Overview
On 18 December 2023, the Inclusive Framework (“IF”) released its third tranche of Administrative Guidance on the Global Anti-Base Erosion (“GloBE”) Model Rules (“December AG”). The guidance is principally focused on the application of the Transitional CbCR Safe Harbour.
The Transitional CbCR Safe Harbour was introduced in guidance released in December 2022, and enables a Multinational Enterprise (“MNE”) Group to avoid both completing a full GloBE computation and paying a top-up tax for jurisdictions where they are eligible for one of three safe harbour tests: (1) de minimis; (2) simplified effective tax rate (“ETR”); and (3) routine profits. A KPMG report on this guidance is available here.
The initial guidance on the application of the Transitional CbCR Safe Harbour, Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two), included some key requirements MNE Groups must meet in order to be entitled to rely on the Transitional CbCR Safe Harbour. Most notably, there was a requirement for MNE Groups to prepare a Qualified CbC Report based on Qualified Financial Statements (“QFS”), essentially the accounts used to prepare the Consolidated Financial Statements (“CFSs”) of the Ultimate Parent Entity (“UPE”) or local statutory accounts. The initial guidance was relatively brief, and the December AG provides further guidance on how the safe harbours should apply.
The December AG has six sections. Sections 1-2 focus on the Transitional CbCR Safe Harbour, whilst Sections 3-6 focus on various other aspects of the GloBE Rules.
1. Purchase price accounting adjustments in Qualified Financial Statements clarifies when purchase pricing accounting adjustments do and do not need to be excluded from a MNE Group’s Qualified CbC Report.
2. Further Guidance on the Transitional CbCR Safe Harbour addresses a variety of technical issues, including more details on the definition of QFSs, the computation of the Simplified ETR and routine profits test, including in circumstances where an MNE is not required to file a CBC Report, and introduces new rules to counteract concerns about hybrid arbitrage arrangements.
3. Administrative Guidance on application of GloBE Rules provides more clarity on the definition of revenue for the purpose of the €750m scope threshold, and the treatment of mismatches between the fiscal year of the UPE and Constituent Entities (“CEs”) and between the fiscal and tax years of CEs.
4. Further Administrative 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 Transitional CbCR Safe Harbour under the simplified ETR test.
5. 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.
6. Simplified Calculation Safe Harbour for Non-Material Constituent Entities (“NMCEs”) provides a safe harbour (similar to the Transitional CbCR Safe Harbour) for NMCEs.
Like the first and second tranches released in February (“February AG”) and July 2023 (“July AG”), this guidance is intended to be incorporated in a revised version of the Commentary to the GloBE Model Rules and is intended to ensure a consistent application of the rules across jurisdictions. KPMG reports on the February and July AG are available here and here.
How should businesses respond?
The December AG provides greater clarity on how the IF intend the Transitional CbCR Safe Harbour to apply. Businesses that are seeking to rely on this safe harbour to minimise their Pillar Two compliance should review their CbCR preparation process to ensure that their CbC Report will meet the “Qualified” standard.
Other issues addressed in the guidance, such as the definition of revenue or allocation of blended controlled foreign company (“CFC”) taxes (i.e., Global Intangible Low-Taxed Income (“GILTI”)), can also materially impact the tax implications of Pillar Two for some MNE Groups.
Group should review this guidance and determine whether it impacts the disclosures they expect to make in their financial statements from the first quarter of 2024.
The remainder of this document provides a more detailed summary of the December AG.
