On 2 February 2023, the OECD released the long-awaited Administrative Guidance on the Pillar 2 Model Rules. The GloBE Rules and Commentary consist of a coordinated system of rules designed to ensure that large MNE Groups are subject to a minimum effective tax rate of 15%. This set of rules are also to be implemented in the local legislation of all EU Member States before 2024.
The 111-page document published yesterday addresses a wide range of issues related to the GloBE Rules and Commentary which welcomed some additional clarification and examples. The Administrative Guidance will be incorporated into a revised version of the Commentary that will be released later this year. Further piecemeal guidance will be released by the Inclusive Framework to form a comprehensive guide.
Key issues addressed in the Administrative Guidance
- One of the most important issues can be found at the end of the document. This concerns the issue of Qualified Domestic Minimum Top-up Tax (QDMTT). Until now, there was no guidance available on this topic. The current document provides important details for the design of the QDMTT in line with the GloBE Rules. It is important to note that jurisdictions may apply the QDMTT to groups who do not meet the 750 million threshold.
- The Guidance provides further details on the scope of the rules – in particular, on how to determine whether a Group qualifies for Pillar 2. This will involve the application of the ‘deemed-consolidation test’ and the guidance provides details on how this will work out in practice.
- Another long-awaited part of the Guidance relates to the application of a top-up tax in the event of a Net GloBE Loss (under article 4.1.5 of the MR) or a Top-up Tax percentage exceeding 15% due to a negative GloBE ETR (under article 5.2.1 of the MR). There is now an optional system which allows the taxpayer to opt for the Excess Negative Tax Expense administrative procedure. Under this procedure, the taxpayer will be able to avoid the immediate cash out and opt to defer the cash payments on Excess Negative Tax Expenses until such a time when these assets are actually used.
- The introduction of guidance on Blended CFC Taxes is also very important. The most well-known example of this is the US GILTI. The Guidance introduces a simplified allocation key in order to allocate the GILTI charges to the various Constituent entities. This simplified Key will only apply for the first years. However, the Guidance now also explicitly mentions that GILTI is a qualifying CFC for Pillar 2 purposes.
- All pre-regime deferred tax attributes are available for use, notwithstanding the adjustments otherwise required with respect to the Adjusted Covered Taxes.
- All transactions and corporate restructurings where the MNE Group creates or increases the asset’s carrying value should be regarded as an asset transfer during the pre-GloBE period (since 30 November 2021). The Guidance includes multiple examples that try to solve the potential issue of double taxation in the event of such asset transfers.
- The Guidance includes a full chapter dedicated to the application of the Pillar 2 rules to insurance companies.
Are you wondering what the potential (cash tax) impact might be for you? Let’s discuss! Please also feel free to tune in to our podcast series PwC tax bites, where our experts dive into more detail on the Administrative Guidance.
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