Overview
On 15 January 2025, the OECD released the latest installment of administrative guidance agreed upon by the OECD/G20 Inclusive Framework on BEPS ("Inclusive Framework"). This represents the third consecutive year of such publications, bringing the total rounds of guidance to five. However, based on comments made in the guidance, this is unlikely to be the final installment. Consistent with previous rounds, changes are made to the commentary to the GloBE Model Rules, which materially alter the operation of the rules in certain circumstances, likely resulting in incremental tax liabilities for affected taxpayers.
The latest tranche of guidance covers three areas:
- Changes made to restrict the admission of certain Deferred Tax Assets (DTAs) into the regime (and foreshadowing of future guidance on related benefits): Deferred tax is an integral part of the regime, with Article 9.1 regulating the extent to which preexisting deferred tax assets and liabilities are taken into account in measuring the effective tax rate of a jurisdiction. Material amendments are made to restrict the extent to which certain deferred tax attributes are taken into account (both for the GloBE Model Rules and Transitional Country-by-country reporting (CBCR) Safe Harbor). The guidance also provides some indication on the structure of future guidance that will cover the extent to which benefits can be provided to taxpayers before triggering adverse consequences under the GloBE Model Rules (for both taxpayer and the jurisdiction concerned).
Central record of legislation with transitional qualified status: Meanwhile, a register has been published of jurisdictions that are accepted as applying a qualified IIR or a QDMTT under the transitional qualification mechanism agreed by the Inclusive Framework. For those jurisdictions accepted as applying a QDMTT, the register also states whether they are eligible for the QDMTT Safe Harbor. The register appears to only currently cover jurisdictions that applied their rules in 2024. All jurisdictions that apply a QDMTT are eligible for the QDMTT Safe Harbor, although the qualification of Barbados' domestic minimum tax regime is contingent upon it applying to all in-scope Multinational enterprise (MNE) groups in 2025, not just those subject to an IIR (or Undertaxed Profits Rule (UTPR)) in another jurisdiction in respect of their Barbadian subsidiaries. The guidance notes that a jurisdiction's current omission does not mean that the legislation is not qualified. Rather, it means that, as at the date of publication, the process provided for under the transitional qualification mechanism has not yet been initiated or completed for that legislation. The guidance further notes that the register will be updated on a regular basis and in a timely manner as jurisdictions receive approval through the transitional qualification mechanism process.
- Basis for preparing the GIR: Amendments are made to the Commentary to Articles 8.1.4 and 8.1.5 of the GloBE Model Rules, which deal with the filling of the GIR, in anticipation of divergence between domestic legislation. Those changes clarify that taxpayers are required to prepare data points in the GIR by reference to the GloBE Model Rules, while also reporting the impact of divergent positions under domestic legislation on key data points. The exceptions to this are where the QDMTT Safe Harbor is applied to a jurisdiction (and the switch-off rules do not apply) or a single jurisdiction exercises taxing rights over a jurisdiction or subgroup (e.g., under an IIR).
In depth: Changes to Article 9.1 and foreshadowing of future guidance on related benefits
Background to the issue
The most substantive change in the package is the revision of Article 9.1 to limit the extent to which certain tax attributes can be taken into account in computing effective tax rates under both the GloBE Model Rules and the Transitional CBCR Safe Harbor.
On a taxpayer's entry into the GloBE Model Rules (referred to as a "Transition Year"), preexisting deferred tax assets (and liabilities) are taken into account under Article 9.1.1 to the extent they are reflected on the taxpayer’s balance sheet (or would have been reflected if the taxpayer had sufficient taxable income to support recognition). This is subject to limitation by Article 9.1.2, which requires that deferred tax assets arising from transactions that take place after 30 November 2021 not arise from items that would be excluded in the computation of GloBE income under Chapter 3 of the GloBE Model Rules.
Administrative guidance published in February 2023 confirmed that Article 9.1 governs the admission of deferred tax assets into the regime and Article 4.4, which determines the extent to which deferred tax items are taken into account post-Transition Year, does not apply to preexisting items. Therefore, for example, preexisting tax credits would be admitted into the regime and respected in computing effective tax rates because Article 4.4.1(e) does not apply (and there is no equivalent provision under Article 9.1). However, tax credits that arise post-Transition Year would not be respected, as Article 4.4.1(e) would remove such amounts from the relevant effective tax rate (ETR) calculation. Thus, the composition of a taxpayer’s balance sheet at the start of its Transition Year could have material impact on its profile under the rules.
Three "bad" attributes targeted for counteraction (but reprieve for certain losses)
The Inclusive Framework identified three categories of tax attributes that it considers should not be admitted into the regime under Article 9.1 (but a grace period is granted that allows these attributes to be taken into account to some extent):
- A deferred tax asset that is attributable to a governmental arrangement concluded or amended after 30 November 2021, where such governmental arrangement provides the taxpayer with a specific entitlement to a tax credit or other tax relief (including, for example, a tax basis step-up) that does not arise independently of the arrangement.
- A deferred tax asset that is attributable to an election or choice exercised or changed by a Constituent Entity after 30 November 2021 and that retroactively changes the treatment of a transaction in determining its taxable income in a tax year for which an assessment by the tax authority was already made or a tax return was already filed.
- A deferred tax asset or a deferred tax liability arising from a difference in the tax basis or value and accounting carrying value of an asset or liability if the tax basis or value was established pursuant to a corporate income tax that was enacted by a jurisdiction that did not have a preexisting corporate income tax and that was enacted after 30 November 2021 and before the Transition Year.
The first category of attributes under point a) appears to be concerned with the following:
- Taxpayers that have entered into arrangements with governments to receive tax credits prior to commencing their Transition Year to benefit from the delineation noted above in respect of pre- and post-Transition Year tax credits (For example, if a taxpayer was granted a tax credit in December 2023 before entering into the regime on 1 January 2024, prior to this guidance, the deferred tax asset recognized on that tax credit ought to have been respected under the GloBE Model Rules. Therefore, the monetization of that credit from 1 January 2024 should have increased the ETR of the relevant jurisdiction as the deferred tax expense recognized on reversal of the deferred tax asset would have been included in adjusted covered taxes (or simplified covered taxes). This guidance aims to remove that benefit where, for example, the credit was granted purely at the discretion of the relevant tax authorities (and not, for example, generated pursuant to incurring eligible expenditure under a statutory incentive regime.)
- Arrangements that might be regarded as circumventing Article 9.1.3, which limits the extent to which the value of assets can be stepped up, either under relevant Generally Accepted Accounting Principles (GAAP) or local tax rules (For example, the taxpayer might have been granted fair market value basis in an existing asset for local tax purposes without performing a transaction (be it a sale, a migration or otherwise). Prior to this guidance, taxpayers might have believed that this did not fall within the scope of the Article 9.1.3 limitation, which would disregard the fair market value step-up in basis. This guidance intends to counter that interpretation.)
The second category of attributes under point b) appears to be concerned with taxpayers that have sought to revisit choices made prior to the advent of the GloBE Model Rules to optimize their position under the regime. For example, prior to the introduction of the GloBE Model Rules, a jurisdiction seeking to attract foreign direct investment may have offered a taxpayer a choice of treatment on their investment in the jurisdiction: (i) full amortization of the fair market value of investments made in the jurisdiction; or (ii) a tax holiday/reduced rate of corporate income tax on the profits yielded from their investment.
Taxpayers may have previously preferred the tax holiday/reduced rate of corporate income tax as it provides both a cash tax benefit and a GAAP ETR benefit. However, the GloBE Model Rules seek to recapture the benefit of a tax holiday or reduced rate of tax, but largely respect the benefit of full amortization. Thus, if taxpayers had known of the GloBE Model Rules when making their investment, they would have chosen differently. It is somewhat surprising to see this guidance punish taxpayers in this context. The Inclusive Framework has made a habit of revisiting its decisions in light of new information; taxpayers, it seems, are not afforded that privilege.
The third attribute under point c) appears to target the economic transition adjustment (ETA) in Section 33 of Bermuda’s Corporate Income Tax Act 2023 ("CITA 2023"). Announced in 2023, Bermuda's corporate income tax took effect on 1 January 2025, broadly aligning with the GloBE Model Rules. Given the significant business operations on the island, the reinsurance industry in particular, the ETA allows for the amortization of the fair market value of assets on the island as of 30 September 2023, over a 10-year period. This was designed to enable businesses to better account for the cost of their investments when calculating the profits generated from those investments. As the CITA 2023 was enacted in 2023, taxpayers would have recorded a deferred tax asset for the ETA before starting the Transition Year of their Bermudan operations. Thus, as the GloBE Model Rules were originally drafted, this attribute should have been respected in computing the effective tax rate of operations in Bermuda. The Inclusive Framework, it seems, disagrees that this relief should be available and is prepared to retroactively amend its rule to counter it.
A warning shot is fired on a fourth attribute: losses incurred more than five years before the introduction of a corporate income tax regime within a jurisdiction. The context for this statement also seems to lie within Bermuda’s CITA 2023. The CITA 2023 can grant an opening tax loss carryforward on entry to the regime that captures losses incurred in the previous five years. We understand that members of the Inclusive Framework had sought to add all such losses to the list of "bad" attributes, so this represents something of a concession. This should provide some relief to taxpayers, particularly reinsurers whose five-year lookback period covers the COVID-19 pandemic.
Grace period for the three bad attributes (subject to a cap)
For the three "bad" attributes identified under points a), b), and c) above, a grace period will apply that allows taxpayers to continue to benefit from these attributes subject to a cap calculated as the aggregate of 20% of the amount of each such attribute originally recorded (as measured at the lower of the 15% minimum rate or the applicable domestic tax rate). This cap applies on a cumulative basis across the grace period (and is referred to as the "Grace Period Limitation").
The grace period for points a) and b) covers fiscal years beginning on or after 1 January 2024 and before 1 January 2026 but not including a fiscal year that ends after 30 June 2027 (so, 2024 and 2025 for calendar year taxpayers).
Meanwhile the grace period for Bermuda's ETA under point c) covers fiscal years beginning on or after 1 January 2025 and before 1 January 2027 but not including a fiscal year that ends after 30 June 2028 (so, 2025 and 2026 for calendar year taxpayers; 2024 is not covered as the CITA 2023 did not apply until 1 January 2025).
No grace period is granted for losses, as, presumably, no such losses currently exist (and nor will they exist following this guidance).
These changes affect both the computation of adjusted covered taxes under the GloBE Model Rules and the Simplified ETR under the Transitional CBCR Safe Harbor.
The guidance contains some protective measures to prevent taxpayers from accelerating the benefit of bad attributes by amending the arrangement after 18 November 2024. Similarly, the guidance also precludes jurisdictions from adopting bad attributes to take advantage of the grace period; only those that existed on or before 18 November 2024 may benefit.
The guidance argues that the changes are not retroactive but it seems hard to square this statement with reality. Taxpayers that breach the Grace Period Limitation in 2024 face tax liabilities based upon guidance published in 2025. There is substantial precedent for jurisdictions adopting administrative guidance on a prospective basis, so it will be interesting to see how this latest round is approached.
Consequential amendment to Article 9.1.3
Article 9.1.3 to also amended ensure that the three bad attributes are not taken into account (to any degree) in assessing the extent to which pre-Transition Year asset transfers within a group are subject to tax for the purposes of Article 9.1.3 (as revised by the administrative guidance published in February 2023). For example, if an asset was transferred pre-Transition Year that led to the reversal of a deferred tax asset (because carried forward losses were used to offset the gain on transfer) or a deferred tax asset did not arise as a consequence of the transfer (because current year losses are used to offset the gain), favorable treatment is received under Article 9.1.3, with a notional DTA typically granted. This amendment ensures that utilization of a bad attribute to offset a gain arising pre-Transition Year does not receive such favorable treatment.
Implications for jurisdictions that have granted bad attributes
The guidance notes that the Inclusive Framework has granted an "exceptional derogation" that allows jurisdictions to remain eligible for the QDMTT Safe Harbor even if their general governments (which include subnational bodies such as cantonal governments) have granted bad attributes.
Eligibility for the QDMTT Safe Harbor is determined on a jurisdictional basis. Thus, if the Inclusive Framework had precluded jurisdictions from benefiting from the QDMTT Safe Harbor, taxpayers that had not received bad attributes would have been impacted.
The benefit of the QDMTT Safe Harbor is that it allows taxpayers to disapply the IIR and UTPR such that only the QDMTT jurisdiction exercises taxing rights. The alternative position outside the safe harbor is that the QDMTT payable is credited against their IIR and UTPR liabilities leading to duplicative compliance obligations (and potentially incremental liabilities in certain circumstances).
The price for the "exceptional derogation" is that the relevant QDMTT jurisdiction must do either of the following:
- Apply this guidance (thereby negating the benefit of the attributes it has provided).
- Be subject to the switch-off rule for taxpayers that have received bad attributes. Applying the switch-off rule allows other jurisdictions to negate the benefit of the attributes through the IIR or UTPR. This effectively means the QDMTT Safe Harbor does not apply to the affected taxpayer but allows the QDMTT Safe Harbor to continue to be available to taxpayers that have not received bad attributes. Thus, it seems the derogation is intended to contain the collateral damage of countering the bad attributes provided to taxpayers.
Foreshadowing of future guidance on related benefits
That the Inclusive Framework has allowed jurisdictions to maintain eligibility for the QDMTT Safe Harbor as an "exceptional derogation" is perhaps an indication that future indiscretions will not be treated so kindly. On that subject, the guidance notes that the Inclusive Framework is developing guidance to identify benefits provided by a jurisdiction that would be taken into account to be either of the following:
- A refund of tax that reduces adjusted covered taxes, where provided in the context of a covered tax such as a corporate income tax.
- A reduction in the amount of QDMTT payable, where provided in the context of a QDMTT, with the potential for a switch-off mechanism that limits the operation of the QDMTT Safe Harbor where necessary.
The Inclusive Framework will also consider how the provision of benefits impact on the qualified status of a jurisdiction’s rules (i.e., its implementation of the IIR and UTPR).
Benefits under consideration include tax credits, government grants and other benefits that are calculated based on income or taxes. This guidance will be supplemented by an ongoing monitoring process that will ensure a coordinated assessment of whether benefits are "related benefits" including benefits provided by investment promotion agencies or subnational governmental authorities.
