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2 February 20232 minute read

OECD releases long-awaited Pillar 2 GILTI guidance

Today, the OECD released its first batch of implementation guidance to the Pillar 2 Model Rules. As anticipated, global intangible low-taxed income (GILTI) will be considered a qualifying controlled foreign corporation (CFC) tax for the purpose of Pillar 2, according to the document.

The OECD’s guidance additionally provides how GILTI tax is to be allocated among constituent entities.  The GILTI tax to be allotted is actual US tax liability on GILTI – that is, actual US tax liability after taking into account the effect of the Section 250 deduction and foreign tax credits, as adjusted by the 20-percent haircut and Section 861 expense allocation.  The allocation key allows GILTI to be allotted to low-taxed jurisdictions based on the ratio of income to amount of taxes paid within the jurisdictions.

As a result, relatively more GILTI tax will be allocated to jurisdictions with lower effective tax rates.  The allocation key is intended to sunset and be revisited in 2027, which places pressure on the US to modify GILTI so that it qualifies as an income inclusion rule (IRR) in the future. This allocation rule would similarly apply to the US’s Subpart F regime due to the credits being blended in the general and passive baskets. 

Also of interest is the interaction between the GILTI allocation key and the Qualified Domestic Minimum Top-Up Tax (QDMTT).  The QDMTT aims to ensure that a low-taxed jurisdiction, in principle, has the first right of tax on its own (low-taxed) income.

Today’s guidance additionally establishes that CFC tax, in principle, does not count as a Covered Tax against the QDMTT.  Instead, the OECD expects the QDMTT to be creditable against any CFC taxes.  If the QDMTT were determined not to be creditable for GILTI purposes, US taxpayers that only pay US residual tax on GILTI due to expense allocation would be penalized under the proposed allocation rules, as a portion of the residual US tax would be allocated to entities that are otherwise subject to the QDMTT in any event in order to reach 15 percent.  We would expect this to put pressure on Treasury to confirm that the QDMTT is a creditable tax under the new FTC regulations.

A more detailed alert on this topic as well as other relevant elements of today’s release will follow shortly. For more information, please contact any of the authors.