OECD releases Administrative Guidance for implementation of the BEPS 2.0 - Pillar 2

Overview

The GloBE Model Rules (released October 2021) and the Commentary (released March 2022) consist of a coordinated system of rules designed to ensure that large MNE Groups are subject to a minimum effective tax rate of 15% in each of its operational jurisdictions. The aim of the Implementation Framework, of which this release of Administrative Guidance is a part of, aims to ensure greater certainty in the interpretation and application of the GloBE Rules by providing additional clarification and examples.

The first chapter addresses issues relating to the scope of the GloBE rules. Inter alia these issues relate to:

The foreign currency translation of monetary thresholds within the GloBE Rules;

The application and consequences of the deemed consolidation test; and

The financial accounts to be used in the calculation of Deferred Taxes; etc.

The second chapter relates to further guidance on issues regarding the calculation of GloBE Income or Loss and Adjusted Covered Taxes. Even though this chapter provides long-awaited clarification on the treatment of CFC taxation (e.g. US GILTI), the more crucial areas for Swiss headquartered groups seem to be:

A Five-Year Election to treat foreign exchange gains or losses on certain hedging transactions reflected in a constituent Entity’s Financial Accounting Net Income or Loss as also an Excluded Equity Gain or Loss for the purposes of Article 3.2.1(c);

The prevention of asymmetric treatment (debt vs equity) of dividends and distributions in regard to Excluded Dividends in Article 3.2.1(b);

An election to adjust GloBE Income or Loss for income generated from debt releases under prescribed circumstances;

Clarification on the Accrued Pension Expense Adjustment in Article 3.2.1(i) to ensure that only the net contributions (i.e., contributions less any earnings of the pension plan refunded to the company) are considered for GloBE purposes;

Allocation of the taxes paid on deemed distributions to the distributing Constituent Entity under Article 4.3.2(e); and

The introduction of an optional system in the event of a Net GloBE Loss and additional Top-up Taxes under Article 4.1.5 to defer the cash payments on Excess Negative Tax Expenses (i.e., additional Top-up Taxes) until such a time when these assets are being used.

The third chapter is concerned with the application of the GloBE Rules to insurance companies. This chapter mainly provides further definitions and simplifications.

The fourth chapter provides further clarifications on the transition rules under Article 9.1.1 and 9.1.3. It is stated that pre-regime deferred tax assets - incl. tax credits and unrecognised (but disclosed) DTAs - are available for use when computing Adjusted Covered Taxes and do not need to be adjusted except for recasting considerations. Furthermore, the guidance clarifies the different treatment of pre-GloBE (since 30 November 2021) intra-group transactions based on the accounting treatment (booked at either cost or fair value) at the level of the acquiring Constituent Entity and the level of taxation levied on the disposing Constituent Entity.

The fifth and last chapter sets out guidance on the design of a Qualified Domestic Minimum Top-up Tax (QDMTT) and will be used for an assessment of whether a minimum tax meets the requirements for qualified status. For this the Guidance provides two guiding principles:

The minimum tax must be consistent with the design of the GloBE Rules; and

The minimum tax must provide for outcomes that are consistent with the GloBE Rules [or produce a greater incremental tax liability].

A QDMTT can be applied to any group within the jurisdiction.

Certain aspects (i.e., information collection and reporting requirements under a QDMTT) are not covered within this Guidance and will be addressed in future Administrative Guidance.

Takeaway

The newly released Agreed Administrative Guidance lays the foundation for the design of a Qualified Domestic Minimum Top-up Tax, which is one of the key considerations from a Swiss lawmaker perspective. From a Swiss business perspective, the new guidance on deemed distributions as well as further clarification on the transition rules are of great interest. Specifically for insurance companies, the guidance provides necessary clarifications on the application of the GloBE Rules.

Further guidance to minimize the prevailing uncertainties in the interpretation and application of the GloBE Rules can be expected throughout the year as soon as an agreement has been reached by the Inclusive Framework.

For a detailed analysis on the published Agreed Administration Guidance, we refer to the respective Tax Policy Alert provided by PwC Global.

Taxpayers should model the outcomes of the guidance as soon as possible given the rapid influx of individual jurisdictions moving forward with implementing these rules.

OECD releases Administrative Guidance for implementation of the BEPS 2.0 - Pillar 2 Rules

Overview

Takeaway

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