On 2 February 2023 the Inclusive Framework released technical guidance on implementation by governments of the global minimum tax. The Agreed Administrative Guidance for the Pillar Two GloBE Rules aims to ensure co-ordinated outcomes and greater tax certainty.

Guidance on scope of the rules

As some jurisdictions may choose to implement the rules with monetary thresholds denominated in local currency, the guidance sets out harmonised foreign exchange translation rules for the thresholds.

There is also guidance on the deemed consolidation test that is applied where the GloBE Rules require a determination that is based on a Group or Entity’s financial statements and the relevant Group or Entity does not prepare Consolidated Financial Statements using an Authorized Financial Accounting Standard. The guidance also clarifies which financial accounts should be used for the calculation of Deferred Tax.

The rules also clarify the definition of an excluded entity.

Income and Taxes

Sometimes an MNE group may account for intragroup transactions at cost. The GloBE rules generally require groups to apply the arm’s length principle to cross-border intra-group transactions, and the guidance outlines the procedure for determining the income of the disposing entity.

Guidance is also given on various aspects including the treatment of debt releases, accrued pension expenses, covered taxes on deemed distributions and loss-making parent entities of CFCs.

Allocation of taxes arising under blended CFC tax regimes

The GloBE rules require taxes imposed under a Controlled Foreign Company (CFC) tax regime to be allocated to the constituent entity through which the CFC income has arisen, to ensure that the tax is matched with the income on which it arose, for the purpose of the effective tax rate (ETR) computations. The CFC tax is allocated to each CFC based on the constituent entity’s share of the underlying income.

Under a blended CFC tax regime the CFC tax charge is computed based on a blend of income, losses and creditable taxes of multiple CFCs owned by a constituent entity. Blended CFC tax regimes, including the US GILTI, ensure that the aggregate foreign income beneficially owned by a taxpayer through CFCs is subject to a minimum level of tax. The GILTI aggregates income, losses, and taxes of all CFCs owned by a US shareholder to ensure that the relevant income is taxed at a certain minimum rate; and imposes an additional tax if the globally blended ETR is below the specified percentage in a tax year.

The OECD guidance sets out a temporary allocation formula for fiscal years beginning on or before 31 December 2025 but not including a fiscal year that ends after 30 June 2027.

Allocable blended CFC tax is the amount of tax incurred by a constituent entity under the blended CFC tax regime. The blended CFC tax allocated to an entity is calculated as the blended CFC allocation key divided by the total of all the blended CFC allocations keys, then multiplied by the allocable blended CFC tax. The blended CFC allocation key is the attributable income of the entity, multiplied by the applicable tax rate less the GloBE jurisdictional ETR.

QDMTTs

The definition of Qualified Domestic Minimum Top-up Tax (QDMTT) requires that the domestic minimum tax is implemented consistently with the outcomes provided for under the GloBE rules and commentary, so it increases the MNE Group’s domestic liability on domestic excess profits to the minimum rate and there is no provision of benefits to the MNE Group related to the GloBE rules.

The current QDMTT top-up tax should be determined by multiplying the domestic QDMTT income by the jurisdictional top-up tax percentage and then adding any additional QDMTT top-up tax arising for the jurisdiction.

A QDMTT is not required to have a substance carve-out, however if it does have a substance carve-out this must not be broader than the substance factors set out in the Substance-based Income Exclusion, i.e. the tangible assets and payroll. To be functionally equivalent, the tax rate applicable under a QDMTT must equal or exceed the minimum rate. Otherwise, the tax collected would consistently fall short of the GloBE top-up tax.

Next steps

The Agreed Administrative Guidance will be included in a revised version of the commentary to be issued later in 2023. Further administrative guidance will be released on an ongoing basis, to ensure coordinated implementation.