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17 January 2025 OECD releases new documents on GloBE rules and on qualified jurisdiction status
On 15 January 2025, the OECD released new Administrative Guidance on the application of Article 9.1 of the GloBE Model Rules (the 9.1 AG), focusing on deferred tax assets (DTAs) arising from certain tax benefits provided by General Government (i.e., all levels of federal, state, regional, local government) or following the introduction of a new corporate income tax after 30 November 2021. The 9.1 AG applies to DTAs arising from governmental arrangements as well as from elections and choices regarding tax treatment that have retroactive effects. The tax expense resulting from the reversal of such DTAs will be excluded from Covered Taxes for purposes of the application of the GloBE rules and from Simplified Covered Taxes for purposes of the application of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour rules. It also introduces a two-year Grace Period during which a capped amount of that tax expense can be included for both such purposes. Tax benefits described in the 9.1 AG will constitute a benefit related to a jurisdiction's rules (a Related Benefit) to the extent they are provided in a jurisdiction that has implemented a Domestic Minimum Tax (DMT) and that does not exclude the associated deferred tax expenses. A DMT in a jurisdiction that provides a Related Benefit will not have qualified status as a Qualified Domestic Minimum Top-up Tax (QDMTT) or for purposes of the QDMTT Safe Harbour. Also on 15 January, the OECD released new Administrative Guidance (the Central Record AG) on the qualified status of jurisdictions' legislation, which includes the Central Record of Legislation with Transitional Qualified Status listing the jurisdictions with legislation that has completed the transitional qualification mechanism process for the Income Inclusion Rule (IIR), the DMT or the QDMTT Safe Harbour, together with explanatory information. The list of jurisdictions is included in Annex B to the Commentary to the GloBE Model Rules. The OECD also released an updated document containing Questions and Answers on the Qualified Status under the Global Minimum Tax, which reflects the release of the Central Record. In addition, the OECD released an updated GIR document and new documents related to the exchange of GIR information. A forthcoming EY Global Tax Alert will address these new GIR developments. In October 2021, the 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 Base Erosion and Profit Shifting (BEPS) 2.0 project.1 Since the October 2021 agreement was reached, the Inclusive Framework has released a series of significant agreed documents on the Global Minimum Tax under Pillar Two, including GloBE Model Rules,2 Commentary to the GloBE Model Rules,3 guidance on GloBE Safe Harbours4 four packages of GloBE Administrative Guidance,5 and a standard template for the GloBE Information Return.6 On 25 April 2024, the OECD released the Consolidated Commentary to the GloBE Model Rules, which incorporates the three tranches of Administrative Guidance that were issued before the end of 2023. In addition, on 17 June 2024, the Inclusive Framework released a Question & Answer document providing information regarding the peer review process for determining the qualified status of the elements of the Global Minimum Tax that are implemented by jurisdictions.7 Article 9.1.1 of the GloBE Model Rules provides transition rules that allow deferred tax accounting attributes that arose prior to the Transition Year to be used in the calculation of the effective tax rate to prevent distortions upon a Multinational Enterprise (MNE) Group becoming subject to the GloBE Rules. The 9.1 AG deals with issues that have been raised with respect to the application of Article 9.1 to DTAs arising from tax benefits provided by General Governments. As background, it notes that, after 30 November 2021, some MNE Groups have entered into arrangements with General Governments8 that provided tax benefits such as tax credits or basis step-ups in advance of the GloBE Rules or a DMT coming into effect with respect to their jurisdiction. It further notes that these benefits could be recorded as DTAs in the financial accounts and MNE Groups could take them into account under the Article 9.1 transition rules for DTAs and deferred tax liabilities (DTLs). In response to the issues identified, the 9.1 AG provides that DTAs arising from tax benefits provided by a General Government after 30 November 2021 are excluded under the transition rules in Article 9.1. This exclusion also applies to the determination of Simplified Covered Taxes under the Transitional CbCR Safe Harbour rules. In essence, the 9.1 AG applies to deferred tax expenses resulting from the reversal of DTAs created by governmental arrangements, as well as DTAs and DTLs arising from similar events, such as retroactive elections or General Governments granting MNE Groups a step-up in basis when introducing a new corporate income tax regime before the GloBE Rules come into effect. This includes DTAs that arise from specific agreements, rulings, decrees, grants or similar arrangements provided by General Governments, as well as any amendments or modifications to pre-existing arrangements. The 9.1 AG introduces a two-year transitional timeframe intended to allow for the gradual inclusion of such DTAs (the Grace Period). The Grace Period includes Fiscal Years 2024 and 2025.9 For DTAs related to introduction of a new corporate income tax, the Grace Period includes Fiscal Years 2025 and 2026.10 The maximum amount of tax expense related to the reversal of such DTAs that can be included in Covered Tax (or Simplified Covered Tax) is limited to 20 percent of the amount of the DTAs originally recorded and considered at the lower of the Minimum Rate or the applicable domestic tax rate (the Grace Period Limitation). The transitional exception does not allow acceleration of the reversal of the DTAs to increase the amount of deferred tax expenses that can be taken into account in the Grace Period. To the extent a DTA is the result of changes in law, elections (or choices), accounting methodologies or the terms of arrangements that are made after 18 November 2024, the deferred tax expense attributable to the reversal is not eligible for the Grace Period and the Grace Period Limitation. As an overall limitation, the 9.1 AG limits the total amount of deferred tax expense attributable to the reversal of covered DTAs that can be included in the Total Deferred Tax Adjustment Amount and the Simplified Covered Taxes under the Transitional CbCR Safe Harbour. In that respect, the total amount of a Constituent Entity's deferred tax expense that is attributable to the reversal of DTAs in scope shall not exceed the maximum amount allowable during the Grace Period. Examples illustrate the application of new transition rule, the Grace Period and the Grace Period Limitation. The 9.1 AG also indicates that if a QDMTT jurisdiction allows (in determining Adjusted Covered Taxes or the applicability of the Transitional CbCR Safe Harbour under the QDMTT) the deferred tax expense associated with a DTA that has been disallowed in accordance with this guidance, MNE Groups will be subject to a Switch-off Rule that prevents them from applying the QDMTT Safe Harbour to Constituent Entities in the QDMTT jurisdiction and requires the MNE Groups to switch to the credit method for the QDMTT liability. The 9.1 AG also clarifies that the reference in Article 9.1.2 to "items excluded from the computation of GloBE Income or Loss under Chapter 3" includes not only DTAs attributable to the items expressly excluded under Chapter 3 but also DTAs associated with non-economic expenses or losses for tax purposes. Furthermore, the reference to DTAs is not limited to the situation in which taxes are prepaid, but, for instance, also covers DTAs resulting from a tax basis step-up. The Commentary to Article 9.1.3 permits the creation of a DTA based on the amount of tax paid on the sale by the selling Constituent Entity and also allows the creation of a DTA based on "Other Tax Effects," which generally includes reversal of a deferred tax asset of the seller. The 9.1 AG updates the Commentary to Article 9.1.3 to clarify that "Other Tax Effects" does not include any amount of a DTA that is excluded from the computation under Article 9.1.1 that reverses during the Grace Period. The GloBE Model Rules provide that a jurisdiction that has implemented a Qualified IIR, Qualified UTPR or QDMTT must implement and administer its domestic law in a way that is consistent with the outcomes provided under the GloBE Model Rules and the Commentary and must not provide Related Benefits. The 9.1 AG addresses the interaction between tax benefits described in the updated guidance to Article 9.1 and the qualified status of jurisdiction's Globe Rules, indicating that jurisdictions that provide such benefits would not meet the requirements for QDMTT status under the transitional qualification mechanism. However, an exceptional derogation allows jurisdictions to self-certify transitional qualified status for the QDMTT and QDMTT Safe Harbour, provided that they apply this guidance to neutralize a portion of the deferred tax expense arising from the tax benefits or, if they don't apply the guidance, that the Switch-off Rule in the QDMTT Safe Harbour will apply so that other Implementing Jurisdictions can neutralize the same portion of the deferred tax expense arising from the tax benefits instead. The 9.1 AG also indicates that the Inclusive Framework is developing additional guidance to assist MNE Groups and tax administrations in identifying Related Benefits and consider how they impact on the qualified status of a jurisdiction's rules. The Central Record of Legislation with Transitional Qualified Status Administrative Guidance (Central Record AG) indicates that the Inclusive Framework has developed a transitional qualification mechanism process to assist tax administrations and other stakeholders in determining whether a jurisdiction has introduced a Qualified IIR or a QDMTT or is eligible for the QDMTT Harbour. The Central Record AG provides that this process is a simplified procedure that allows swift recognition of the qualified status of implementing jurisdictions' legislation on a temporary basis, pending the development of a full legislative review and ongoing monitoring process. The Central Record of Legislation with Transitional Qualified Status is included as an appendix to the Commentary to the GloBE Model Rules (Annex B). The Annex lists 27 jurisdictions that have a qualified status for the IIR legislation for a transitional period and 28 jurisdictions with legislation that has the QDMTT Safe Harbour status for a transitional period. Among the listed jurisdictions, Australia is the only country for which the self-certification is based on draft legislation. Barbados is the only country on the list with a Conditional DMT in 2024. A Conditional DMT only applies to a Constituent Entity when the MNE Group is subject to the GloBE Rules in another jurisdiction. The qualified status for the Conditional DMT is only available for 2024. The Annex further provides that the Central Record will be updated on a regular basis. In addition, it indicates that if a particular jurisdiction's legislation is not included in this Central Record it does not necessarily mean that the legislation is not qualified; rather, it means only that the transitional qualification mechanism process has not yet been initiated or completed by the jurisdiction. The Annex further provides that the qualification starts from the effective date of the legislation. In connection with the release of the Central Record AG, the OECD has also updated the document on the Questions and Answers on the Qualified Status under the Global Minimum Tax to make reference to the respective central record. The updated document indicates that the next step remains the development of a full legislative review and ongoing monitoring process. The 9.1 AG provides important new information on the interpretation and operation of technical aspects of the GloBE Rules. Reversal of DTAs arising from tax benefits provided by General Governments after 30 November 2021 may be excluded or partially excluded from qualification as Covered Taxes for the GloBE Rules or as Simplified Covered Taxes for the Transitional CbCR Safe Harbour. This may lead to additional top-up tax under the GloBE Rules or under a DMTT. Companies should review the impact of these new rules. Although this guidance addresses the application of Article 9.1 of the GloBE Model Rules, some jurisdictions may need to consider whether their domestic legislation should be amended to apply some aspects of this guidance. Therefore, companies should also monitor whether and how relevant jurisdictions incorporate this guidance into their domestic legislation. In addition, the Central Record AG provides key information for determining the order in which the various elements of the Global Minimum Tax rules apply, and in which countries MNE Groups will have to report their Global Minimum Tax liability. Companies should review the treatment of their relevant jurisdictions in the Central Record and evaluate the implications for their Global Minimum Tax calculations.
Document ID: 2025-0266 | ||||||||