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21 February 202318 minute read

Administrative Guidance under Pillar 2 GloBE Model Rules: a detailed review

On February 2, 2023, the OECD released the Administrative Guidance on Pillar 2 GloBE Model Rules, as approved by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The document provides significant additional guidance on a series of issues arising under the GloBE Model Rules and related commentary, making it an essential component of the global minimum tax package.

Below, we provide a summary of the technical issues discussed by the guidance.

1.  Scope

In terms of scope, the Administrative Guidance provides for interpretative and operational guidance on certain aspects of the Model Rules that raised doubt or were requested to be clarified by stakeholders. These aspects, as clarified by the Administrative Guidance, will be translated into new language and examples in a revised version of the GloBE Model Rules Commentary and a revised set of detailed examples, respectively.

The Guidance provides clarification on both the definition of Consolidated Financial Statements and Controlling Interest where the GloBE Model Rules deemed consolidation test is applied. The previous published set of detailed examples will be revisited to include several illustrative examples that deal with privately held and investment entities that do not prepare financial statements or consolidate investments.

Furthermore, the guidance clarifies that, where the individual financial accounts of a constituent entity do not contain its deferred tax expense, the amount recorded in the MNE group’s consolidated financial accounts should be included for the purposes of calculating the Total Deferred Tax Adjustment Amount and computing the adjusted covered taxes.

2. Income and taxes

2.1. Intra-group transactions accounted at cost

Article 6.3.1 of the Model Rules provides that a disposing entity will include the gain or loss on the disposition of an asset in its GLoBE income.  In case an applicable accounting standard allows or requires an intra-group transfer of an asset to take place at carrying value, Article 6.3.1 would require an adjustment for GLoBE purposes when determining the GLoBE income.  US GAAP is an example of an accounting standard which generally does not recognize a gain in relation to the intra-group transfer of an asset. In other words, an asset is transferred at carrying value, but a deferred tax asset may be created in case the acquiring entity accounts for the asset at stepped-up value.

The guidance confirms that the disposing entity must apply the arm’s-length principle as per Article 3.2.3 in relation to the transfer of the asset. However, the guidance does not address how the asset should be treated at the level of the acquiring entity for GLoBE purposes. It is therefore still unclear if the acquiring entity accounts for the asset at fair market value or if a deferred tax asset is recognized for GLoBE purposes.  Further guidance will be provided at a later statge to provide clarity on this matter.

2.2. Excluded Equity Gains or Loss and hedges of investments in foreign operations

Based on Article 3.2 of the Model Rules, certain gains or losses are to be excluded from the computation of the GLoBE income (Excluded Equity Gain or Loss). The guidance clarifies that foreign exchange gains or losses on certain qualifying hedge instruments in relation to such equity may also be excluded from the computation of the GLoBE income.

The guidance allows for a five-year election to treat the qualifying hedge instruments as Excluded Equity Gains or Losses in case certain specific conditions are met. 

2.3. Excluded dividends — asymmetric treatment of dividends and distributions

The guidance indicates that certain financial instruments may allow for a mismatch in accounting treatment at the level of the issuer and the holder (hybrid instruments for accounting purposes).  This would effectively result in a so-called deduction/non-inclusion situation increasing the GLoBE tax rate at the level of the holder of the issuer (no income recognition). The guidance provides two examples of such instruments:

  1. Hybrid financial instrument (eg, redeemable preference shares) treated for financial statement purposes as debt by the issuer and equity by the holder and

  2. Hybrid financial instruments that have both debt and equity characteristics (eg, a convertible bond) for financial statement purposes.

The guidance requires the holder of such instruments to follow the accounting treatment of the issuer.

2.4. Treatment of debt releases

The guidance recognizes that in certain cases a debt release by a borrower may result in a financial statement income recognition without corresponding taxation of such income from a tax perspective in the jurisdiction of the borrower. This could result in a lower GLoBE tax rate and potential top-up tax.  In order to avoid this scenario, the guidance allows an elective solution allowing income from debt release to be excluded from GLoBE income. The conditions to elect for this solution are strict. For related (and unrelated) party debt, the debt release must, among other things, be under legal statutory insolvency or bankruptcy proceedings.

The guidance indicates that it is under consideration whether or not similar guidance is necessary for the creditor side of a debt release.

2.5. Accrued pension expenses

Based on the Model Rules, accrued pension expenses are adjusted for the purpose of GLoBE income. This guidance clarifies that only accruals to pension funds (third-party and in-house) are eligible for the accrued pension expense adjustment. Payments directly to (former) employees are not within the scope of this adjustment.

The guidance also clarifies that a pension surplus or pension income recognized for financial statement purposes should be excluded from the GloBE income to the extent that it is retained by a pension fund.

2.6. Covered taxes on deemed distributions

The Administrative Guidance clarifies that Article 4.3.2(e) of the GloBE Model Rules – which allocates covered taxes on dividends or other distributions to the distributing constituent entity – applies also to deemed distributions, where the underlying ownership interest is treated as an equity interest for tax in the jurisdiction imposing the tax and for financial accounting purposes.

2.7. Excess negative tax carryforward guidance

The GloBE Model Rules provide for the imposition of top-up tax with respect to a jurisdiction in a loss year when a permanent difference causes the domestic tax loss in that jurisdiction to be greater than the GloBE Loss for the jurisdiction.

The Model Rules have two mechanisms to prevent timing difference from becoming an instrument that eliminates permanent differences and are necessary to preserve the integrity of the GloBE Model Rules, respectively included in Article 4.1.5 and 5.2.1 of the Model Rules.

To avoid such results, the Administrative Guidance provides that jurisdictions shall adopt an administrative procedure in relation to the determination of total adjusted covered taxes for a jurisdiction for a certain fiscal year. The administrative procedure comprises a methodology by which an MNE group carries forward any excess negative tax expense determined for a fiscal year and reduces adjusted covered taxes in a subsequent fiscal year (or years) in which the MNE group has GloBE Income for the jurisdiction. The administrative procedure is elective where Article 4.1.5 applies and mandatory where Article 5.2.1 applies.    

2.8. Loss-making parent entities of CFCs

In this paragraph, the guidance states that the GloBE Model Rules should not disadvantage jurisdictions that include CFC or other foreign income against domestic losses and those that do not.

In particular, there are some jurisdictions which include foreign source income under CFC regimes and require that such income offset domestic losses prior to applying FTCs against the foreign source income of its subsidiaries. In other countries, if there is a domestic source loss and foreign source income in the same year, tax on foreign source income is offset by FTCs, and the loss is generally carried forward under domestic rules.

The GloBE Model Rules at Article 4.4 only allows DTAs associated with this loss to be carried forward and used as an addition to adjusted covered taxes when the loss is used to offset domestic source income in a later year, while DTAs related to FTC carryforwards are not taken into account. 

In order to avoid more top-up tax in a jurisdiction offsetting future income with FTCs than in a jurisdiction carrying forward losses, the guidance provides a rule to ensure equivalent outcomes between the above two scenarios under the GloBE Model Rules. Specifically, Article 4.4.1(e) (which excludes the amount of deferred tax expenses associated with FTCs from the computation of the Total Deferred Tax Adjustment Amount) shall not apply in the case of a "Substitute Loss Carry-forward DTA."

2.9. Equity gain or loss inclusion election and qualified flow-through tax benefits

Under Article 3.2.1(c) of the GloBE Model Rules, three types of income or loss related to equity investments are excluded from the GloBE tax base. The document offers some guidance on how to deal with these three amounts, called "Excluded Equity Gain or Loss."

  • Gains and losses from changes in fair value of an ownership interest in an entity, other than a portfolio shareholding

    Certain gains and losses are excluded from GloBE income or Loss if exempt from taxation under domestic tax rules. Although the loss is excluded from the computation of GloBE income or loss, it will reduce the domestic tax liability in the relevant jurisdiction, thereby reducing the GloBE ETR for such jurisdiction. This might produce a distorted jurisdictional ETR and may produce a top-up tax liability in an otherwise high-tax jurisdiction.

    The guidance provides for an "Equity Investment Inclusion Election," which allows companies to make a five-year election, on a per jurisdiction basis, to turn off the exclusion in Article 3.2.1(c). In other words, companies can opt to take certain excluded gains or losses and the associated tax attributes into account for purposes of computing GloBE income or loss and adjusted covered taxes, to the extent those gains or losses are generally included in domestic taxable income. All taxes (including deferred taxes) related to those amounts will be reflected in covered taxes).

  • Treatment of qualified flow-through tax benefits of qualified ownership interests

    This rule is targeted for tax equity structures whereby a tax credit is an essential component of the expected return on investment. This rule is intended to provide special treatment for certain structures where an investor invests in a partnership (without having control that would trigger line-by-line consolidation) that generates non-refundable tax credits and tax losses that are specially allocated to the investor. The Guidance provides that, to the extent that these credits and losses, plus certain other items, can be treated as reducing an owner's investment in the partnership, these tax benefits are removed from the owner’s covered taxes, up to the amount of the owner’s investment in the entity. Without this rule, credits earned through equity method investments would diminish the GloBE ETR as compared to another MNE earned a similar cash return with a traditional equity structure.

2.10. Allocation of taxes arising under a Blended CFC Tax regime

The Administrative Guidance confirms that the US’s tax on CFCs’ global intangible low taxed income (or GILTI) is a CFC tax regime for purposes of the GloBe Model Rules. The OECD’s guidance provides that such regime is a “Blended CFC Tax Regime.”  The guidance provides how GILTI tax is to be calculated and 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.  Additionally, the guidance provides that the US’s tax on Subpart F income is also a Blended CFC Tax Regime.

A more detailed description of these allocation rules can be found here.

3. Application of the GloBE Model Rules to insurance companies

This section of the Administrative Guidance clarifies questions raised by stakeholders in respect of Chapter 7 of the GloBE Model Rules which contains a series of special rules applicable to investment entities and insurance investment entities.


4.  Transition

This section of the Administrative Guidance covers several aspects of Chapter 9 (Transition Rules) of the GloBE Model Rules.

4.1. Deferred tax assets with respect to tax credits under Article 9.1.1.

The transition rule included in Article 9.1.1 of the GloBE Model Rules allows pre-existing tax attributes to be used when assessing the GloBE ETR of an MNE group in a jurisdiction. Under this rule, an MNE group takes into account all DTAs and DTLs reflected or disclosed in the financial accounts of all the constituent entities in a jurisdiction for the first year within scope of the GloBE Model Rules for that jurisdiction (the transition year), at the lower of the minimum rate or the applicable domestic tax rate.

The Administrative Guidance clarifies that DTAs on tax credit carryforwards are taken into account in computing adjusted covered taxes for GloBE purposes. To avoid complexity, a simplified approach of recasting DTAs with respect to tax credits, including FTCs, is included where the applicable domestic tax rate is equal to or higher than the minimum rate. The recast is not permitted where the applicable domestic tax rate is lower than the minimum rate. The recast amount for such DTAs shall be determined in accordance with the following formula:

Deferred tax assets reflected in the financial accounts

_______________________________________________       X    Minimum rate   

Applicable domestic tax rate

The applicable domestic rate is the rate applicable in the fiscal year preceding the transition year, but the outstanding balance of tax credit must be recalculated in case of tax rate changes in subsequent years.

The Administrative Guidance also provides additional clarity on what happens when such pre-existing tax credits are settled or used. In particular, it states that the settlement of refundable tax credits (both qualified refundable tax credits and non-qualified refundable tax credits) that were recorded as income in the financial accounts prior to the beginning of the transition year generally should not be treated as reduction to adjusted covered taxes, regardless of whether the amount satisfies an income tax liability.

4.2 Applicability of Article 9.1.3 to transactions similar to asset transfers

Based on Article 9.1.3 of the GloBE Model Rules, in the case of a transfer of assets between constituent entities after November 30, 2021 and before the commencement of a transition year, the basis in the acquired assets (other than inventory) is to be based upon the disposing entity’s carrying value of the transferred assets upon disposition with the DTAs and DTLs brought into GloBE determined on that basis.

The Administrative Guidance states that all transactions and corporate restructurings that are recorded in a similar manner as an asset transfer (ie, where the MNE group creates or increases the carrying value of an asset), regardless of their form and whether they take place within an entity or among entities, should be viewed as a transfer of asset for purposes of Article 9.1.3.

Furthermore, the Administrative Guidance provides that the term “transfer of assets” includes any transfer in which the acquiring entity creates or increases the carrying value of an asset in its financial accounts and the disposing entity recognizes the corresponding amount of income in the pre-GloBE period. The rule also applies where the MNE group records intra-group transactions at cost and a DTA based on the difference between book and tax basis under the domestic law is created, and to a transfer or deemed transfer within the same entity.

It is important to note that the Administrative Guidance on transition rules has implications for transactions that take place after November 30, 2021 and before the GloBE Model Rules take effect.

4.3 Asset carrying value and deferred taxes under 9.1.3

This section provides additional guidance on Article 9.1.3 of the GloBE Model Rules, which prevents MNE groups from recording a step-up value on their assets transferred after November 30, 2021 and before the transition year, without including the resulting gain in the computation of GloBE income.

The Administrative Guidance provides that the carrying value that should be used for GloBE purposes at the beginning of the transition year is the carrying value upon disposition of the transferred asset on the day of transfer, and adjusted for capital expenditures, amortization or depreciation after the transaction and before the acquiring entity becomes subject to the GloBE Model Rules.

For transactions recorded at cost, the additional guidance makes it explicit that the scope of this article also prevents an MNE group to consider DTAs created in connection with the transfer of assets, based on a difference between the carrying value of the transferor and the tax basis of the acquiring entity. DTAs and DTLs that already existed at the time of the transfer, adjusted for the effects of subsequent capitalized expenditures, amortization and depreciation and re-cast at the minimum rate, shall be considered under Article 9.1.1 in the transition year and subsequent years.

5. Qualified domestic minimum top-up taxes

This section of the Administrative Guidance sets out, for the first time, the general principles for determining whether a domestic minimum tax is “functionally equivalent” to the GloBE Model Rules and therefore constitutes a QDMTT. The recognition of a domestic minimum tax as a QDMTT for GloBE purposes is an important issue for MNE groups because tax payable under a QDMTT can be fully credited against the top-up tax otherwise determined under the GloBE Model Rules. On the other hand, tax payable under a non-qualifying domestic minimum tax is treated as a covered tax and can only be included in the GloBE jurisdictional ETR calculation (at the numerator level), which is less advantageous.

Importantly, the Administrative Guidance changes the ordering rule for purposes of determining the covered taxes in determining the amount of any QDMTT. In the updated guidance, a CFC tax is not considered a covered tax for purposes of calculating QDMTT.

The Administrative Guidance further indicates that the Inclusive Framework will develop a multilateral review process in 2023 to assess whether the domestic minimum tax of a jurisdiction should be treated as a QDMTT. The new guidance on functional equivalence with the GloBE Model Rules is intended to be used in the development and application of that process. 

The Administrative Guidance clarifies that the Inclusive Framework will undertake further work on the development of a QDMTT safe harbor. 

The overall principle in the new paragraphs is that, to be considered functionally equivalent, a domestic minimum tax must be designed, implemented and administered so that its design is consistent with the design of the GloBE Model Rules, and so that it reliably produces outcomes that are consistent with the outcomes for the jurisdiction that are produced under the GloBE Model Rules.

Specifically, a minimum tax must be structured so that it is in line with the architecture of the GloBE Model Rules and does not systematically result in an incremental top-up tax for the jurisdiction that is less than what would have been determined under the GloBE Model Rules. As such, variations in outcomes between the domestic minimum tax and GloBE Model Rules should not prevent that tax from being treated as a QDMTT if those variations systemically produce a greater incremental tax liability or do not systematically produce lower tax liability than would be expected under the GloBE Model Rules and Commentary. 

Going forward

As of the date of this alert, approximately 50 countries have indicated that they will implement the Pillar 2 GloBE Model Rules, with the largest group of countries consisting of the EU Member States. Under the EU Directive adopted on December 15, 2022, EU Member States have until December 31, 2023 to enact the EU Directive into national legislation with the rules to be applicable for fiscal years starting on or after December 31, 2023, except for the UTPR, which is to be applicable for fiscal years starting on or after December 31, 2024. Similar Pillar 2 adoption timetables are being discussed in the remaining countries that have indicated they will implement the Pillar 2 GloBE Model Rules.

With the issuance of the Administrative Guidance on February 2, 2023, the OECD is nearing completion of an ambitious program to rewrite the international tax rules that began with the release of the report Addressing Base Erosion and Profit Shifting in February 2013.

For more information, please contact any of the authors.


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