Pillar Two Global Minimum Tax – OECD, EU and UK updates

Summary of key recent developments in relation to Pillar Two from the OECD, in the EU and UK

Key recent Pillar Two developments

The end of 2023 brought a flurry of activity from the OECD, in the UK and across the EU in relation to adoption of the Pillar Two rules. The rules are summarised in this article, which sets out the key developments, as well as the state of play of Pillar Two adoption in the EU.

December OECD Pillar Two Admin Guidance and updated HMRC guidance

On 18 December 2023, the OECD Inclusive Framework (IF) released its third tranche of Administrative Guidance (Guidance) on the Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two). 

The Guidance principally focuses on clarifying the application of the Transitional Country-by-Country Reporting (CbCR) Safe Harbours as well as various other aspects of the GloBE Rules. It is issued as a series of amendments to the existing Commentary to the GloBE Model Rules.

The Guidance states that there will be a revised version of the Commentary in early 2024, replacing the current version and incorporating all three Administrative Guidance papers. According to the IF press release, it is expected that the IF will release further agreed guidance in the first half of 2024 on the application of deferred tax liability recapture rules and the allocation of deferred taxes relating to cross-border taxes such as Controlled Foreign Company (CFC) Tax Regimes. It is noted that the IF is also working on a peer review process, an administrative framework, as well as dispute resolution mechanisms.

A summary of the key points included in the latest Guidance from the IF is set out below.

A. Further guidance and clarifications on the application of the Transitional CbCR Safe Harbour (TCSH):

  • Purchase price accounting adjustments in Qualified Financial Statements - clarifies when purchase price accounting adjustments do and do not need to be excluded from a Multinational Entity (MNE) Group’s Qualified CbC Report; and
  • Further Guidance on the TCSH addresses a variety of technical issues, including more details on the definition of Qualified Financial Statements, the computation of the Simplified effective tax rate (ETR) and routine profits test, including in circumstances where an MNE is not required to file a CbC Report, and introduces new rules to address hybrid arbitrage arrangements.

B. Clarifications in respect of other aspects of the GloBE Rules:

  • The Guidance provides more clarity on the principles for determining Revenue for the purpose of the €750 million scope threshold;
  • Further Guidance on the allocation of Blended CFC Taxes addresses the application of the temporary allocation rules in various scenarios where a MNE Group is not required to compute the jurisdictional ETR under the full GloBE rules in respect of jurisdictions that are eligible for the TCSH under the simplified ETR test. This should provide more clarity for US groups that have been assessing how Global Intangible Low-Tax Income (GILTI) taxes will be allocated between jurisdictions including those to which the safe harbour applies; 
  • Transitional Filing Deadlines for MNE Groups with Short Reporting Fiscal Years ensures that groups with short fiscal years will not be required to file a Global Information Return (GIR) until 30 June 2026; and
  • Simplified Calculation Safe Harbour for Non-Material Constituent Entities (NMCEs) provides a safe harbour (similar to the TCSH) for NMCEs.  

It is worth noting that certain issues that many may have expected to have been determined by now were not addressed, including:

  • Permanent Safe Harbours - other than for NMCEs;
  • Treatment of securitisation entities and certain Investment Fund matters; and
  • Clarity on the application of intragroup financing arrangements (paragraph 3.2.7 of the Model Rules).

For more details and KPMG commentary, please refer to the dedicated report from KPMG International.

We understand from HMRC that it is the UK Government’s intention to ensure this latest Guidance is reflected in UK legislation in due course. HMRC have also released further draft HMRC guidance on the UK Pillar Two legislation, on which they welcome views from stakeholders.

EU: EC publishes FAQs on interpretation and transposition of EU global minimum tax

On 22 December 2023, the European Commission (EC) published ‘frequently asked questions’ (FAQs) on the interpretation and/or transposition of the EU minimum tax directive (2022/2523). The FAQs represent the outcome of informal reflections of the Commission Services and therefore cannot be interpreted as binding on the EC and the member states.

The FAQs reinforce the reference to the OECD’s work under Recital 24 of the Preamble to the Directive and confirm that the Commentary to the OECD Model Rules could be used as a source of illustration or interpretation to ensure consistency in application of the rules across member states, to the extent that those sources are consistent with the Directive and EU law.

For more details and KPMG commentary, please refer to the detailed report from KPMG’s EU Tax Centre.

Pillar Two implementation in the EU – State of Play

The end of 2023 brought a flurry of activity across the EU in relation to local adoption of the Pillar Two rules ahead of the transposition deadline of 31 December 2023. As at 9 January 2024, the state of play of the local implementation process across the EU can broadly be summarised as follows.

A. EU jurisdictions that have opted for deferral: Estonia, Latvia, Lithuania (draft legislation), Malta (no draft legislation published), Slovenia (legislation enacted).

Note that for these jurisdictions, deferral has been confirmed by the EC. These jurisdictions will nevertheless legislate for Pillar Two (including potentially for a qualified domestic top-up tax (QDMTT) to apply during the deferral period) and will determine the duration of the deferral (a maximum of six years).

B. EU jurisdictions that have not opted for deferral or that do not qualify for deferral (i.e. are required to apply the rules according to the standard timeline – income inclusion rule (IIR): 2024 / undertaxed profit rules (UTPR): 2025): 

  • Legislation fully enacted (including QDMTT: 2024): Austria, Bulgaria, Belgium, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Romania, Slovenia, Sweden;
  • Draft legislation published: Cyprus (QDMTT: 2025), Spain (QDMTT: 2024); and
  • No (draft) legislation published: Greece, Poland, Portugal. 

Note that the jurisdictions that that have missed the EU Directive transposition deadline of 31 December 2023 (namely Cyprus, Greece, Poland, Portugal and Spain) are nevertheless required to apply the rules according to the EU Directive timeline. Such retroactive application of the rules may raise constitutional issues in some of these jurisdictions, in particular Portugal and Poland. This is by no means a straightforward matter and it therefore remains to be seen how the issue of the date of application will be resolved in each of these jurisdictions. 

Developments in European countries outside of the EU are summarised as follows:

  • Switzerland enacted the ordinance to implement the QDMTT from 2024. It is currently not certain when Switzerland is going to implement the IIR and UTPR;
  • In Liechtenstein, the bill was enacted end of December 2023. While the QDMTT and IIR would generally apply for financial years starting on or after 1 January 2024, the bill authorises the Government to defer the application to 1 January 2025 depending on the implementation timeline in other countries. In addition, the bill further authorises the Government to set the start date for the UTPR but clarifies that the rule would not apply earlier than for financial years starting on or after 1 January 2025;
  • Norway submitted draft legislation to Parliament at the end of November 2023 with IIR and DMTT rules applicable from 2024. The timeline for the UTPR was not clarified; and
  • The Governments of Guernsey, Jersey and the Isle of Man issued a joint statement in May clarifying their intention to implement IIR and DMTT rules from 2025.

For more details as well as the state of play globally, please refer to KPMG International’s dedicated global Pillar Two State of Play tracker.