in March 2022. The Guidance includes clarification on the scope of definitions determining which entities and groups are covered by the rules, including guidance for rebasing thresholds where these are denominated by local law in currencies other than Euros, the reference currency for the Model Rules. The Guidance also addresses stakeholder feedback on various technical issues, such as the collection of top-up tax in a jurisdiction in a period where the jurisdiction has no GloBE income, and the treatment of debt releases and certain tax credit equity structures.

An area of significant complexity has been the computation of GloBE Income and Covered Taxes, necessary for determination of the jurisdictional effective tax rate (ETR), the reference against which a liability to Top-up Tax is assessed. The treatment of certain investments and distributions, the associated taxes, and carried forward items is clarified. Notably, the OECD / G20 Inclusive Framework (IF) has agreed a simplified approach to integrating the US Global Intangible Low-Taxed Income (GILTI) rules with the GloBE rules. This is an area for which guidance has been eagerly awaited by affected groups and will now be welcome.

There is considerable further guidance on the Article 9 Transitional Rules, especially relating to:

  • The treatment of pre-transition deferred tax assets relating to tax credits; and
  • Intra-group transfers of assets between 30 November 2021 and transition as per Article 9.1.3., confirming that ‘transfer of assets’ has a broad interpretation and providing further guidance on how 9.1.3 is intended to work.

A new five year election has been made available to include all dividends from Portfolio Shareholdings in GloBE income, regardless of whether those are short-term or have been held for more than one year. Whilst aimed at insurers, it is available to all, and is made on a Constituent Entity by Constituent Entity basis. The impact may vary depending on whether such dividends have been exempted or subjected to tax. There is a specific chapter on insurance and investment funds. This includes the election for dividends on portfolio shareholdings, a widening of elections available to insurers with respect to their Investment Funds, rules on mutual insurers, and extending the deduction from GloBE income for distributions on Restricted Tier One Capital to insurers.

Finally, there are some additional explanations for deferred tax on transition into the regime and on the interaction of the GloBE rules with Qualified Domestic Minimum Top-up Taxes, which are expected to be introduced by many regimes to ensure that they receive the benefit locally of any additional tax payable by groups with ETRs below 15 percent.

Overall the Guidance amounts to around 100 pages of additional support for businesses, tax administrations and advisers seeking clarity over the application of the GloBE rules to their individual situations. The IF will continue to release further agreed administrative guidance, to ensure that the GloBE rules continue to be implemented and applied in a coordinated manner.

The GloBE regime represents a radical departure from the existing framework for international tax and it will be important to monitor how domestic implementation in the UK and globally tracks over coming months as part of impacted groups’ readiness approach.