OECD/G20 Inclusive Framework releases additional Administrative Guidance on Pillar Two GloBE Rules and update on Pillar One Amount A timeline

December 22, 2023
2023-2118

On 18 December 2023, the OECD/G20 Inclusive Framework released a third tranche of Administrative Guidance on the Pillar Two Global Anti-Base Erosion Rules, addressing various technical issues and providing new rules regarding the application of the Transitional Country-by-Country Reporting Safe Harbour.
On the same date, the Inclusive Framework released an updated timeline for Pillar One, reflecting a commitment to finalizing the Multilateral Convention for Amount A by the end of March 2024 with the aim of having a signing ceremony by the end of June 2024.
Companies should monitor ongoing developments with respect to both Pillars in the global negotiations and in the jurisdictions where they operate.

Executive summary

On 18 December 2023, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released documents on Pillars One and Two of the OECD/G20 project on addressing the tax challenges of the digitalization of the economy (the BEPS 2.0 project). On Pillar Two, the Inclusive Framework released Administrative Guidance on the Global Anti-Base Erosion (GloBE) Model Rules, which provides additional information a series of technical issues under the GloBE Rules. On Pillar One, the Inclusive Framework released a statement updating the timeline for the multilateral convention (MLC) on Amount A, which expresses the member jurisdictions' commitment to finalize the MLC text by March 2024.

Detailed discussion

Background

In October 2021, the Organisation for Economic Co-operation and Development (OECD) released a statement reflecting the high-level agreement of Inclusive Framework member jurisdictions on core design elements of Pillars One and Two of the BEPS 2.0 project.¹

Since that agreement was reached, the Inclusive Framework has released a series of significant agreed documents on the global minimum tax under Pillar Two, including Model GloBE Rules,² Commentary to the Model GloBE Rules,³ guidance on GloBE Safe Harbors,⁴ two packages of GloBE Administrative Guidance,⁵ and a standard template for the GloBE Information Return.⁶ The OECD also released a public consultation document on potential dispute prevention and resolution mechanisms for the GloBE Rules, an area under consideration by the Inclusive Framework but on which consensus has not been reached.⁷ In addition, with respect to the other core element of Pillar Two, the Subject to Tax Rule (STTR), the OECD has released a model treaty provision together with an accompanying commentary,⁸ as well as documents with respect to a multilateral instrument that jurisdictions can use to facilitate implementation of the STTR into their tax treaties.⁹

On 12 July 2023, the OECD released an outcome statement reflecting the agreement reached by 138 of the 143 Inclusive Framework member jurisdictions on the remaining elements of the BEPS 2.0 project, including Amount A and Amount B of Pillar One.¹⁰ On Amount A, the July statement indicated the intention to have the Amount A MLC opened for signature in the second half of 2023 and a signing ceremony by year-end with the objective of having the MLC enter into force in 2025. It also addressed the existing standstill agreement on imposing newly enacted digital services taxes (DSTs) and similar measures, which currently runs through 31 December 2023, announcing an agreement of member jurisdictions of the Inclusive Framework to refrain from imposing newly implemented DSTs or similar measures on any company during 2024, conditioned on the Amount A MLC being signed by a critical mass of member jurisdictions before the end of 2023. The OECD subsequently released a text of the Amount A MLC, together with accompanying documents.¹¹ However, the text of the MLC as released was not yet ready for signature, with further work ongoing to resolve differing views of member jurisdictions on some specific items.

On Amount B of Pillar One, the OECD has released a second consultation document for stakeholder comment, which addresses some of the comments received on the first Amount B consultation document, reflects some remaining issues to be resolved and does not yet represent consensus of the Inclusive Framework.¹² The July statement indicated the aim for the Inclusive Framework to approve and publish a final report on Amount B by the end of 2023, with Amount B to be incorporated into the OECD Transfer Pricing Guidelines by January 2024.

December Administrative Guidance

This is the third tranche of Administrative Guidance approved by the Inclusive Framework, following the release of the first tranches of Administrative Guidance in February 2023 and July 2023. The December Guidance covers:

Purchase price accounting adjustments in Qualified Financial Statements
Transitional Country-by-Country Reporting (CbCR) Safe Harbour
Application of the GloBE Rules
Allocation of Blended Controlled Foreign Company (CFC) Taxes
Transitional filing deadlines for Multinational Entity (MNE) Groups with short Reporting Fiscal Years
Simplified Calculations Safe Harbour for Non-Material Constituent Entities

The December Guidance will be incorporated into a revised version of the Commentary that will be released in 2024 and will replace the original version of the Commentary released in March 2022.

The OECD press release accompanying the December Guidance indicates that the Inclusive Framework will continue to release Administrative Guidance on an ongoing basis, responding to stakeholder requests for clarification and where necessary addressing "aggressive tax planning that may undermine the integrity of the rules or their application to certain MNE Groups." It further indicates that the Inclusive Framework will continue to develop simplifications on key compliance items on a timely basis, including "guidance expected in the first half of 2024 on the application of deferred tax liability recapture rules and the allocation of deferred taxes relating to cross-border taxes such as CFC Tax Regimes." In addition, the press release notes that the Inclusive Framework will implement a peer review process and continue work on the administrative framework and dispute resolution mechanisms for the GloBE Rules.

Purchase price accounting adjustments in Qualified Financial Statements

The December Guidance addresses the treatment of purchase price accounting (PPA) adjustments in the context of the Transitional CbCR Safe Harbour and Qualified Financial Statements.

The Administrative Guidance specifies that if an MNE Group has allocated and incorporated PPA adjustments into the financial accounts of an acquired Constituent Entity, which are then utilized in the preparation of Consolidated Financial Statements or included in the separate financial statements of the Constituent Entity, those financial accounts or separate financial statements will not be considered Qualified Financial Statements for the purposes of the Transitional CbCR Safe Harbour, unless the consistent reporting condition is satisfied and the specified goodwill impairment adjustment is made. The consistent reporting condition requires that all Country-by-Country (CbC) Reports for fiscal years commencing after 31 December 2022 incorporate PPA adjustments, except in situations in which the Constituent Entity was required by law or regulation to modify its reporting package or separate financial statements to include PPA adjustments in a subsequent period.

In addition, if the Qualified Financial Statements include PPA adjustments, any expense attributable to goodwill impairment related to transactions entered into after 30 November 2021 must be added back to the Profit (or Loss) before Tax (PBT) for purposes of applying the routine profit function test and the simplified effective tax rate (ETR) test. For the latter, this adjustment only applies if the financial accounts do not contain a reversal of deferred tax liability or the recognition or increase of a deferred tax asset in respect of the impairment of goodwill.

Moreover, the Administrative Guidance provides additional clarity regarding the definition of Qualified Financial Statements. Specifically, it states that the Transitional CbCR Safe Harbour does not generally require or permit adjustments to the amounts reported in financial accounts or separate financial statements for them to be considered Qualified Financial Statements.

Transitional CbCR Safe Harbour

The December Guidance provides additional guidance on the Transitional CbCR Safe Harbour with respect to areas that tax administrations and MNE Groups identified as requiring further clarification. It supplements the original Safe Harbours and Penalty Relief document issued by the Inclusive Framework in December 2022; the additional guidance will be incorporated into the Safe Harbours and Penalty Relief document, which in turn will be incorporated into the revised Commentary to be released in 2024.

For purposes of applying the Transitional CbCR Safe Harbour to an MNE Group that has both Constituent Entities and a Joint Venture or members of a Joint Venture Group (JV Group) in the same jurisdiction, the December Guidance provides that the Joint Venture or members of the JV Group should be treated as being in separate Tested Jurisdictions than the Constituent Entities (with all members of the same JV Group treated as being in the same separate Tested Jurisdiction).

The December Guidance addresses various questions related to the use of Qualified Financial Statements:

Consistent use of data: All of the data of an Entity/Permanent Establishment (PE) that is used in the Transitional CbCR Safe Harbour computations must come from the same Qualified Financial Statements, meaning that an MNE Group must use either the accounts used to prepare the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) or separate financial statements of the Constituent Entity. However, fields in the CbC Report that are not used in the Transitional CbCR Safe Harbour (i.e., Income Tax Paid (on Cash Basis), Income Tax Accrued — Current Year, Stated Capital, Accumulated Earnings, Number of Employees, Tangible Assets other than Cash and Cash Equivalents) may be populated from any source permitted under the Relevant CbC Regulations.
The guidance also indicates that all data used to perform the calculations must come from the same type of Qualified Financial Statements and clarifies that whether a CbC Report is considered Qualified is determined separately for each jurisdiction, so that a CbC Report may be considered Qualified for some jurisdictions and not for others.
Using different accounting standards: A CbC Report can be considered Qualified if it is based on data from the UPE's Consolidated Financial Statements for some jurisdictions and data from local GAAP accounts for other jurisdictions.
Adjustments to Qualified Financial Statements: Making adjustments to the data from Qualified Financial Statements would disqualify a jurisdiction from the Transitional CbCR Safe Harbour regardless of whether the adjustments were intended to make the CbC Report data more consistent with the GloBE Rules (e.g., a post-year-end transfer pricing adjustment) or to align to a different treatment of a transaction in the CbC Report. The only exception is for adjustments that are explicitly required under the Commentary or Agreed Administrative Guidance.
MNE Groups not required to file CbC Report: MNE Groups that are in scope of the GloBE Rules but are not required to file CbC Reports are still eligible for the Transitional CbCR Safe Harbour if they complete the relevant section of the GloBE Information Return using the data from Qualified Financial Statements that would have been reported if the MNE Group were required to file a CbC Report.
Qualified Financial Statements for Permanent Establishments: If Qualified Financial Statements are not available for a PE, the MNE Group may determine the portion of the Main Entity's Total Revenue and PBT that is attributable to the PE using separate financial statements prepared by the Main Entity for the PE for financial reporting, regulatory, tax reporting or internal management control purposes.

The December Guidance addresses various questions related to the Simplified ETR test under the Transitional CbCR Safe Harbour:

Simplified Covered Taxes: Where the income tax expense includes an adjustment to bring the amount reported for a prior year's income tax expense in line with the final amount of the expense (a so-called return to provision adjustment), the effect of any uncertain tax position reflected in that adjustment must be removed.
Simplified ETR computation for PEs: The income tax expense in the PE jurisdiction on the PE's income can only be included in the Simplified ETR Test for the PE jurisdiction and shall not be included in the Simplified ETR Test for the Main Entity's jurisdiction.
Allocation of taxes relating to a PE, CFC or Hybrid Entity: If the Transitional CbCR Safe Harbour does not apply in a jurisdiction in which a PE, CFC or Hybrid Entity is located, taxes paid under a CFC Tax Regime or a taxable branch regime are not required to be allocated when determining the Simplified ETR for the jurisdiction of the Constituent Entity-Owner or Main Entity. This is the case even if some or all of such taxes are considered in the GloBE ETR computations of a jurisdiction that includes a CFC, PE or Hybrid Entity.

The December Guidance addresses the calculation of the Substance-based Income Exclusion (SBIE) for the Routine Profits Test under the Transitional CbCR Safe Harbour, providing that MNE Groups are to calculate their SBIE amount using the same percentage that would be used to calculate their SBIE amount under the GloBE Rules, including the transitional rates for the SBIE.

Finally, the December Guidance indicates that the Inclusive Framework has become aware of certain transactions that exploit differences in the source of financial information or differences between tax and financial accounting treatment to allow a Constituent Entity to qualify for the Transitional CbCR Safe Harbour. It describes these transactions as typically involving the use of arrangements in which the parties are able to account for the income, expenses, gains, losses or taxes under that arrangement in an inconsistent or duplicative manner and in a way that purports to allow one of the Constituent Entities to qualify for the Transitional CbCR Safe Harbour and thereby avoid GloBE Top-up Taxes that would otherwise arise.

The December Guidance provides that for purposes of determining if a jurisdiction qualifies for the Transitional CbCR Safe Harbour, adjustments must be made to the jurisdiction's PBT and income tax expense with respect to any Hybrid Arbitrage Arrangements entered into after 15 December 2022. In this regard, the guidance states that for a jurisdiction that is unable to apply the rules to transactions entered into after 15 December 2022 based on constitutional grounds or other superior law, the jurisdiction may adopt this guidance is if the date reference were to 18 December 2023, which is the date of publication of this guidance.

For these purposes, a Hybrid Arbitrage Arrangement is: (i) a deduction/non-inclusion arrangement; (ii) a duplicate loss arrangement; or (iii) a duplicate tax recognition arrangement.

A jurisdiction's safe harbor calculation must be adjusted by excluding:

Any expense or loss arising as a result of a deduction/non-inclusion arrangement or duplicate loss arrangement from the jurisdiction's PBT
Any income tax expense arising as a result of a duplicate tax recognition arrangement from the jurisdiction's income tax expense

A deduction/non-inclusion arrangement is an arrangement under which one Constituent Entity directly or indirectly provides credit or otherwise makes an investment in another Constituent Entity that results in an expense or loss in the financial statements of a Constituent Entity to the extent that either:

There is no commensurate increase in the revenue or gain in the financial statements of the Constituent Entity counterparty
The Constituent Entity counterparty is not reasonably expected over the life of the arrangement to have a commensurate increase in its taxable income

A duplicate loss arrangement is an arrangement that results in an expense or loss being included in the financial statement of a Constituent Entity to the extent that either:

The expense or loss is also being included as an expense or loss in the financial statement of another Constituent Entity
The arrangement also gives rise to a duplicate amount that is deductible for purposes of determining the taxable income of another Constituent Entity in another jurisdiction

A duplicate tax recognition arrangement is an arrangement that results in more than one Constituent Entity including part or all of the same income tax expense in either:

Its Adjusted Covered Taxes
Its Simplified ETR for purposes of applying the Transitional CbCR Safe Harbour, unless such arrangement also results in the income subject to the tax being included in the relevant financial statements of each such Constituent Entity

For purposes of these rules, further definitional rules and specified exceptions to the definitions are provided.

The December Guidance specifies that these rules are limited to the use of the Transitional CbCR Safe Harbour and do not apply with respect to any other Temporary or Permanent Safe Harbour. However, the Guidance states that further guidance will be provided to address hybrid arbitrage arrangements, including those addressed in these rules, that may affect the application of the GloBE rules outside the context of the Transitional CbCR Safe Harbour.

Application of GloBE Rules

The December Guidance provides updates to the Commentary with respect to Article 1.1 (Scope) and Article 4.1.1 (Adjusted Covered Taxes) of the GloBE Rules.

Consolidated revenue threshold

Under Article 1.1, the GloBE Rules apply to MNE Groups that have revenues in two of the past four years equal to or in excess of a €750m threshold. The GloBE Commentary indicates that this is based on the CbCR threshold, although the two thresholds are not identical. Both thresholds are determined under the relevant financial accounting standard and taken from the consolidated profit and loss statement of an MNE Group. However, this can vary across financial accounting standards and UPE jurisdictions.

The December Guidance provides that the definition of revenues for purposes of Article 1.1 is to be determined in line with the relevant accounting standard, before deducting cost of sales and other operating expenses. If different types of revenue are separately presented in the consolidated profit and loss statement of the Consolidated Financial Statements, they must be aggregated for purposes of Article 1.1. Revenue is to include net gains from investments (whether realized or unrealized). Specific guidance is provided with respect to financial entities.

Mismatch between Fiscal Years of UPE and another Constituent Entity

The Fiscal Year for purposes of the GloBE Rules is generally the accounting period used by the UPE in the preparation of its Consolidated Financial Statements. In some cases, an MNE Group may maintain the financial accounts of some Constituent Entities based on a different fiscal year than the UPE's Fiscal Year. This may trigger the application of different accounting conventions in the preparation of the Consolidated Financial Statements of MNE Groups depending upon the rules of the financial accounting standard used in these statements, which further impacts the GloBE calculations.

The December Guidance provides that when the financial accounts of a Constituent Entity that are used in the preparation of the Consolidated Financial Statements are maintained based on a fiscal period that is different than the Fiscal Year of the UPE, the GloBE computations for the UPE's Fiscal Year will be based on the method the MNE Group uses to address the discrepancy in fiscal years in its Consolidated Financial Statements.

In addition, when a Constituent Entity has a different Fiscal Year from the UPE and its financial accounts are not included in the preparation of the UPE's Consolidated Financial Statements (e.g., due to materiality), the GloBE computations for the Constituent Entity's Fiscal Year must be made based on the financial accounting period that ends during the UPE's Fiscal Year. The same principles apply where a Joint Venture or JV Group's financial accounts are maintained on a different Fiscal Year.

Mismatch between Fiscal Year and Tax Year of Constituent Entity

Under the GloBE Rules, an MNE Group will need to determine its Adjusted Covered Taxes based on its Fiscal Year. In some cases, however, the taxable period of Constituent Entities in a jurisdiction does not align with the Fiscal Year of the MNE Group. This may trigger the application of different accounting conventions in preparing the MNE Group's Consolidated Financial Statements. In these cases, the December Guidance provides that the Constituent Entity should apply the method used in the Consolidated Financial Statements (or other financial statements used to determine the Financial Accounting Net Income or Loss of the Constituent Entity) to determine its Adjusted Covered Taxes for the Fiscal Year. The same principles apply where a Joint Venture or JV Group has a tax year different from its Fiscal Year.

Allocation of Blended CFC Taxes

For a Constituent Entity whose Constituent Entity-owner is subject to a CFC Tax Regime, Article 4.3.2(c) of the GloBE Rules allocates to the CFC any Covered Tax included in the owner's financial accounts for its share of the CFC's income. The Administrative Guidance released in February 2023 provides special allocation rules in applying Article 4.3.2(c) when the CFC Tax Regime constitutes a Blended CFC Tax Regime (such as the global intangible low-taxed income (GILTI) regime in the United States). Under that guidance, an owner's Allocable Blended CFC Tax is allocated to an Entity based on a fraction, where the numerator is the Entity's Blended CFC Allocation Key and the denominator is the Sum of All Blended CFC Allocation Keys. For this purpose, an Entity's Blended CFC Allocation Key is equal to the product of (i) the Entity's Attributable Income (if any) and (ii) the Applicable Rate less the GloBE Jurisdiction ETR.

Computing an Entity's Blended CFC Allocation Key when multiple GloBE Jurisdictional ETRs are computed for a jurisdiction

The February Guidance defines the GloBE Jurisdiction ETR as "the Effective Tax Rate for a jurisdiction as computed under Article 5.1 of the GloBE Rules without regard to any Covered Taxes under a CFC Tax Regime" (emphasis added). The December Guidance notes the need for clarification as to how to compute the GloBE Jurisdictional ETR for a given Entity where an MNE Group is required to determine multiple GloBE Jurisdictional ETRs for different subgroups of Entities located in the same jurisdiction (referred to as blending groups) under Article 5.1. This situation may arise if, for instance, the special rules on Joint Ventures (Article 6.4), Minority-Owned Constituent Entities (Article 5.6) or Investment Entities (Article 7.6) apply.

The December Guidance clarifies that in the foregoing scenario, the Blended CFC Allocation Key for an Entity must be computed using the GloBE Jurisdictional ETR that is applicable to the blending group to which the Entity belongs. In conjunction with this requirement, the definition of the GloBE Jurisdiction ETR is modified to mean "the Tax Rate for Entities located in a jurisdiction" (emphasis added). For purposes of allocating the Allocable Blended CFC Tax here, the December Guidance requires the Sum of All Blended CFC Allocation Keys to include those computed for all Entities located in the relevant jurisdiction, even though some may have been determined based on different GloBE Jurisdictional ETRs.

Computing an Entity's Blended CFC Allocation Key when it is not required to compute an ETR under Article 5.1

As noted, the GloBE Jurisdiction ETR, by definition, is determined "under Article 5.1" (herein referred to as the "default" method). In some cases, an MNE Group may not otherwise be required to determine an ETR under the default method because, for example, the Entities in a jurisdiction are eligible for the Transitional CbCR Safe Harbour or the QDMTT Safe Harbour or the de minimis exclusion under Article 5.5 of the GloBE Rules applies. The December Guidance acknowledges that in such situations, requiring an MNE Group to apply the default method would "undermine the simplification benefits and purpose of the relevant safe harbour or the de minimis exclusion" and therefore provides alternative GloBE Jurisdictional ETR computation methods, as described below.

With respect to a jurisdiction for which an MNE Group has elected the Transitional CbCR Safe Harbour, the MNE Group will be required to use the Simplified ETR (computed based on all applicable OECD guidance), regardless of whether the election is based on the Simplified ETR test, the routine profits test, or the de minimis test. In the context of allocating GILTI taxes, if the Transitional CbCR Safe Harbour election with respect to a jurisdiction is based on the Simplified ETR test, the above approach will result in a zero Blended CFC Allocation Key for the Entities located in the jurisdiction (and thus no allocation of GILTI taxes to such Entities) because the Applicable Rate for GILTI is 13.125% while the minimum ETR to meet under the Simplified ETR test is higher (i.e., 15%, 16%, and 17% for fiscal years beginning in 2023, 2025, and 2026, respectively). If the Transitional CbCR Safe Harbour election is based on either of the other two tests, however, an Entity's Blended CFC Allocation Key may be greater than zero depending on the Simplified ETR .

For a jurisdiction for which the MNE Group has elected the QDMTT Safe Harbour, the numerator in the alternative GloBE Jurisdictional ETR computation will be the sum of taxes used to determine the ETR pursuant to the Qualified Domestic Minimum Top-up Tax (QDMTT) and any creditable QDMTT payable in the jurisdiction, and the denominator will be the income determined pursuant to the QDMTT. Depending on the level of SBIE applied to the QDMTT income base, the GloBE Jurisdictional ETR for the QDMTT jurisdiction may be lower than the Minimum Rate of 15% as well as lower than the Applicable Rate, potentially resulting in a push-down of Allocable Blended CFC Taxes to the QDMTT jurisdiction. Any taxes so allocated will not be utilized because a QDMTT Safe Harbour jurisdiction will be deemed to have a zero top-up tax regardless of such tax allocation.

For any other jurisdiction for which an MNE Group is not required to compute an ETR under the default method (for instance, when the Article 5.5 de minimis exclusion election is made), the MNE Group must apply the Simplified ETR under the Transitional CbCR Safe Harbour, except that it must take information on PBT from Qualified Financial Statements, and not from a Qualified CbC Report.

If an MNE Group computes multiple Simplified ETRs or QDMTT ETRs for a jurisdiction (such as when it is required to compute a separate ETR for a Joint Venture and JV Subsidiaries as required under the Transitional CbCR Safe Harbour or the QDMTT Safe Harbour), it must use the ETR applicable to the blending group to which the entity belongs. If some of the Entities located in a Transitional CbCR Safe Harbour or QDMTT Safe Harbour jurisdiction are not eligible for the safe harbor (e.g., Investment Entities or Joint Ventures), the MNE Group must apply the default method for those Entities, while using the alternative GloBE Jurisdictional ETR computation method described above with respect to Entities eligible for the safe harbor. For purposes of allocating the Allocable Blended CFC Tax, the Sum of All Blended CFC Allocation Keys must include those computed for all Entities located in the relevant jurisdiction, regardless of the computation method used.

Computing a non-GloBE Entity's Blended CFC Allocation Key when multiple GloBE Jurisdictional ETRs are computed for a jurisdiction

If a Constituent Entity is subject to a Blended CFC Tax Regime with respect to the income of non-GloBE Entities (i.e., Entities that are not Constituent Entities, Joint Ventures, or JV Subsidiaries) in which it has an Ownership Interest, the December Guidance requires each non-GloBE Entity to (i) compute a Blended CFC Allocation Key using the GloBE Jurisdictional ETR (determined under the default or alternative method) for the blending group in the same jurisdiction that has the largest aggregate amount of Attributable Income and (ii) include its Blended CFC Allocation Key in the Sum of All Blended CFC Allocation Keys. The December Guidance notes that this approach avoids any additional analysis or ETR computation with respect to non-GloBE Entities while ensuring that any tax allocated to such Entities are properly excluded from the Adjusted Covered Taxes of the Constituent Entities, Joint Ventures, or JV Subsidiaries of the MNE Group.

Transitional filing deadlines for MNE Groups with short Reporting Fiscal Years

Article 8.1.6 of the GloBE Rules states that the GloBE Information Return and the domestic notifications are to be filed with the relevant tax administration no later than 15 months after the last day of the Reporting Fiscal Year. Article 9.1.4 of the GloBE Rules extends this deadline to 18 months for the first Fiscal Year that the MNE Group comes within the scope of the GloBE Rules.

The December Guidance notes that this provides tax administrations with 30 months starting from when the GloBE Rules enter into effect to set up their filing systems. However, this window is shortened for MNE Groups that have a short financial year the first year the GloBE Rules come into effect (or a financial year of less than three months that begins in 2025). A similar issue arose in 2016 when CbCR requirements entered into effect for the first time and specific relief was provided for that situation.

The December Guidance provides similar relief for the filing of GloBE Information Returns and notifications with an explicit statement that the due date for filing and notification obligations for any Fiscal Year shall not be before 30 June 2026.

In addition, the December Guidance indicates that the Inclusive Framework will consider similar guidance to address short Reporting Fiscal Years of MNE Groups operating in jurisdictions that adopt the GloBE Rules for the first time for Fiscal Years that begin after 2024, as well as further guidance for MNE Groups that are subject to the GloBE Rules in a jurisdiction for a Reporting Fiscal Year after being subject to those rules in another jurisdiction for a prior Reporting Fiscal Year.

Simplified Calculations Safe Harbour for Non-material Constituent Entities

The December Guidance addresses compliance cost issues that could arise in situations where subsidiaries are excluded from an MNE Group's Consolidated Financial Statements, noting that the Inclusive Framework agreed to provide a Simplified Calculations Safe Harbour as discussed in the Safe Harbours and Penalty Relief document released in December 2022. This is a permanent Safe Harbour in addition to the Transitional CbCR Safe Harbour, the QDMTT Safe Harbour and the Transitional Undertaxed Profits Rule (UTPR) Safe Harbour.

The December Guidance provides for Simplified Calculations for determining GloBE Income or Loss, GloBE Revenue, and Adjusted Covered Taxes for Non-Material Constituent Entities (NMCEs) as part of the Simplified Calculations Safe Harbour. This alternative calculation method for NMCEs is intended to alleviate some of the compliance challenges in terms of data collection, processing and recording for such NMCEs.

For this purpose, an NMCE is an Entity that is not consolidated on a line-by-line basis in the Consolidated Financial Statements solely on size or materiality grounds and is considered a Constituent Entity provided that all of the following conditions are satisfied:

The Consolidated Financial Statements of the UPE are prepared in accordance with an Acceptable Financial Accounting Standard or Authorized Financial Accounting Standard subject to adjustments to prevent any material competitive distortions.
The Consolidated Financial Statements are externally audited.
In the case of an Entity with a Total Revenue that exceeds €50m, its financial accounts that are used to complete the CbC Report are prepared in accordance with an Acceptable Financial Accounting Standard or Authorised Financial Accounting Standard.

Where a Main Entity with a PE is consolidated on a line-by-line basis, the PE is not considered an NMCE regardless of its size or materiality. However, if the Main Entity is an NMCE, all its PEs are also considered NMCEs.

Using the Simplified Calculations for an NMCE means applying Simplified Income, Revenue and Tax calculations for purposes of applying the tests under the Simplified Calculations Safe Harbour as follows:

Under the Simplified Income Calculation, GloBE Income or Loss of an NMCE will be the Total Revenue as determined in accordance with the CbCR legislation or regulations applicable in the UPE Jurisdiction or in the surrogate parent entity jurisdiction if a CbC Report is not filed in the UPE Jurisdiction (the Relevant CbC Regulations). Therefore, instead of computing the GloBE Income or Loss of an NMCE (i.e., the Financial Accounting Net Income or Loss adjusted in accordance with the GloBE Rules), the GloBE Income or Loss of the NMCE will be equal to its Total Revenue as determined under the Relevant CbC Regulations.
Under the Simplified Revenue Calculation, the GloBE Revenue of an NMCE is equal to its Total Revenue as determined in accordance with the Relevant CbC Regulations. This means that the GloBE Income and GloBE Revenue will be the same under the Simplified Income and Revenue calculations.
Under the Simplified Tax Calculation, the Adjusted Covered Taxes of an NMCE is the Current Year's Accrued Income Tax as determined under the Relevant CbC Regulations. This means that the Simplified Tax Calculation will exclude any deferred tax expenses, adjustments for non-current items and provisions for uncertain tax liabilities.

The Simplified Calculations for NMCEs are to be extracted, on an Entity-by-Entity basis, from the financial accounts available to NMCEs using the definitions stipulated in the Relevant CbC Regulations.

The election to apply the Simplified Calculations Safe Harbour for NMCEs is an annual election and is made for each NMCE individually, not on a jurisdictional basis.

The Administrative Guidance specifies that the Simplified Calculations for NMCEs can only be used for purposes of the Simplified Calculations Safe Harbour and not the regular GloBE computations.

Update to Pillar One Timeline

The brief update to the Pillar One timeline released by the Inclusive Framework references both the Amount A MLC, a text of which was published in October 2023, and the standstill on new DSTs and relevant similar measures, which is scheduled to expire at the end of 2023. The statement notes that the publication of the MLC text was intended to provide transparency, facilitate the ability of some member jurisdictions to conduct internal processes necessary for the adoption of the MLC by the Task Force on the Digital Economy, and facilitate resolution of the remaining differences among member jurisdictions reflected in the published text.

The statement indicates that work to resolve these differences will have to carry over into 2024. In the statement, members of the Inclusive Framework reaffirm their commitment to achieving consensus and finalizing the text of the Amount A MLC by the end of March 2024, with a view toward a signing ceremony for the MLC by the end of June 2024.

The statement does not address the timeline for Amount B.

Implications

The December Guidance provides important additional information on the interpretation and operation of the GloBE Rules, including significant new rules related to eligibility for the Transitional CbCR Safe Harbour. In addition, the December Guidance indicates that further guidance will be provided to address hybrid arbitrage arrangements in the context of applying the GloBE Rules outside the safe harbor context.

Companies should monitor ongoing developments with respect to Administrative Guidance to identify all items relevant to the operation of the GloBE Rules in their circumstances. It also will be important for companies to monitor how the jurisdictions where they operate reflect the December Guidance and all other agreed Administrative Guidance in their domestic Pillar Two legislation.

Further developments are also expected on Amount A and Amount B of Pillar One, including the potential for adoption of DSTs by additional jurisdictions. Companies should monitor relevant activity in this area, both in the global negotiations and in jurisdictions where they operate.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, United States