Add a bookmark to get started

24 July 202314 minute read

OECD releases Administrative Guidance on Pillar 2 implementation

On July 17, 2023, the Organisation for Economic Co-operation and Development (OECD) released a second set of Administrative Guidance (July AG/July Guidance) with respect to the implementation of Pillar 2. The release follows Administrative Guidance published in February 2023 (February AG) and is part of ongoing OECD guidance related to the interpretation and clarification of the Pillar 2 Model Rules. 

Additional guidance is expected later in 2023, alongside revised versions of the rules’ Commentary and Examples.

As jurisdictions move toward Pillar 2 implementation, the OECD expects, based on a dynamic interpretation, that the Inclusive Framework’s implementing jurisdictions will adhere to the Administrative Guidance.

In addition to the July Guidance, the OECD released an update to the GLoBE Information Return, as well as the text, design, and multilateral instrument necessary to implement the tax-treaty-based Subject to Tax Rule.

Some key observations following the release of the July Guidance are as follows:

  • The OECD demonstrated core attention to the introduction of a Qualified Domestic Minimum Top-up Tax (QDMTT) and an accompanying Transitional QDMTT Safe Harbor – these are likely to follow the same principles as the GloBE rules
  • The release includes a newly introduced Transitional UTPR Safe Harbor of two years, which appears to primarily benefit MNEs headquartered in jurisdictions that may not be able to adopt the Pillar 2 rules, such as the US, and
  • The release includes additional guidance on the treatment of tax credits, most notably expanding the reach of Qualifying Refundable Tax Credits, which appears to – at least partially – address US concerns.

This July Guidance includes guidance on general currency conversion rules for the purposes of the GloBE calculations on both tax credits and application of the Substance-based Income Exclusion (SBIE). It also provides guidance on the design of a QDMTT, which includes the introduction of a QDMTT Safe Harbor. Further, it clarifies the mechanism of a Transitional UTPR Safe Harbor.

The guidance on these items is briefly discussed below.

General currency conversion rules for the GloBE rules

According to the guidance, GloBE calculations and the GloBE return should be completed using the same presentation currency as the ultimate parent entities’ consolidated financial statements. Amounts relevant to the GloBE calculations that are not translated into the presentation currency should be translated into the presentation currency of the ultimate parent entity, taking into account the applicable foreign currency translation rules of authorized financial accounting standards in the jurisdiction. 

The amount of Top-Up tax due in an implementing jurisdiction may need to be translated to local currency for assessment or payment purposes. Jurisdictions will have some flexibility to determine the currency translation basis: average rate for the year, end-of year rate, or rate on date of payment. A number of thresholds, such as the EUR750 million scope and EUR1 million de-minimis rule in the GloBE rules, are set in Euros. In order to determine whether these thresholds are met, the guidance prescribes that translation to the ultimate parent’s currency – if not Euros – should take place against the average December exchange rate of the previous year.

The Administrative Guidance provides a number of examples with further explanation and interpretation of the rules.

Guidance on tax credits

A significant concern within the business community has centered around the treatment in the Pillar 2 calculations of tax credits – especially the risk that tax credits will be treated as tax rebates, thereby increasing the likelihood that companies will be subject to a top-up tax, even in jurisdictions with high nominal tax rates.

Under the current rules, a distinction is made between Qualified Refundable Tax Credits (QRTCs), which are refundable in cash or cash equivalents within four years, and Non-Qualified Refundable Tax Credits (Non-QRTCs), which are refundable after four years. A QRTC is treated as an increase to the GloBE Income (denominator), while a Non-QRTC is treated as a reduction to the Covered Taxes (numerator). Both therefore reduce the effective tax rate (ETR), but this effect is, in principle, much stronger for a Non-QRTC. The guidance also permits, in limited circumstances, alternative timing for including QRTCs as taxable income in GloBE Income.

The July Guidance establishes rules for the treatment of tax credits outside the two categories outlined above, as well as provides clarifications to the existing Commentary.

In addition to the current distinction between QRTCs and Non-QRTCs, the July Guidance provides the following new categories: Marketable Transferable Tax Credits (MTTCs), Non-Marketable Transferable Tax Credits, (non-MTTCs), and Other Tax Credits (OTCs). MTTCs will be treated the same as QRTCs – ie, an increase in GloBE Income instead of a decrease in Adjusted Covered Taxes. Non-MTTCs and OTCs reduce the amount of Adjusted Covered Taxes.  

These newly introduced concepts are summarized as follows:

  • MTTCs are tax credits that the holder of the credit can use to reduce its tax liability, and that meet two cumulative standards (determined separately for tax credit originators and purchasers): i) the legal transferability standard, met if the credit can be transferred by the originator or purchaser to an unrelated party, and ii) the marketability standard, met if the credit is transferred by the originator or from the purchaser at a price at least 80 percent of the net present value of the credit.
  • Non-MTTCs are tax credits that, if held by the originator, are considered transferable but are not considered MTTCs – and, if held by the purchaser, are not considered MTTCs.
  • OTCs are non-refundable and non-transferable tax credits that can only be used to offset a tax liability of the originator.

In order to determine the category of a tax credit for GloBE purposes, one should first determine whether the tax credit is refundable and qualifies as a QRTC. If it meets those criteria, it will be classified as a QRTC regardless of whether the conditions of a MTTC are met.

If a tax credit is not considered a QRTC, it should be tested whether the transferability criterion is met and whether the tax credit could be considered a MTTC. The marketable transferable tax credit is treated for the seller as either additional income or a grant – a favorable outcome under the Pillar 2 calculations. This treatment also applies for taxpayers who could have sold the credit, but who chose not to do so.

The guidance also clarifies that tax credits that do not qualify as QRTCs or MTTCs are treated as reductions to Covered Taxes, and Covered Tax refunds that are credited against another Covered Tax liability are treated as reductions to Adjusted Covered Taxes; consequently, where such credits are treated for financial accounting purposes as income rather than tax reductions (eg, tax credits refundable after four years), they are required to be subtracted in full from the computation of GloBE Income or Loss.

The MTTC treatment is especially relevant (and especially welcome) for US multinational enterprises (MNEs) as many of the transferable credits arising under the Inflation Reduction Act (IRA) are likely to benefit from this addition in the July Guidance.  US-MNEs that are originators of transferrable IRA credits should achieve QRTC treatment. 

Conversely, US-MNEs that buy IRA credits to satisfy their own tax liability will be considered to have a non-marketable transferable credit as the IRA credits cannot be resold.  However, the discount (ie, the difference between the credit’s face value and its discounted purchase price) is not treated as a reduction of covered taxes.  Instead, the discount is required to include in GloBE income, with the inclusion in GloBE Income occurring ratably as the credits are used to offset tax liability.  This is a favorable outcome for US-MNEs.

The July 2023 AG also contains further guidance on the Qualified Flow-Through Tax Benefits (QFTBs) and the definition of Qualified Ownership Interests (QOIs) through which QFTBs are received, concepts that were introduced in the Feb 2023 AG. 

Substance-based income exclusion

The Administrative Guidance provides clarifications with respect to several aspects of determining the substance-based income exclusion. In relation to interjurisdictional assets and employees, the OECD considered the numerous circumstances in which employees work temporarily outside the jurisdiction of the constituent entity during the relevant period (eg, secondments, work trips for business purposes).

Granting the full relevant payroll carve-out to the jurisdiction in which the employee is formally employed by a constituent entity would defeat the rule’s purpose of capturing the substantive activities occurring in that jurisdiction if that employee were to carry out work mostly in another jurisdiction. To prevent the substantial compliance costs of tracking the amount of working time and location of each employee, a threshold test would be the appropriate solution. In other words, if an eligible employee spends more than 50 percent of the working time within the jurisdiction of the constituent entity employer, the constituent entity employer will be entitled to claim the full payroll carve-out with respect to that employee.

On the other hand, a working time of less than 50 percent in the jurisdiction of the constituent entity employer would allow only a proportional payroll carve-out (eg, 30-percent working time, 30-percent of the payroll carve-out). Suitable company policies which are appropriately enforced should allow to determine whether the test is satisfied with respect to the majority of employees without the burden of everyday location tracking. The same test would also be applicable to the eligible tangible assets that can be temporarily located in a different jurisdiction for the purposes of the tangible asset carve-out.

 Guidance has been provided in relation to the possibility to make a claim for only a portion of the total eligible payroll costs and tangible assets. No requirement exists to calculate the maximum allowable amount of eligible costs for the purpose of the substance-base income exclusion.

In relation to the amount of stock-based compensation to be considered for the eligible payroll costs, the OECD clarified that the amount intended is the one included in the financial accounts used to determine the constituent’s entity’s net income or loss (not impacted by the election under Article 3.2.2).

Another answered question relates to whether a lessor is allowed a carve-out in respect of the carrying value of a leased asset subject to an operating lease. The OECD clarified that the lessor will be permitted to take a portion of the carrying value of such asset if the asset is located in the same jurisdiction of the lessor. The amount allowed is equal to the excess, if any, of the lessor’s average carrying value if the asset over the average amount of the lessee’s right of use asset.

In determining the carrying value of eligible tangible assets in the context of impairment losses, guidance has been provided that such carrying value is intended to include adjustments for impairment losses, and any reversal of the impairment charge under applicable accounting standards should be taken into account.

Finally, in relation to the allocation with respect to an Ultimate Parent Entity where, as a result of a deductible dividend regime, the GloBE Income is reduced in application of Article 7.2.1, it has been confirmed that there should be a corresponding adjustment to the amounts of eligible payroll costs and eligible tangible assets. Without proportionate reduction to these amounts, the substance-based income exclusion would be disproportionately large compared to the GloBE Income in the jurisdiction under the GloBE rules.


Supplementing the February 2023 Administrative Guidance, the July Guidance also clarifies specific issues related to the QDMTT and provides the Inclusive Framework member jurisdictions with tailored solutions they can rely on for the implementation and design of a QDMTT in their respective tax system.

The July Guidance covers the application of a QDMTT mechanism for entities such as joint ventures, joint venture subsidiaries, minority-owned constituent entities, flow-through entities (FTEs), and flow-through UPEs, as well as for scenarios such as an eligible distribution tax system.

Furthermore, the July Guidance clarifies the coordination of the GloBE rules concerning the transition years for the purposes of the IIR and/or UTPR and the application of a QDMTT in cases where the first fiscal year in which a QDMTT applies to domestic constituent entities located within the jurisdiction is before or after the first fiscal year in which the GloBE rules apply to those constituent entities. The guidance indicates that a QDMTT must have a supplemental rule that treats the fiscal year in which the GloBE rules come into effect for such constituent entities as a new Transition Year and gives guidance as to how certain tax attributes, such as any excess negative tax expense carry-forward, deferred tax liability, and GloBE loss carry-forward, of those constituent entities will have to be eliminated and/or restated.

The July AG brings a significant change in respect to the application of article 9.1.3 of the GloBE rules by restricting the transition rule for disposing entities in jurisdictions which are partially subject to GloBE rules. According to the guidance, the Transition Year referred to in article 9.1.3 does not include a fiscal year in which the Transitional CbCR safe harbor applies to the disposing constituent entity that potentially targets hybrid planning around the Transitional CbCR safe harbor.

The July Guidance also includes new filing obligations for a QDMTT jurisdiction, specifically by allowing a QDMTT jurisdiction to collect the data points required to compute the GloBE tax liability in a format other than the GloBE Information Return.

Finally, the July AG discusses the cases where a QDMTT jurisdiction is prevented or restricted from applying the QDMTT to a constituent entity located in the jurisdiction due to constitutional provisions or tax stabilization agreements (ie, international investment agreement or similar agreements between the QDMTT jurisdiction and the MNE group). Any direct or indirect challenge to the application of a QDMTT by the MNE Group based on these grounds means that the amount challenged shall not be treated as QDMTT payable. The Top-up Tax payable under the QDMTT will not reduce the GloBE Top-up Tax to zero and thus may be collected by another jurisdiction under the GloBE rules.

Safe harbors

As anticipated in the 2022 implementation package, the July Guidance includes new Safe Harbors meant to address two different issues.

The QDMTT Safe Harbor provides a practical solution to lower compliance costs for MNE Groups and administrative burdens for tax administrations. The possibility of an MNE Group paying less Top-up Tax under a QDMTT than it would have paid under an IIR/UTPR, due to the slight calculation differences permitted between both mechanisms, is solved through the credit mechanism in Article 5.2.

However, this requires the completion two different Top-up Tax calculations under parallel rules. Using a QDMTT as a Safe Harbor allows MNE Groups to avoid the second calculation under Article 8.2. Any potential risk of shortfall Top-up Tax payment that would have derived from performing a QDMTT calculation only is addressed via imposition of three additional mandatory standards to a QDMTT: the (i) QDMTT Accounting Standard; (ii) Consistency Standard; and (iii) Administration Standard. It is important to note that the Consistency Standard requires a QDMTT to exclude CFC and PE taxes from the Covered Taxes computation, mainly to respect the agreed ordering rule.

The Transitional UTPR Safe Harbor buys more time for jurisdictions (such as the US) to adopt the GloBE rules or adapt their corporate income tax to produce ETRs at or above 15 percent. Although the UTPR is designed as a backstop to the IIR, it will effectively operate as the primary charging rule where no QDMTT exists in a UPE jurisdiction, and will become more common over the next few years.

This Safe Harbor will provide transitional relief in the UPE jurisdiction for fiscal years which run no longer than 12 months and that begin on or before December 31, 2025 and end before December 31, 2026, where the nominal statutory corporate income tax rate of the UPE jurisdiction, including sub-national taxes, is 20 percent or higher. An MNE Group that qualifies for both a transitional CbCR Safe Harbor and the UTPR Safe Harbor may apply the Transitional CbCR Safe Harbor anyway to avoid losing this benefit for subsequent years.

The July Guidance provides significant additional information on the interpretation and operation of the GloBE rules and therefore requires close attention. In-scope multinational businesses should monitor ongoing developments with respect to the Administrative Guidance to identify all items relevant to the operation of the GloBE rules in their specific circumstances. Furthermore, over the coming months, businesses are encouraged to monitor how the jurisdictions in which they operate ultimately incorporate the Administrative Guidance into their domestic Pillar 2 legislation.


Our Global Tax Reform hub features related articles covering developments in global tax legislation.