{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
Dominik Birrer
Partner Tax, PwC Switzerland
Rolf Roellin
Director Corporate Tax, PwC Switzerland
Etienne Michaud
Manager Transfer Pricing and Value Chain Transformation, PwC Switzerland
On 20 December 2022, exactly one year after the publication of the GloBE Model Rules, the OECD continued its tradition of making Christmas presents by publishing long awaited additional guidance regarding the future shape of Pillar 2.
Overview
The implementation package released contains the following three elements:
- Guidance on Safe Harbours and Penalty Relief (extent: 30 pages);
- a public consultation document on the GloBE Information Return (extent: 67 pages); and
- a public consultation document on Tax Certainty for the GloBE Rules (extent: 13 pages).
The guidance on Safe Harbours and Penalty Relief leverages insights gained during previous public consultations. On the other hand, the OECD is asking for public input on certain administration, operation, compliance and rule coordination topics and summarised its ask in two public consultation documents. Comments can be submitted to the OECD on those two documents by 3 February 2022.
The OECD clarified that further administrative guidance will be released on a rolling basis with the first package being published in early 2023. In parallel, work is being performed to finalise the Subject to Tax Rule and related multilateral instrument to assist in its implementation.
BEPS 2.0
Tax challenges arising from the digitalisation of the economy
Learn more
A. Executive summary
- Building on the input from the previous public consultations, the Inclusive Framework has agreed on the design of a CbCR-based transitional safe harbour to provide a “soft-landing” in the introduction of the GloBE Rules as well as a regulatory framework for the development of permanent safe harbours. In addition, the OECD has developed a common understanding for a transitional penalty relief regime;
- The consultation document on the GloBE Information Return (“GIR”) sheds light on the potential design of the GIR and provides an overview of the Inclusive Framework’s work done to date to identify the set of data points to compute the GloBE tax liability. The data point list is summarised in Annex A of the public consultation document. At this stage, the OECD is seeking for input on the amount and type of information that needs to be collected in a Pillar 2 context. In addition, input is requested with respect to potential simplifications to the GIR and the ability of a multinational group to provide alternative data points. Not surprisingly, the required data points are extensive and the process to gather the information needed will mean changes to company’s existing computation, reporting and disclosure methodologies and ERP systems;
- The consultation document on Tax Certainty for the GloBE Rules contains various mechanisms to achieve tax certainty under the GloBE Rules. Mechanisms proposed amongst others entail classic instruments such as dispute prevention and dispute resolution tools whilst the OECD is looking for input from stakeholders on the further development of these mechanisms. As is the case for the consultation on the GIR, the consultation regarding Tax Certainty for the GloBE Rules lasts until 3 February 2022.
B. Further considerations
Guidance on Safe Harbours
- Broadly speaking the Safe Harbour rules can be divided into transitional and permanent Safe Harbours.
- The Transitional CbCR Safe Harbour is designed as a short-term measure that excludes an MNE’s operations in certain lower-risk jurisdictions from the scope of GloBE in the initial years. As such, it should be providing relief to groups with respect to their GloBE compliance obligations.
- It is designed to apply to fiscal years beginning on or before 31 Dec 2026 and will therefore provide a potential simplification for the first three years.
- In order to qualify for the Transitional CbCR Safe Harbour, an MNE group needs to meet one of the following three tests:
- De minimis test: the MNE Group reports total revenues of less than EUR 10 million and Profits (Loss) before income tax of less than EUR 1 million in a jurisdiction on its Qualified CbC Report for the respective year.
- ETR test: the MNE Group has a Simplified ETR hat is equal to or greater than the required rate in a jurisdiction for a fiscal year. The required rate is 15% for years beginning in 2023 and 2024, 16% in 2025 and 17% in 2026. The Simplified ETR is calculated by dividing the income tax expense (including deferred taxes but excl. uncertain tax positions and taxes not qualifying as Covered Taxes) reflected in the Qualified Financial Statements[1] by the Profit (Loss) before income tax as per the Qualified CbCR[2].
- Routine profits test: the MNE Group’s Profit (Loss) before income tax in a jurisdiction is equal to or less than the Substance-based Income Exclusion amount calculated as per the GloBE Rules.
- Important to note is the fact that an MNE Group that qualifies for the Transitional CbCR Safe Harbour for a particular jurisdiction is not discharged from complying with group-wide GloBE requirements (e.g. the filing of a GloBE Information Return, including the information concerning the application of the Transitional CbCR Safe Harbour in a jurisdiction where applicable).
- If the MNE Group consists of certain specific entities (like JVs, a tax neutral UPE, investment entities, etc.), then a more detailed review of these cases would be required. There are also specific provisions foreseen with respect to the treatment of impairment losses and any reversals of impairments linked to certain Ownership Interests (except for Portfolio Shareholdings) that require specific attention.
- If an MNE Group has not applied the Transitional CbCR Safe Harbour with respect to a jurisdiction in a year in which it is subject to the GloBE Rules, the MNE Group cannot qualify for that safe harbour for that jurisdiction in a subsequent year (“once out, always out” approach).
- Last but not least, it should be kept in mind that the Transition Rules covered by the OECD Model Rules in chapter 9.1. basically continue to apply to the Constituent Entities of that jurisdiction.
- The Permanent Safe Harbour has the aim to reduce the number of computations and adjustments an MNE Group is required to make under the GloBE Rules, i.e. to use simplified income, revenue, and tax calculations in determining whether it meets any of the tests under the GloBE Rules to avoid a potential top-up tax.
- The Permanent Safe Harbour uses the same tests as outlined above for the Transitional CbCR Safe Harbour. However, the difference between the Permanent Safe Harbour and the Transitional CbCR Safe Harbour is that the tests are applied under the Permanent Safe Harbour using the GloBE Rules, with simplified calculations of income revenue and tax calculations as opposed to using CbCR and Qualified Financial Statement data for the Transitional CbCR Safe Harbour.
- The OECD publication provides specific simplified calculations that can be used for Non-Material Constituent Entities (“NMCE”), i.e. an entity that is not consolidated on a line-by-line basis in the MNE Group’s consolidated financial statements solely by reason of its size or on materiality grounds. The revenue, income and adjusted covered taxes of such NMCE are determined by reference to the relevant CbC regulations or OECD CbCR guidance if there are no domestic CbC regulations.
- Further simplified calculations permitted under this Permanent Safe Harbour will be outlined in Administrative Guidance to be published on an ongoing basis.
Guidance on Penalty Relief
- Although the OECD document acknowledges the fact that many jurisdictions already provide for penalty relief, a common understanding among implementing jurisdictions is that there is a necessity to provide specific penalty relief in respect of the filing of GloBE information returns for a transition period (i.e. as is the case with the Transition CbCR Safe Harbour, applicable for any fiscal year beginning on or before 31 December 2026, but not including a fiscal year that ends after 30 June 2028).
- Accordingly, where a tax administration considers that an MNE Group has taken reasonable measures to ensure the correct application of the GloBE Rules (and the MNE Group can demonstrate that it acted in good faith to understand and comply with the GloBE Rules), relief from sanctions and penalties should apply.
Consultation on the GloBE Information Return
- The consultation document consists of a brief part providing background information about the public consultation and the relevant questions the OECD seeks input on and an Annex A setting out the draft data points (depicted on roughly 20 pages) and respective explanatory guidance (stretching over more than 30 pages). It goes without saying that the form / extent of the GIR is subject to changes depending on the input the OECD will receive as part of the public consultation.
- The GIR has been developed by a multi-disciplinary focus group, which was formed by the Inclusive Framework. This group consisted of policy experts, tax administration experts and it regularly consulted with the Pillar Two Business Advisory group to obtain input from a business perspective.
- It is important to note that the GIR is to be separated from the tax return requirements (tax filing and payment obligations), which are to be determined by each jurisdiction separately upon implementing the GloBE Rules. In the same context, it is worthwhile mentioning that the scope for the information that needs to be made available to tax authorities has not been decided yet and the Implementation Framework acknowledges that a balance must be struck between enabling tax authorities to carry out their control / review work and imposing unnecessary reporting requirements for impacted companies.
- The data points set out in Annex A of the consultation document are considered to be sufficient for a multinational group to compute its GloBE tax liability. Conceptually, the data points can be divided into four sections:
- General information about the multinational group and the filing Constituent Entity (“CE”). The section also provides general accounting information on the fiscal period and the Consolidated Financial Statements of the Ultimate Parent Entity (“UPE”).
- Corporate structure of the entire group to identify which CE could be subject to the GloBE Rules and whether the IIR / UTPR applies to which CE, including information on any changes to the ownership structure that occurred during the reporting period. Members of JV Groups are to be listed as well. Furthermore, should a multinational group have any Excluded Entities, these would need to be identified together with a reasoning for their exclusion.
- ETR computation and Top-up Tax computation for each relevant jurisdiction in which the group is present, including an overview of the elections made. This section contains the most extensive data point list of all of the four sections and will clearly be the one that will give rise to many challenges and questions. Safe harbour application and a potential de minimis exclusion election would be considered in this section as well. Considering the importance of this section, we have added additional considerations focusing on the key observations below.
- Top-up tax allocation and attribution in accordance with the GloBE rule order (on both the IIR and the UTPR). In this section, the low-tax jurisdictions are to be listed together with an overview of who the IIR / UTPR applies in respect of such particular low-tax jurisdiction.
- Annex A includes detailed explanations, which should facilitate the interpretation of the various elements of the GIR.
- Public consultation comments that the OECD obtained so far showed a clear interest for a single point of filing the GIR, i.e. that the latter could be filed in one country followed by an exchange of the GIR via information exchange agreements. The respective centralised filing requirements are being developed as well.
- As mentioned above, the section “ETR computation and Top-up Tax computation” reflects the most comprehensive and at the same time most challenging of the four data point categories. Selected key observations from the public consultation document are as follows:
- The GIR basically follows a jurisdictional approach, i.e. the relevant information is to be reported on a jurisdictional basis. However, the Implementation Framework suggests a concept in the consultation document in that in certain instances, the ETR and the Top-up Tax computation are to be made on a sub-group basis. The GIR foresees a list of possible subgroups such as Constituent Entities, Minority-Owned Subgroup, Standalone MOCEs, Investment Entities etc. Importantly, the jurisdictional computation of the ETR, the Top-up Tax and the GloBE Income / Loss shall be reported for each subgroup.
- If a group elects to apply the Transitional CbCR Safe Harbour, it will need to input the relevant information ascertaining that the group is actually eligible for that safe harbour in a particular jurisdiction. The same procedure is expected to be applied in case other safe harbours would become relevant / applicable.
- The computation of the GloBE Income / Loss and the Covered Taxes is to be listed on an aggregate jurisdictional basis, detailing out the adjustments to the Financial Accounting Net Income / Loss that were necessary. However, the same information is then also listed by CE, which means that the preparation file would become quite material in size / extent as soon as a taxpayer has numerous group entities in one particular jurisdiction. The consultation document mentions that the inclusion of such detailed information by CE may not be necessary if simplifications are developed.
- The OECD has drafted a table to reflect the recapture mechanism in connection with deferred tax liabilities under Art. 4.4.4. of the Model Rules. The table is to be completed on a jurisdictional basis and will ultimately indicate whether a group has any deferred tax liabilities that did not revers during a period of five years and thereby giving rise to a recapture. In a similar fashion, the OECD has proposed tables to track and identify pre-existing deferred tax accounting attributes that are to be taken into account at the beginning of the Transition Year.
- The extensive data points required to actually be able to run the calculations on both a jurisdictional and a CE-level basis will result in significant challenges to in-scope companies. Existing processes of data gathering, computation and reporting will need to be rethought and redesigned to cope with the new reality. Experience shows that defining and realising the changes needed is a matter of several months / years and will require the involvement of a multi-disciplinary team within an organisation (tax, finance, IT etc.).
Consultation on Tax Certainty for the GloBE Rules
- Despite the availability of consistent global model rules and administrative guidance, the OECD anticipates that differences could arise in the interpretation or application of the GloBE rules between jurisdictions. These differences create uncertainty for MNEs (e.g. with respect to their filing positions) and could potentially result in double taxation. As a result, the OECD will put in place certain mechanisms to provide taxpayers with further tax certainty.
- Dispute prevention mechanisms:
- The recognition of a “Qualified Rule Status” for an IIR, UTPR or DMTT would be achieved through a review process covering all chapters of the GloBE Rules. It would limit or modify the application of the rules in one jurisdiction where there is an applicable “qualified” rule in another jurisdiction. A referral process to the Inclusive Framework would also be available to jurisdictions, which may lead to the release of Agreed Administrative Guidance clarifying the issue at stake.
- A coordinated program similar to the OECD International Compliance Assurance Programme (ICAP) could be established for various jurisdictions to give comfort to a taxpayer on the methodology used and computations performed.
- A binding certainty mechanism similar to an advanced pricing agreement (APA) is also considered. For this purpose, a common standard would first need to be defined, akin to the arm’s length principle in the context of APAs.
- Dispute resolution mechanisms:
- Similar to the mutual agreement procedure (MAP) process, the three basic elements of a dispute resolution mechanism include i) MNEs should be able to submit a request to a competent authority to resolve a dispute, ii) the competent authority should be able to enter into discussions with the competent authorities concerned, and iii) the competent authorities should implement the decision reached and provide relief to the MNE.
- Some elements of a dispute resolution mechanism may need to be specific to GloBE requirements. These include the nature of disputes covered and the basis for resolving disputes. The scope could be narrowed to i) cases in which the MNE group is required to pay top-up tax in several jurisdictions, or ii) cases in which the MNE demonstrates that the different interpretation of the rules led to double taxation.
- Dispute resolution could be achieved through the following options: i) developing a multilateral convention, ii) relying on competent authority agreements under the Mutual Administrative Assistance in Tax Matters (MAAC), iii) relying on exiting tax treaties and/or iv) creating a dispute resolution provision in domestic law. The public consultation discusses the pros and cons of each legal instrument but does not at this stage conclude on which instrument(s) would most likely be selected.
1Accounts used to prepare the Consolidated Financial Statements of the UPE (which mirror the requirement under Article 3.1.2), or separate financial statements of Each Constituent Entity provided they are prepared in accordance with either an Acceptable Financial Accounting Standard, or if the information contained in such statements is reliable, another Authorised Financial Accounting Standard.
2Country-by-Country Report prepared and filed using Qualified Financial Statements.
#social#
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Contact us
