Over the last months the implementation of the GloBE Rules continued to progress and will come into effect in many countries in 2024. Following the first and second sets of Administrative Guidance that were published in February 2023 and July 2023, respectively, the OECD/G20 Inclusive Framework on BEPS (IF) issued on 18 December 2023 the third publication (see link). Overall, this third set of Administrative Guidance will serve as an additional valuable resource for MNE Groups navigating the complexities of complying with the GloBE Rules. The new guidance will help MNE Groups transitioning into the GloBE Rules by providing further clarifications on key areas summarized in six Chapters. In the following you will find a short summary of the main content. A more in-dept analysis and observations can be found in following PwC’s Tax Policy Alert.
Application of the Transitional CbCR Safe Harbour
Purchase price accounting (PPA) adjustment in Qualified Financial Statements
The Guidance confirms that under certain conditions a Constituent Entity may use financial accounts that include the effect of PPA adjustments in the computation of Profit (or Loss) before Tax for purposes of the Transitional CbCR Safe Harbour. This includes the consistent reporting condition (i.e. CbC Report is based on Constituent Entity’s reporting package or separate financial statements including PPA adjustments) and the goodwill impairment adjustment (i.e. goodwill impairment related to transactions after 30 November 2021 must be added back to profit before tax for purposes of two out of the three tests under the Transitional CbCR Safe Harbour rules).
Further Guidance on the Transitional CbCR Safe Harbour
This chapter focuses on the following main aspects:
- Tested Jurisdictions: The guidance clarifies that Constituent Entities, standalone Joint Ventures, and JV Groups located in the same jurisdiction are treated as separate Tested Jurisdictions.
- Consistent use of data within a territory: To perform the safe harbour computations and not being disqualified thereof, all data required for Constituent Entities in a Tested Jurisdiction must consistently come from the same type of Qualified Financial Statements.
- Using different accounting standards: An MNE Group may use different Qualified Financial Statements as the source of data for different Tested Jurisdictions.
- Adjustments to Qualified Financial Statements: Making adjustments to the data drawn from Qualified Financial Statements in a CbC Report for a jurisdiction would disqualify a Tested Jurisdictions from the Transitional CbCR Safe Harbour, regardless of whether such adjustments were intended to make CbCR data more consistent to the GloBE Rules.
- Simplified ETR computation: The guidance clarifies that the “Simplified Covered Taxes” includes the current and deferred income tax expense (including prior-year adjustments) as reported in the Qualified Financial Statements and does not require any adjustments under GloBE (e.g. allocation of CFC taxes), other than the removal of taxes which are not Covered Taxes and Uncertain Tax Positions.
- Treatment of hybrid arbitrage arrangements: The guidance confirms that a Constituent Entity cannot qualify for the Transitional CbCR Safe Harbour as a result of entering into a hybrid arbitrage arrangement after 15 December 2022 (or 18 December 2023 in some cases). Hence, respective adjustments must be made to the Tested Jurisdiction’s profit before tax and income tax expense.
Administrative aspects of applying GloBE Rules
Administrative Guidance on application of GloBE Rules
This chapter covers the following main aspects of the GloBE Rules application:
- Consolidated revenue threshold: Generally, the definition of revenue is derived from the financial accounting standard used in the MNE Group’s Consolidated Financial Statements. However, as the financial accounting standards have different requirements, the definition of revenues for GloBE purposes is further clarified.
- Mismatch between Fiscal Years of UPE and another Constituent Entity: The fiscal year for purposes of GloBE Rules is generally the accounting period used by the UPE in its Consolidated Financial Statements. In case some Constituent Entities use a different fiscal year, the same method to address the discrepancy that is used in the Consolidated Financial Statements is used.
Further Administrative Guidance on the allocation of Blended CFC Taxes
This chapter deals with additional guidance on the allocation of taxes incurred under a Blended CFC Tax Regime. The following three issues are specifically addressed:
- Computing an Entity’s Blended CFC Allocation Key when multiple GloBE Jurisdictional ETRs are computed for a jurisdiction (e.g. due to JV Sub-Groups or Investment Entities in the same jurisdiction).
- Computing an Entity’s Blended CFC Allocation Key when it is not required to compute ETR under Art. 5.1 MR.
- Computing a non-GloBE Entity’s Blended CFC Allocation Key when multiple GloBE Jurisdictional ETRs are computed for a jurisdiction.
Transitional Filing Deadlines for MNE Groups with Short Reporting Fiscal Years
The IF has agreed that administrative relief is necessary for the filing of GloBE Information Returns and notifications if MNE Groups have short Reporting Fiscal Years ending before 31 March 2025. Hence, the due date for filing and notification obligations for any Fiscal Year shall not be before 30 June 2026.
Simplified Calculations Safe Harbour for Non-Material Constituent Entities
The third set of Administrative Guidance introduces a Simplified Calculations Safe Harbour for Non-Material Constituent Entities (NMCE). An NMCE is an Entity, including Permanent Establishments, that is not consolidated on a line-by-line basis in the UPE’s Consolidated Financial Statements solely on size and materiality grounds and is considered as a Constituent Entity.
The Simplified Calculations for NMCEs offer an alternative simplified and conservative method for determining the GloBE Income/Loss, GloBE Revenue, and Adjusted Covered Taxes of such Entities as part of the Simplified Calculations Safe Harbour (annual election on an Entity-by-Entity basis). If the terms of the Simplified Calculations Safe Harbour are not met with respect to a Tested Jurisdiction (i.e. Routine Profits, De Minimis and ETR tests are not met), then the general GloBE computations shall apply to that jurisdiction. However, if one test is met, then the Top-up Tax of that jurisdiction shall be deemed to be zero.
Takeaway
The newly released Administrative Guidance brings greater clarity on the matters outlined. However, many questions remain and need to be addressed. Hence, further guidance can be expected to be published next year.
All three sets of Administrative Guidance (releases in February 2023, July 2023 and December 2023) will be incorporated into a revised version of the Commentary and further documents published by the OECD. It is expected that updated versions will be released at some point in 2024.
As the implementation of Pillar Two progresses it is crucial to stay informed about the further developments to assess the potential implications for affected groups. Actively monitoring and engaging with the evolving landscape will enable companies to adapt effectively and make informed decisions regarding the changes in international tax matters.
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