The OECD offered its latest developments and guidance on the global minimum tax rules and their implications for multinational corporate tax departments — Here’s a brief overview
The 38 member-countries association, Organisation for Economic Co-operation and Development (OECD) has been and continues to be a trusted advisor to the Group of 20 (G20) countries. The OECD has advised and help shape tax policy that impacts certain global policies. In 2016, for example, the OECD and G20 joined forces to create a 15-point action plan, known as the Inclusive Framework, to address Base Erosion and Profit-Shifting (BEPS).
The OECD/G20 Inclusive Framework is a two-pillar solution to address tax challenges arising from the digitalization of the economy. Pillar One focuses on the allocation of taxing rights among jurisdictions, while Pillar Two aims to ensure that multinational enterprises (MNEs) pay a minimum level of tax on profits, regardless of where they operate.
Pillar 2 consists of four interrelated rules: i) the Income Inclusion Rule (IIR); ii) the Undertaxed Payments Rule (UTPR); iii) the Subject to Tax Rule (STTR); and iv) the Global Anti-Base Erosion (GloBE) rules.
The central component of Pillar 2 is the GloBE rules which provide a framework for the application of the IIR and the UTPR. Its function is to impose top-up tax on any MNE that is subject to an effective tax rate that is below a certain threshold, which is yet to be agreed upon by the members of the Inclusive Framework. The GloBE rules apply to MNEs that had annual consolidated revenue of more than €750 million in the previous fiscal year.
Detailing the regulations
The rolling out of Pillar One and Two, as expansive and complicated as they are, often left taxpayers scrambling to meet compliance deadlines without having the complete guidance from tax authorities. In order to provide more clarity and guidance on the GloBE rules, the OECD has issued several documents covering various aspects of the design and operation of the rules, such as the scope, calculation, administration, and enforcement of the top-up tax. The most recent documents, released in June, include:
Transitional CbCR safe harbor guidance — This guidance outlined how MNE groups can use the Country-by-Country Reporting (CbCR) data as a safe harbor to determine their effective tax rates under the GloBE rules, at least until a common reporting template is developed. The guidance also clarifies how tax authorities can use the CbCR data to assess the compliance risk of MNEs and initiate audits or enquiries.
Qualified status Q&A document — This explains the peer review process that will be used to determine whether a jurisdiction has implemented the GloBE rules in a manner consistent with the OECD standards and guidance, and therefore qualifies for the status of a GloBE rule-implementing jurisdiction. The qualified status allows a jurisdiction to exempt its resident entities from the application of the UTPR by other jurisdictions, and to apply the IIR to the income of its resident entities that are part of an MNE group.
Administrative guidance — This included guidance in the following areas:
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- Deferred tax liability recapture — This document provides extensive guidelines on how to determine if deferred tax liability accruals have reversed within five years, and how to account for such reversals in the calculation of the effective tax rate and the top-up tax under the GloBE rules.
- Differences between GloBE and accounting values — This guidance addresses the situations in which there are differences between the values used for GloBE purposes and the values used for accounting purposes, such as different functional currencies, different consolidation methods, or different accounting standards. The guidance explains how to reconcile and adjust these differences to ensure consistency and accuracy in the application of the GloBE rules.
- Allocation of cross-border current and deferred taxes — This guidance explains how to allocate the current and deferred taxes paid or accrued by an entity to its income from different sources and jurisdictions, taking into account the relevant tax rules and treaties. The guidance also provides examples and formulas to illustrate the allocation process.
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The OECD will continue to provide additional guidance in the “near future” on topics such as the treatment of losses, the definition of covered taxes, the coordination of the STTR with the UTPR, and the dispute resolution mechanisms. The OECD also intends to develop a common reporting template and a multilateral instrument to facilitate the implementation and administration of the GloBE rules.
Importantly, the implementation of the GloBE rules has had significant implications for the tax planning and compliance functions for corporate tax departments of many multi-national companies. These departments no doubt have increased their workload as they now have to monitor and report their effective tax rates across multiple jurisdictions and entities, while potentially adjusting their tax positions and structures to avoid or minimize the top-up tax.
It’s worth mentioning GloBE and Pillar 2 rules are not a replacement of existing tax laws in various jurisdictions, but instead, they are an addition to them, creating complex situations and possible disputes among tax authorities. Corporate tax departments will have to be extremely efficient, potentially relying more on automation and technology to organize data, keep up with changing regulations in multiple jurisdictions, while still engaging in strategic work like tax planning and modeling.
You can find more about the issues facing Corporate Tax Departments here.
