OECD/IF releases further Administrative Guidance on the GloBE Rules (Pillar Two)

For the purpose of applying the Transitional CbCR Safe Harbour, the CbC Report data should be derived from a Qualified CbC Report. A Qualified CbC Report requires its data to be prepared and filed using Qualified Financial Statements.

The Transitional CbCR Safe Harbour does generally not require or permit adjustments to the amounts reported in the financial accounts used to prepare the Consolidated Financial Statements or the separate financial statements of a Constituent Entity (CE) in order for them to be considered Qualified Financial Statements. However, a potential for significant distortions exists where the reporting package or separate financial statements of a CE include the effect of PPA adjustments.

Where PPA adjustments are included in the reporting package or separate financial statements of an acquired CE, the reporting package or separate financial statements will only be considered Qualified Financial Statements, in case the condition of consistent reporting is met and a required adjustment for previously applied goodwill impairment is made.

The consistent reporting condition requires that the MNE Group has not submitted a CbC Report for a fiscal year beginning after 31 December 2022 that was based on the CE's reporting package or separate financial statements without the PPA adjustments, unless including PPA adjustments was required by law or regulation.

The goodwill impairment adjustment requires a reduction to the CE's income attributable to an impairment of goodwill related to transactions entered into after 30 November 2021 to be added back to the PBT for applying the Routine Profits test and the Simplified ETR test (unless also recognised as correction of the deferred tax expense in the financial statements).

The Transitional CbCR Safe Harbour tests are applied based on data from all CEs in a Tested Jurisdiction. If CEs, stand-alone Joint Ventures (JV) and JV Groups are located in the same jurisdiction, they should be treated as being separate Tested Jurisdictions: all CEs are treated as one Tested Jurisdiction, all entities of the same JV group are treated as one Tested Jurisdiction and each stand-alone JV is treated as a Tested Jurisdiction.

The Dec 2023 AG considers various questions that have been raised in respect of Qualified Financial Statements. The answers that are provided can be summarised as follows:

• An MNE Group cannot use data from different types of Qualified Financial Statements for the same CE. This implies that all data (such as for example the income tax expense and PBT) relevant for the Transitional CbCR Safe Harbour must be derived from the same Qualified Financial Statements. However, an exception applies if the deferred tax expense in relation to a PBT that is reflected in the Qualified Financial Statements can only be derived from the Consolidated Financial Statements. In that case, this deferred tax expense must be included for the purpose of computing the Simplified ETR under the Transitional CbCR Safe Harbour. Data in the CbC Report that are not relevant for this safe harbour may be populated from other sources permitted under the applicable CbC regulations.
  
  
• An MNE Group also cannot use different types of Qualified Financial Statements for different CEs within the same Tested Jurisdiction. All data relevant for the Transitional CbCR Safe Harbour in a Tested Jurisdiction must thus be derived from the same type of Qualified Financial Statements. An exception applies to Non-Material Constituent Entities (NMCEs) or Permanent Establishments (PEs) for which any permitted data source can be applied.
  
  
• An MNE Group may use different types of Qualified Financial Statements as the source of data for different Tested Jurisdictions in a Qualified CbC Report. As a result, a CbC Report remains qualified if data from local GAAP accounts are used for some Tested Jurisdictions and data from the accounts used to prepare the consolidated financial statements of the UPE are being used in other Tested Jurisdictions.
  
  
• Whether a CbC Report is qualified is assessed separately for each Tested Jurisdiction. A CbC Report is thus still to be considered as a Qualified CbC Report for those Tested Jurisdictions where the data is sourced from Qualified Financial Statements, even if the data in the CbC Report for other Tested Jurisdictions is not based on Qualified Financial Statements.
  
  
• Qualified Financial Statements can include separate financial statements if these statements are prepared in accordance with an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard. It is irrelevant whether or not these statements must be prepared for local statutory reporting purposes or any other regulatory reporting purposes.
  
  
• An MNE Group is not allowed to make adjustments to the data included in the Qualified Financial Statements used for the purpose of computing the Transitional CbCR Safe Harbour, even if these adjustments were intended to make the CbC Report more consistent with the GloBE Rules. An exception only applies if such adjustments are explicitly required by the Commentary or Agreed Administrative Guidance.
  
  
• An intra-group payment that is treated as income in the Qualified Financial Statements of the recipient and as an expense in the Qualified Financial Statements of the payer shall be included in Total Revenues and PBT for the purpose of computing the Transitional CbCR Safe Harbour. It is in this respect irrelevant that the payment would, for example, be treated as a dividend for tax purposes in the payer’s jurisdiction and therefore excluded from the Total Revenues and PBT in the CbC Report based on OECD Guidance on the CbC Report.
  
  
• If Qualified Financial Statements are not available for a PE in a Tested Jurisdiction, the MNE Group may determine the portion of the Main Entity’s Total Revenue and PBT that is attributable to the PE using separate financial statements prepared by the Main Entity for the PE for financial reporting, regulatory, tax reporting or internal management control purposes.

To avoid unequal treatment, the Dec 2023 AG confirms that Groups that fall into the scope of Pillar Two but are not required to file a CbC Report (e.g., due to variance in threshold tests, fluctuations in foreign exchange currency rates or because it concerns a domestic group) are still eligible for the Transitional CbCR Safe Harbour. To apply this safe harbour, the Group must complete the Total Revenue, the PBT and the Simplified Covered Taxes in the relevant section of the GloBE Information Return using the data that would have been reported in a Qualified CbC Report if the Group were required to file such report in accordance with applicable CbC regulations.

Under the Simplified ETR Test, the Top-up Tax is deemed zero if the Simplified ETR in the Tested Jurisdiction is equal or greater than the Transition rate (i.e. 15% for financial years beginning in 2023 and 2024; 16% for financial years beginning in 2025 and 17% for financial years beginning in 2026). The Simplified ETR is calculated by dividing the Simplified Covered Taxes by the PBT as reported in the Qualified CbC Report.

For calculating the Simplified Covered Taxes, the Dec 2022 Safe Harbour Document refers to the income tax expense as recorded in the Qualified Financial Statements of the CEs in the Tested Jurisdiction, after eliminating any taxes that are not Covered Taxes under the GloBE Rules and uncertain tax positions. With respect to the Simplified Covered Taxes, the following three clarifications are made by the Dec 2023 AG:

• The adjustments to prior-year income tax expenses (i.e. adjustments to bring the amount reported in a previous year in line with the final amount of the expense) must not be removed from the income tax expense, unless these adjustments relate to uncertain tax positions.
• The income tax expense on the income of a PE must be allocated exclusively to the jurisdiction where the PE is located and can only be included in the Simplified ETR Test for this jurisdiction.
• For purposes of the Simplified ETR Test, taxes paid under a CFC regime by the Parent Entity or under a taxable branch regime by the Main Entity must not be removed from the Simplified Covered Taxes of the Parent Entity or Main Entity, notwithstanding the fact that these taxes are also taken into account in the jurisdiction of the CFC, PE or Hybrid Entity under the GloBE Rules if no safe harbour applies in these jurisdictions.

The Routine Profits Test compares the Tested Jurisdiction’s SBIE amount under the GloBE Rules to the PBT as reported in the Qualified CbC Report. The Top-up Tax is deemed zero for the Tested Jurisdiction if the PBT is equal to or less than the SBIE amount. The SBIE amount is based on a percentage of the Eligible Employees and Eligible Tangible Assets. The Dec 2023 AG confirms that the SBIE amount for purposes of the Transitional CbCR Safe Harbour must be computed based on the same percentages that would be used under the GloBE Rules, including the transitional rates that apply up to 2032.

The Inclusive Framework has agreed that the Transitional CbCR Safe Harbour is not available to an MNE Group if certain hybrid arbitrage arrangements are entered into resulting in a Tested Jurisdiction to qualify for the Transitional CbCR Safe Harbour.

Under certain conditions, adjustments will therefore need to be made to (i) a Tested Jurisdiction’s PBT with respect to a deduction/non-inclusion arrangement or a duplicate loss arrangement entered into after 15 December 2022, and/or (ii) a Tested Jurisdiction’s income tax expense with respect to a duplicate tax recognition arrangement entered into after 15 December 2022. 

This anti-avoidance rule will only apply to the Transitional CbCR Safe Harbour and does not apply to other safe harbours. However, further guidance will be provided to address hybrid arbitrage arrangements outside the context of the Transitional CbCR Safe Harbour. 

Please note that Additional Tier One Capital should in principle not be considered as a hybrid arbitrage arrangement.

According to the Dec 2023 AG, the revenue includes the inflow of economic benefits arising from delivering or producing goods, rendering services, or other activities that constitute the MNE Group’s ordinary activities. The amount should be determined in line with the relevant accounting standard but should in any case include revenue before deducting cost of sales and other operating expenses.

In addition, the Dec 2023 AG clarifies that net gains from investments (realised or unrealised) reflected in the profit and loss statement and income or gains separately presented as extraordinary or non-recurring items are also part of revenue.

Specifically for financial entities, which may not record gross amounts for certain transactions, the Dec 2023 AG clarifies that income from financial transactions recorded on a net amount under the relevant accounting standard should be used when determining the revenue under the revenue threshold.

In cases where a CE has a different fiscal year (the accounting period maintained in the CE’s financial accounts used for preparing the Consolidated Financial Statements) than the Fiscal Year (accounting period of the UPE), the Consolidated Financial Statements could include the results based on the CE’s reporting period. For example, the results from a CE with a fiscal year from 1 December – 30 November could be included in the UPE’s financial statements for 1 January – 31 December. Alternatively, the UPE’s financial statements could include the results from the CE with a different fiscal year based on the results from two of the CE’s fiscal years that cover the period of the UPE’s Fiscal Year.

The Dec 2023 AG clarifies that for the GloBE calculations, the amounts included in the consolidated financial statements of the UPE should be used, irrespective of which of the abovementioned methods of reporting has been used.

In addition, in cases where a CE with a different fiscal year than the UPE is not included in the consolidated financial statements (e.g. due to size or materiality), the GloBE computations for the CE must be made based on the financial accounting period that ends during the UPE’s Fiscal Year.

For a Joint Venture or JV Group with a different fiscal year than the UPE, the GloBE calculations should also be performed based on the financial accounting period that ends during the UPE’s Fiscal Year.

According to the Dec 2023 AG, there may also be a mismatch between the Fiscal Year and the taxable year of an entity. The guidance clarifies that in such cases, the Adjusted Covered Taxes should be determined based on the method used in the financial statements used to determine the Financial Accounting Net Income or Loss of the entity.  

In case of different subgroups in the same jurisdiction, the GloBE Jurisdictional ETR is calculated for each subgroup individually. Examples of subgroups could be JV Groups, ‘regular’ blended groups and Minority-Owned Subgroups. The Dec 2023 AG provides further guidance and indicates that the GloBE Jurisdictional ETR of the subgroup to which the relevant Entity belongs, is the relevant GloBE Jurisdictional ETR to calculate the amount of Blended CFC Taxes attributable to such Entity. Hence, an Entity forming part of a JV Group located in the same jurisdiction as an Entity forming part of the ‘regular’ GloBE Group can have two different GloBE Jurisdictional ETRs even though they are located in the same jurisdiction. Note that the GloBE Jurisdictional ETR is still calculated by also considering the Entities in the relevant subgroup that might not be subject to CFC tax.

In addition, the Dec 2023 AG provides for guidance in case an MNE Group is not required to compute the ETR for a jurisdiction, for example due to the application of the Transitional CbCR Safe Harbour or the election of the De Minimis exclusion.

If the Simplified ETR test forming part of the Transitional CbCR Safe Harbours applied, the Simplified ETR is deemed to be equal to the GloBE Jurisdictional ETR for purposes of allocating CFC taxes under a Blended CFC Tax Regime. As such, no CFC tax is allocated to such jurisdiction. If one of the other Transitional CbCR Safe Harbours is applied, it shall calculate the Simplified ETR for the jurisdiction to assess if CFC tax is allocated to such jurisdiction. In line with the above, in case of subgroups an MNE Group is required to calculate the Simplified ETR for every subgroup defined in accordance with the CbC Safe Harbour rules.  

Special rules are also introduced in case the QDMTT Safe Harbour is applied, indicating that the GloBE Jurisdictional ETR in such case is equal to the ETR calculated under the QDMTT, with an adjustment of the ETR numerator for the amount of QDMTT payable, provided such QDMTT is creditable under the Blended CFC Tax Regime.  

Rules are also in place in case one or more entities forming part of a subgroup cannot apply the relevant safe harbour.

In brief NMCEs are subsidiaries and their Permanent Establishments, that are not consolidated on a line-by-line basis in the UPE's Consolidated Financial Statements solely on size or materiality grounds. In order to be able to claim NMCE status, the Consolidated Financial Statements should be subject to an external audit and if an entity's revenues exceed EUR 50 million additional requirements apply in preparing its financial accounts.

Under the permanent Simplified Calculations Safe Harbour, NMCEs can individually and annually elect to apply the following calculations:

• The GloBE Income of an NMCE is equal to the Total Revenue as determined in accordance with the relevant CbC regulations;
• The GloBE Revenue of an NMCE is (also) equal to its Total Revenue as determined in accordance with the relevant CbC regulations;
• The Adjusted Covered Taxes of an NMCE are equal to its Income Tax Accrued (Current Year) as determined in accordance with the relevant CbC regulations.

Under the Simplified Calculations Safe Harbour, the NMCE will determine whether one of the safe harbours is met (i.e. the Routine Profits test, the De Minimis test and the ETR test) using the outcome of the Simplified Calculations set out above.

The Inclusive Framework will review the methodology used in these Simplified Calculations no later than 2028.