Brief Overview
On February 2, 2023, the Organisation for Economic Co-operation and Development (OECD) released administrative guidance (the 2023 Administrative Guidance) concerning implementation of the Pillar Two global minimum tax (GloBE tax) that will be integrated into a revised version of the original commentary relating to the OECD Model Rules released on December 20, 2021.1 The 2023 Administrative Guidance provides clarity to issues that were identified by members of the OECD Inclusive Framework as topics needing immediate attention, which includes a range of technical guidance in several areas.
This article focuses on the two most focal areas of the guidance, likely impacting U.S. multinational enterprises:2
- Clarification around what makes a minimum tax a qualified domestic minimum top-up tax (QDMTT); and
- Rules for allocating taxes paid by shareholders to constituent entities under blended controlled foreign corporation (CFC) tax regimes (blended CFC tax regimes) which includes the U.S. global intangible low-taxed income (GILTI) regime.
Discussion
Qualified Domestic Minimum Top-Up Tax
The 2023 Administrative Guidance provides detailed commentary and parameters for determining whether a jurisdiction’s local minimum tax qualifies as a QDMTT. A QDMTT is defined in Article 10.1 of the OECD Model Rules as a minimum tax that is included in the domestic law of a jurisdiction that generally follows the principles of the GloBE tax as enumerated in the OECD Model Rules. While the OECD Model Rules define what is a QDMTT, additional clarification with respect to what makes a domestic minimum tax a QDMTT for GloBE purposes was requested by members of the Inclusive Framework. In providing clarification, the OECD sets forth guiding principles for evaluating potential QDMTTs which generally provides that to be a QDMTT, a minimum tax must be consistent with the design of and must provide for outcomes that are consistent with the GloBE rules but do not necessarily need to be identical to the OECD Model Rules.
The OECD expects a modest degree of variability in each jurisdiction adopting a QDMTT but ultimately requires that the result does not produce an inconsistent outcome with the GloBE rules. Specifically, the 2023 Administrative Guidance generally requires that jurisdictional minimum taxes not be broader than the rules provided under the OECD Model Rules. For example, the 2023 Administrative Guidance explains that a domestic minimum tax need not contain any of the substance-based income exclusions for payroll or assets that are provided under the OECD Model Rules to qualify as a QDMTT but specifies that if the domestic minimum tax does provide for any of the substance-based income exclusions, it must do so in a manner that is limited to the parameters set forth in the OECD Model Rules. In addition, the 2023 Administrative Guidance also notes that a jurisdictional minimum tax is not required to provide for a de minimis exclusion similar to Article 5 of the OECD Model Rules but provides that if a de minimis exclusion is included in the jurisdictional minimum tax, it must be based on average revenue and average income or loss similar to the thresholds set forth in the OECD Model Rules.
Further, the 2023 Administrative Guidance confirms the role of taxes paid in respect of foreign entities in evaluating a domestic entity’s effective tax rate (ETR) for purposes of applying a QDMTT. Of note, the OECD confirms that a QDMTT must exclude taxes paid by domestic constituent entities on income attributable to a jurisdiction’s CFC tax regime.
Our Take: This is significant in the context of the U.S.’ GILTI regime as the 2023 Administrative Guidance clarifies that taxes paid under GILTI and other shareholder inclusion regimes are not to be considered in the ETR of a QDMTT and thus, in the absence of a U.S. foreign tax credit (FTC) for the taxes paid under the QDMTT, U.S. multinationals may be subject to international double taxation. If foreign taxes paid under a QDMTT are intended to be eligible for FTCs in the U.S., Treasury will likely need to issue regulations addressing the creditability of foreign taxes paid under a QDMTT.
Finally, the OECD further acknowledges that additional guidance with respect to QDMTTs will be needed as the GloBE tax rules are adopted and implemented in the jurisdictional laws of members of the Inclusive Framework. In so doing, it is acknowledged that future guidance will likely be provided, including the development of a QDMTT safe harbor test, a multi-lateral review process, and other guidance necessary to assist jurisdictions with developing QDMTTs.
Blended Controlled Foreign Corporation Tax Regime
The 2023 Administrative Guidance also provides guidance with respect to allocating taxes incurred under a blended CFC tax regime, like the U.S.’ GILTI regime. Prior to the 2023 Administrative Guidance, the OECD Model Rules provided general guidance with respect to how jurisdictional covered taxes are to be allocated to determine the top-up tax percentage integral to the GloBE tax calculation but did not clarify how such an allocation would work with respect to certain taxes generated from a blended CFC tax regime, which generally involves an aggregation of income, losses, and credits used to quantify a shareholder’s tax liability. Citing the U.S.’ GILTI regime as an example, the 2023 Administrative Guidance provides a temporary methodology for allocating CFC taxes arising from a blended CFC tax regime to constituent entities that is permitted for fiscal years beginning on or after December 31, 2025, but not permitted for fiscal years ending after June 30, 2027.
Under this temporary methodology, blended CFC taxes are to be allocated based on a ratio that is designed mechanically to consider the constituent entity’s incremental tax associated with the blended CFC tax regime after considering the constituent entity’s jurisdictional ETR under the GloBE rules. Specifically, the 2023 Administrative Guidance requires that allocable blended CFC tax is to be apportioned on the basis of the ratio of a constituent entity’s “blended CFC allocation key” to all blended CFC allocation keys in the blended CFC tax regime group.
The term “blended CFC allocation key” refers to a computation that multiplies a constituent entity’s attributable income or, the constituent entity’s proportionate share of income of the CFC in the jurisdiction in which the constituent entity is located, with a specified rate that is determined by the excess of (a) the minimum rate at which foreign taxes on CFC income generally fully offsets the CFC tax, i.e., the Applicable Rate, which in the context of GILTI is 13.125%, less (b) the ETR of the jurisdiction of the constituent entity computed without regard to any covered taxes under a CFC tax regime, i.e., GloBE Jurisdictional ETR. If the GloBE jurisdictional ETR equals or exceeds that applicable rate or the minimum rate, the blended CFC allocation key for the constituent entity will be treated as zero.
The 2023 Administrative Guidance provides both members of the OECD Inclusive Framework and affected taxpayers much-needed guidance as to the role of QDMTTs with respect to the GloBE tax and confirms much of what the tax community had anticipated. In addition, although a temporary measure, the allocation methodology for taxes incurred by blended CFC tax regimes provides affected taxpayers with more visibility around how the current GILTI regime is to be treated for purposes of computing the GloBE tax for several years.
Our Take: It should be noted that the 2023 Administrative Guidance has indirectly confirmed that the current GILTI regime does not meet the definition of a qualified income inclusion rule (QIIR) for GloBE tax purposes and such a GILTI regime will need to be amended if it is to become a QIIR. Thus, if the U.S. is to become GloBE tax compliant, new U.S. international tax legislation and regulations will likely be needed.
Final Observations
Multinational enterprises with average annual global revenues of at least EUR 750 million are likely to be affected by the 2023 Administrative Guidance and the OECD Model Rules. To comply with the GloBE rules, FORVIS strongly recommends that affected taxpayers adopt internal protocols to evaluate their internal tax function to determine if GloBE tax provision and compliance requirements can be met. Internal protocols that affected taxpayers should consider include an expedited review of internal data systems and a data gap assessment to confirm that affected taxpayers can source relevant data to not only compute the GloBE tax but to also comply with required informational reporting. Affected taxpayers should also consider how and whether available safe harbors may be useful in scaling the tax accounting and compliance functions of affected taxpayers during the initial years of the GloBE rules.
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- 1The revised commentary of the OECD Model Rules is expected to be released at a later date during the 2023 calendar year.
- 2FORVIS will publish another FORsights in the coming weeks to expand on the areas highlighted herein and also address other areas of Pillar Two included in the 2023 Administrative Guidance.