On 17 June 2024, the OECD released the fourth set of Administrative Guidance on GloBE rules, with the intention of clarifying the operation of these rules. This package follows the Administrative Guidance sets released in February, July and December last year. It is the first package of Administrative Guidance following the publication of the Consolidated Commentary on 25 April 2024, which incorporated the previous sets of Administrative Guidance. The new guidance provides welcome clarification to the Pillar 2 rules, which has come into force in many territories, including Belgium, as of FY 2024. It aims to provide consistency and simplifications for Inclusive Framework members and stakeholders. The guidance is accompanied by two Pillar Two FAQ documents. For a newsflash regarding the Guidance previously issued, please follow this link. Simultaneously, the OECD released supplementary guidance on Amount B of Pillar One.
Summary of key issues addressed in the new Administrative Guidance
- Guidance on application of the recapture rule applicable to deferred tax liabilities (DTL), including how to aggregate DTL categories and methodologies for determining whether a DTL has reversed within five years and therefore would not need to be recaptured. The main objective is to provide clarifications on how to practically manage the DTL recapture rule in line with the policy objective of the rule itself, as well as to minimize administrative and compliance burdens for tax administrations and MNE Groups.
- Clarification as to how to determine deferred tax assets and liabilities for GloBE purposes when the rules create divergences between GloBE and accounting carrying values of assets and liabilities pursuant to a number of other provisions under the GloBE Rules, as well as guidance regarding the GloBE treatment of an intragroup transaction accounted for at cost by the acquiring CE.
- Furthermore, guidance is provided on the cross-border allocation of current and deferred taxes that GloBE Rules provide an allocation mechanism for. Previous Guidance introduced a four-step process for allocating current taxes that have been accrued under a tax system which ‘blends’ together income from multiple sources and allows the cross-crediting of tax credits within the relevant category of income. As for the cross-border allocation of deferred taxes, previous Administrate Guidance introduced the Substitute Loss Carry-forward DTA which applied where a Parent Entity has domestic tax law in the same year as the foreign CFC income against which it is used. The new package provides further clarification with regards to both allocation mechanisms.
- The allocation of profits and taxes in certain structures involving flow-through Entities is part of the GloBE rules, and the guidance clarifies how these rules are intended to allocate profits and taxes between Constituent Entities in structures where different jurisdictions take different views on whether the Entities in the structure are fiscally transparent. According to the guidance, it is important to ensure profits and taxes are allocated appropriately and consistently between jurisdictions.
- Finally, the guidance introduces a specific paragraph on the treatment of securitisation vehicles under a jurisdiction’s domestic minimum top-up tax that will prevent those vehicles from giving rise to volatile outcomes under the GloBE Rules.
Furthermore, the OECD released additional guidance regarding Amount B of Pillar One following the report of 19 February 2024 that was discussed previously. This additional guidance includes definitions of qualifying jurisdictions within the meaning of the existing Amount B guidance and will facilitate adjustments to the return calculated under the simplified and streamlined approach for tested parties located in those qualifying jurisdictions. Also, it includes a definition of covered jurisdictions within the scope of the political commitment on Amount B.
Finally, the revised Question & Answer document summarizes the main features of the Transitional Qualification Mechanism that will provide jurisdictions with the legal certainty that their rules will be recognised as qualified by other implementing jurisdictions for a transitional period while a full legislative review takes place. It will provide MNEs with certainty as to which jurisdiction’s rules it must comply with.
For more insights on the impact of the Administrative Guidance, please do not hesitate to reach out to your regular PwC contact, or contact Pieter Deré, Evi Geerts or Carla Buyens.
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