December 21, 2022
OECD/G20 Inclusive Framework releases document on safe harbors and penalty relief under Pillar Two GloBE rules
On 20 December 2022, the Organisation for Economic Co-operation and Development (OECD) released guidance on safe harbors and penalty relief under the BEPS 2.0. Pillar Two Global Anti-Base Erosion (GloBE) rules (the document), as approved by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). This guidance follows an earlier public consultation on the GloBE Implementation Framework where stakeholders raised concerns about the complexity of the GloBE rules and called for safe harbors and simplifications.
The document includes the agreed terms of a transitional Country-by-Country Reporting (CbCR) safe harbor that effectively removes the need to calculate the GloBE effective tax rate (ETR) based on the GloBE rules for a multinational enterprise’s (MNE) operations in certain lower-risk jurisdictions in the initial years. It also includes the framework for the development of permanent safe harbors based on simplified income and tax calculations. Finally, it includes a common understanding among the Inclusive Framework member jurisdictions as to a transitional penalty relief regime for the initial years of application of the GloBE rules, which requires that jurisdictions give careful consideration as to the appropriateness of applying penalties or sanctions where an MNE has taken reasonable measures to ensure the correct application of the GloBE rules.
The document also notes that the Inclusive Framework will continue to explore whether other safe harbors and simplifications can be developed at a future time, highlighting in particular the ongoing work on a qualified domestic minimum top-up tax (QDMTT) safe harbor that would provide compliance simplifications for MNEs operating in jurisdictions that have adopted a QDMTT.
On the same date, the OECD also released two public consultation documents related to the implementation package of Pillar Two: one covering the GloBE Information Return and another covering tax certainty of the GloBE rules.
Following the release of the GloBE Model Rules on 20 December 20211 and Commentary on 14 March 2022,2 the Inclusive Framework launched a public consultation in connection with the work to be undertaken on the GloBE Implementation Framework. Overall, stakeholders raised concerns about the complexity of the calculations and adjustments required under the GloBE rules and called for the introduction of safe harbors and simplifications to reduce compliance and administration costs and improve tax certainty for MNEs. The EY comment letter submitted to the OECD can be found here
During the 25 April 2022 public consultation meeting, the OECD Secretariat provided an overview of the comments received on key topics.3 On safe harbors, the OECD Secretariat indicated that the common views expressed by stakeholders included the desire for a safe harbor based on CbCR data and a mechanism that would ensure that no GloBE ETR calculations would be required for jurisdictions that have a QDMTT.
Safe harbors and penalty relief
On 20 December 2022, the OECD released guidance on safe harbors and penalty relief under the GloBE rules, as approved by the Inclusive Framework. The document sets out:
The document also notes that the Inclusive Framework will continue to explore whether other safe harbors and simplifications can be developed at a future time, including ongoing work on a QDMTT safe harbor that would eliminate the need for an MNE to perform a GloBE calculation in addition to the QDMTT calculation required under local law for a jurisdiction. The document indicates that the Inclusive Framework will consider such a safe harbor as part of Administrative Guidance on the QDMTT.
Transitional CbCR safe harbor
The transitional CbCR safe harbor is a temporary measure that allows an MNE to avoid undertaking detailed GloBE rule calculations in respect of a jurisdiction where it has Constituent Entities if it can demonstrate, based on its Country-by-Country (CbC) report, that for such jurisdiction it has one of the following:
If one of these tests is met, the Top-up Tax in a jurisdiction for a fiscal year will be deemed to be zero. Furthermore, the transition period referred to in the transition rules in Articles 9.1.1, 9.1.2 and 9.1.3 of the GloBE Model Rules will be extended and the GloBE Loss Election can be delayed until the transitional CBCR safe harbor no longer applies for the jurisdiction.
The document provides a number of conditions for the application of this transitional safe harbor, including the following:
The document provides special rules for the treatment of certain entities and groups, including rules on Joint Ventures, Tax Neutral Ultimate Parent Entities and Investment Entities and their Constituent Entity-owners. Another special rule requires the exclusion of a Net Unrealized Fair Value Loss (i.e., changes in fair value in Ownership Interests other than Portfolio Shareholdings) exceeding €50 million that is reflected in the profit in the CbC report. The document excludes from the application of the transitional CbCR safe harbor:
Permanent safe harbor
The document provides a framework for the development of a potential permanent safe harbor based on simplified calculations. This safe harbor would permit the MNE Group to rely on simplified income, revenue, and tax calculations in determining whether it meets the de minimis, routine profits or ETR test under the GloBE rules. The simplified calculations permitted would be set out in Administrative Guidance. To access the benefit of the simplified calculations safe harbor, the MNE Group would need to comply with the filing requirements that are to be agreed as part of the Administrative Guidance for that safe harbor.
The document provides an example of a simplified calculations safe harbor that would apply to the treatment of non-material constituent entities (NMCEs) (i.e., subsidiaries and their permanent establishments that are excluded from the scope of the consolidated financial statements in a given fiscal year solely on size or materiality grounds). The simplified calculations would be done, on a Constituent Entity-by-Constituent Entity basis, based on the financial accounts available for NMCEs using definitions provided in the relevant CbC Regulations. Because the OECD CbCR model rules are being reviewed as part of the ongoing 2020 Review, the document notes that the Inclusive Framework will monitor changes to such model rules to ensure that any changes do not give rise to issues that could cause the NMCE simplified calculations to undermine the integrity of the GloBE rules.
The document indicates that the permanent safe harbor would be applicable in addition to the transitional CbCR safe harbor.
The penalty relief is designed to provide transitional relief for MNE Groups in the initial years in which the GloBE rules are in effect. It would apply for the same transitional period as the transitional CbCR Safe Harbor (i.e., for any fiscal year beginning on or before 31 December 2026 but not including a fiscal year that ends after 30 June 2028).
Under the common understanding on penalty relief, no penalties or sanctions should apply where a tax administration considers that an MNE has taken "reasonable measures" to ensure the correct application of the GloBE rules. The term "reasonable measure" is not defined in the document, and it should be understood in light of each jurisdiction’s existing rules and practice. Whether an MNE has met the standard of taking reasonable measures must be assessed by a tax administration based on the facts and circumstances of the case. The document also indicates that the transitional penalty relief would not apply to cases of avoidance, fraud, or abuse.
It is expected that Administrative Guidance will be released on a rolling basis, with the first package potentially to be released in early 2023. A QDMTT safe harbor will be considered by the Inclusive Framework as part of the Administrative Guidance on QDMTT. The Inclusive Framework also will continue to explore whether other safe harbors and simplifications can be developed. In this regard, the public consultation document on the GloBE Information Return that was published on 20 December 2022 seeks stakeholder input on simplified income or tax calculations that could be developed as part of permanent safe harbors.
The safe harbors and common understanding on penalty relief described in the document are aimed at reducing complexity and reducing the compliance burden for companies in the initial years of application of the GloBE rules. The document provides information relevant to the operation of the GloBE rules, making it an essential component of the global minimum tax package that should be carefully reviewed. Moreover, the document identifies numerous areas that are being given additional consideration by the Inclusive Framework, including the potential development of further safe harbors, so it will be important to monitor activity in this area.
This document is intended to be used by governments when incorporating the global minimum tax rules into their domestic tax legislation. In the European Union, the Minimum Tax Directive, which was formally adopted on 15 December 2022,4 includes in the preamble specific reference to safe harbors. Because there may well be variation in how different jurisdictions reflect the rules, companies should pay close attention to how the rules are implemented in all relevant jurisdictions.
It is important for businesses to review their CbC reports and evaluate whether these satisfy the requirements to be used for the transitional CbCR safe harbor. At the same time, given the temporary nature of the CbCR safe harbor and its applicability only to jurisdictions where the agreed transition ETR is met, it continues to be crucial for businesses to evaluate the potential impact of the global minimum tax rules on their tax positions and on their data and compliance processes and systems. Businesses also may consider engaging with the OECD and policymakers at both national and multilateral levels, including participation in the public consultations that the OECD has launched on the GloBE Information Return and on tax certainty for GloBE.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP
Ernst & Young LLP (United Kingdom)
Ernst & Young LLP (United States)