The Organization for Economic Cooperation and Development (OECD) has made further progress towards implementing its two-pillar solution for international tax reform.
The two-pillar solution ensures that multinational corporations pay their fair share of taxes.
Under Pillar One, the OECD has released a consultation document on withdrawing digital service taxes and other similar measures.
The document guides countries that have implemented digital service taxes and similar measures on how to withdraw them in a coordinated manner.
This is in line with the proposed tax framework, which aims to reallocate a portion of the profits of large multinational corporations to the countries where their customers are located.
Under Pillar Two, the Inclusive Framework is releasing an implementation package relating to Pillar Two Global Anti-Base Erosion (GloBE) Rules, which provide a coordinated system to ensure that multinational enterprises (MNEs) with revenues above EUR 750 million pay at least a minimum level – at an effective rate of 15% on the income arising in each of the jurisdictions in which they operate.
On December 20, 2022, the Organization for Economic Cooperation and Development (OECD) released guidance and consultation drafts related to Pillar Two Global Anti-Base Erosion (GloBE) rules, including:
the "Guidance on Safe Harbours and Penalty Relief" (not subject to public consultation),
A public consultation document on the GloBE Information Return (GIR) (with a consultation deadline of February 3, 2023), and
A public consultation document on Tax Certainty for the GloBE Rules. (with a consultation deadline of February 3, 2023).
"Guidance on Safe Harbours and Penalty Relief"
Given the complexity of the tax rules under Pillar Two GloBE, various stakeholders have emphasised the need for safe harbours and simplified taxation measures in several public consultations conducted by the OECD.
To address this demand, in the "Guidance on Safe Harbours and Penalty Relief", to ease the compliance burden for multinational enterprises adhering to GloBE, the OECD has established the following:
Transitional country-by-country reporting (CbCR) Safe Harbour (short-term measure),
Simplified Calculations Safe Harbours (permanent), and
Penalty Relief Regime (transitional).
Transitional CbCR Safe Harbour
The country-by-country reporting safe harbour is a transitional measure that exempts multinational companies from complying with GloBE in low-risk jurisdictions in the initial years of its implementation, with the start date of applicable financial years not later than December 31, 2026, and the end date not later than June 30, 2028.
Unless in exceptional circumstances, if a multinational enterprise group satisfies at least one of the following three testing conditions in a jurisdiction for a financial year in the country-by-country report, the top-up tax in that jurisdiction for that financial year will be considered zero:
De Minimis Test: The total revenue in the country-by-country report is less than 10 million euros in the jurisdiction, and the pre-tax profit in the country-by-country report is less than 1 million euros (including loss situations) in the jurisdiction.
Simplified ETR Test: The simplified, effective tax rate in the jurisdiction is not less than the transition rate for the current financial year (15% for Fiscal Years beginning in 2023 and 2024, 16% for Fiscal Years beginning in 2025, and 17% for Fiscal Years beginning in 2026).
Routine Profits Test: The Routine profits test ensures that only "excess profits" above a certain level are subject to the new allocation rules. Specifically, if an entity's profits in a particular jurisdiction fall within a "routine return range" determined by the OECD, those profits would not be subject to the new allocation rules. Instead, they would continue to be taxed in the jurisdiction where the multinational enterprise is headquartered.
Permanent Safe Harbour
The "Guidance on Safe Harbours and Penalty Relief" provides a framework for establishing a permanent safe harbour that allows multinational enterprise groups to avoid certain complex calculations under the GloBE rules without affecting the GloBE results or violating the GloBE rules.
In other words, this measure uses simplified calculations (Simplified Income Calculation, Simplified Revenue Calculation, and Simplified Tax Calculation) to determine income, revenue, and taxes, which replace the calculations for GloBE income or loss, GloBE revenue, and the adjusted Covered Taxes calculations required under the GloBE Rules.
The specific simplified calculation methods will be provided in subsequent guidance.
According to the framework, if a multinational enterprise group satisfies at least one of the following three test conditions using the simplified calculation method for a jurisdiction and fiscal year, the top-up tax for that jurisdiction and fiscal year will be considered zero:
The Routine Profits Test: if its GloBE Income as determined under the simplified income calculation is equal to or less than the amount that results from computing the Substance-based Income Exclusion for that jurisdiction in accordance with Article 5.3 of the GloBE Rules.
The De Minimis Test: if the Average GloBE Revenue of such jurisdiction Income as determined under the simplified income calculation is less than EUR 10 million, and the Average GloBE Income of that jurisdiction is less than EUR 1 million or has a loss in accordance with Article 5.5 of the GloBE Rules.
The ETR Test: if the Effective Tax Rate of the jurisdiction, as determined under the simplified income and tax calculation, is at least 15% as determined in accordance with Article 5.1.1 of the GloBE Rules
The guidelines also specify a simplified calculation safe harbour for Non-Material Constituent Entities (NMCEs).
NMCEs are entities not consolidated line by line in the financial statements of the multinational enterprise group solely due to their size or level of importance (including permanent establishments of NMCEs).
Under the safe harbour rules, the income, profits, and Adjusted Covered Taxes of NMCEs will be determined based on the relevant provisions of country-by-country reporting under local law.
Transitional Penalty Relief
During the initial implementation period of GloBE, both multinational enterprises and tax authorities need to invest significant time and resources to fully understand the new rules and their application and establish appropriate and sound compliance and reporting mechanisms.
To assist tax authorities in implementing GloBE and provide a soft landing for multinational enterprises, the BEPS inclusive framework has introduced a transition period penalty relief mechanism.
This mechanism provides that during the initial period of introducing GloBE (i.e., for fiscal years beginning on or before December 31, 2026, but not including fiscal years ending after June 30, 2028), if a multinational enterprise can demonstrate that it has acted in good faith to understand and comply with the GloBE rules, and tax authorities determine that the multinational enterprise has indeed taken reasonable measures to ensure the correct application of GloBE; then no penalties should be imposed on the multinational enterprise.
GloBE Information Return (GIR)
The GloBE "Model Rules" requires multinational enterprise groups to submit a standardised GloBE information return in each jurisdiction where GloBE is implemented.
The consultation draft on the GloBE information return states that the ultimate goal is to develop consistent and transparent information collection standards to ensure that the reporting results of multinational enterprise groups are consistent and certain while avoiding a significant increase in compliance burdens for taxpayers and tax authorities.
The information collected by the GloBE information return mainly includes:
General information, which includes general information about the MNE Group and the Filing Constituent Entity;
Corporate structure, which includes information about the corporate structure of the MNE Group, in particular each Constituent Entity’s ownership structure, whether it is required to apply the income inclusion rule (IIR) and whether the undertaxed payments rule (UTPR) could apply with respect to such Constituent Entity, as well as information about changes to the ownership structure that took place during the Fiscal Year;
ETR computation and Top-up Tax computation include information about the Effective Tax Rate and Top-up Tax computations for those jurisdictions where Constituent Entities or members of JV Groups are located, as well as any elections made in accordance with the relevant provisions of the GloBE Rules. This section would also incorporate the simplified compliance procedures associated with any agreed safe harbours;
Top-up Tax allocation and attribution include information on the attribution of Top-up Tax and those implementing jurisdictions where such Top-up Tax is payable per the agreed rule order. It further provides more details on the computation of each Parent Entity’s Allocable Share of Top-up Tax to apply the IIR and on the computation of the UTPR Top-up Tax Amount, if any, and of the UTPR Percentage for each UTPR Jurisdiction, where applicable.
The above information collects all the data that multinational enterprise groups need to collect to calculate top-up taxes.
It should be noted that the GloBE information return requires multinational enterprise groups to disclose their entire legal entity structure, including any changes in ownership at the member entity level during the current year, such as equity transfers, contributions, redemptions, acquisitions, divestitures, and other forms.
In addition, multinational enterprise groups are also required to disclose the adjustment items for GloBE income or losses and the Adjusted Covered Taxes at the member entity level, which are used for jurisdictional-level aggregation calculations.
The GloBE "Model Rules" stipulates that the GloBE information return must be submitted within 15 months after the end of the GloBE reporting year (extended to 18 months for the first fiscal year of multinational enterprise groups).
Tax Certainty for the GloBE Rules
Given the complexity of GloBE and the potential for differences in the interpretation or application of the rules by tax authorities in different jurisdictions, the OECD has been studying mechanisms to provide further tax certainty for GloBE.
This consultation document on GloBE tax certainty seeks to find dispute prevention and resolution mechanisms to achieve tax certainty.
Dispute Prevention Mechanisms
Dispute prevention mechanisms aim to ensure that tax authorities and taxpayers can reach a consensus on the interpretation and application of rules early in the tax compliance or assessment process, thus avoiding disputes.
Mechanisms to be considered include:
Identifying qualified IIR, UTPR, and domestic minimum top-up tax based on the GloBE Model Rules, Commentary, and Administration Guidelines and submitting questions for clarification to the BEPS Inclusive Framework;
Tax authority assessment procedures for common risks of taxpayers and establishment of tax-enterprise cooperation mechanisms;
Binding certainty mechanisms, similar to advanced pricing arrangements.
Dispute Resolution Mechanisms
Article 25 of the OECD Model Tax Convention on Mutual Agreement Procedure (MAP) can be the basis for developing GloBE dispute resolution mechanisms.
This mechanism can be implemented through different legal instruments, such as multilateral conventions, the existing Multilateral Convention on Mutual Assistance in Tax Matters, existing tax treaties, or new dispute resolution mechanisms under domestic law.
You may read the "Guidance on Safe Harbours and Penalty Relief", the public consultation document on the GloBE Information Return (GIR), and the public consultation document on Tax Certainty for the GloBE Rules in full text by downloading the attachments below: -
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