On 20 December 2022 the OECD issued a consultation document on providing tax certainty under the Pillar Two GloBE rules. Comments are invited from interested parties by 3 February 2023.

The GloBE rules are to be enacted by each jurisdiction into domestic law and applied by the national tax authorities, and it is possible that differences could arise in interpreting or applying the GloBE rules, leading to divergent outcomes. The risk of problems arising from different interpretations of the rules could be reduced through agreed administrative guidance. However, when the rules are applied by a tax authority the top-up tax liability arising in the jurisdiction could be based on an interpretation of the GloBE rules that that differs from the view of the rules in another jurisdiction. If that jurisdiction is imposing top-up tax in relation to the same pool of taxed income a dispute could arise. There is therefore a need for more tax certainty.

There are a number of possible mechanisms for achieving tax certainty under the GloBE Rules. These could take the form of dispute prevention mechanisms, to be applied in advance, or of dispute resolution mechanisms that would be available after a disagreement has arisen.

Dispute Prevention

Disputes could be prevented by ensuring that tax administrations and taxpayers have a common interpretation or application of rules at an early stage in the compliance process. Jurisdictions will introduce the GloBE Rules in their domestic law based on the Model Rules and this will generally result in the rules in each jurisdiction being aligned. The Commentary to the GloBE Rules sets out an agreed interpretation and therefore supports consistency in their application.

Qualified rule status

The recognition of a “qualified” rule status for an income inclusion rule (IIR), an undertaxed payments rule (UTPR) or a domestic minimum top-up tax (DMTT) is a fundamental mechanism for ensuring the coordinated application of the GloBE Rules. The application of the rules in one jurisdiction would be limited or modified where there is an applicable “qualified” rule in another jurisdiction. The identification of Qualified IIRs, UTPRs and DMTTs will be done through a review process.

Referral to the Inclusive Framework on BEPS

Jurisdictions could refer an issue to the Inclusive Framework on BEPS for clarification where there is a difference of interpretation or application of the GloBE rules. As the Inclusive Framework is a policy body, only questions of interpretation of the Model Rules could be dealt with by this mechanism, and it would not be possible to deal with specific cases.

Coordinated risk assessment and compliance

Coordinated risk assessment related to the GloBE Rules could achieve more consistent outcomes, avoiding unnecessary disputes. A co-ordinated programme along the lines of the OECD’s International Compliance Assurance Programme (ICAP) could be developed for the GloBE procedures. The implementing jurisdictions could give certainty to a multinational on the methodology used for compiling the information and on the accuracy of the computations.

Binding certainty mechanisms

The most common mechanism for providing binding certainty is an Advance Pricing Arrangement (APA). The objective of APA discussions is usually to align with a common standard, the arm’s length principle. A common standard would need to be defined for a similar type of mechanism to apply in relation to the GloBE Rules.

Dispute resolution mechanisms

A dispute resolution mechanism would aim to resolve issues arising from differences in the interpretation or application of the GloBE Rules. The taxpayer would submit a request to a competent authority in the relevant jurisdiction; the competent authority could resolve the case with competent authorities of the other concerned jurisdictions in line with a common standard; and the jurisdictions would implement the resulting agreement regardless of domestic time limits. This dispute resolution mechanism would need to specify the nature of disputes covered and the basis for resolving disputes.

The consultation document looks at the possibility of relying on existing mechanisms, such as the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) or existing tax treaties. Alternatively new mechanisms could be implemented, such as dispute resolution provisions enacted in domestic law or through a multilateral convention.