International: New Pillar Two guidance and public consultations aim to enhance certainty amidst the complexity

The OECD rounds out the year with much-welcomed guidance on Safe Harbours and Penalty Relief, and public consultations on GloBE Information Return and Tax Certainty for the GloBE Rules

In brief

Exactly one year after publication of the Pillar Two Model GloBE Rules on 20 December 2021, this week the OECD Inclusive Framework on BEPS (“OECD IF”) published an implementation package as part of its ongoing efforts to develop the Pillar Two Implementation Framework. The Pillar Two documents released contain (i) guidance on Safe Harbours and Penalty Relief, and (ii) public consultations on the GLoBE Information Return and Tax Certainty for the GloBE Rules.

The Pillar Two implementation package is published less than one week after the EU agreed to adopt the Pillar Two Directive (published today in the Official Journal of the EU), requiring Member States to transpose the EU Pillar Two Directive into domestic law by the end of 2023.

With the Pillar Two implementation package, the OECD seeks to obtain input from stakeholders on various implementation matters connected to the GLoBE Information Return and Tax Certainty for the GloBE Rules. Stakeholders are invited to provide their views on the consultation documents no later than 3 February 2023. Based on the input obtained, it is expected that guidance will be released by the OECD early in 2023.


Key takeaways

As many MNE Groups continue navigating through the intrinsic complexities of the Pillar Two GloBE Rules, the public consultations and guidance issued yesterday are a welcome development. These documents provide some more information in relation to the following key elements:

  • The GloBE Information Return consultation gives a good indication of the amount and type of information that MNE Groups will need to disclose to tax authorities.
  • The Tax Certainty consultation outlines how disputes arising from differences of interpretation on the GloBE rules might be avoided and ultimately resolved.
  • The relatively simplified tests, based on Country by Country Report (CbCR) and financial accounting data, could allow MNE Groups to obtain compliance relief in between two and three years.
  • There is a commitment to develop Administrative Guidance for a permanent and simplified Safe Harbour, which will be based on alternative (and simplified) calculations under the GloBE Rules.
  • There is a clear intent to seek to create a “soft landing” and avoid the imposition of penalties during the transition period provided that the MNE Group has taken reasonable measures, though without definition, this will remain subject to ambiguity and interpretation.

In more detail

The Implementation Package

MNE Groups have been concerned with the uncertainty of the impact of the OECD’s Pillar Two proposal. On 20 December 2022, the OECD IF published the following long-awaited documents:

With these documents, the OECD IF aims to progress the implementation of the Pillar Two GloBE Model Rules. Below, we will outline each of these documents in more detail.

GlobE Information Return Consultation

The GloBE Information Return is based on Article 8.1 of the Pillar Two GloBE Model Rules, and aims to provide a standard template for MNE Groups to file information on their GloBE tax liability calculations with tax authorities. It is intended that each MNE Group will prepare a GloBE Information Return on an annual basis that will generally be submitted to the tax authority of the ultimate parent entity (UPE) jurisdiction. Similar to CbCR reporting, the GloBE Information Return seeks to ensure transparency and ease administration through standardization. Through this consultation, the Inclusive Framework seeks feedback from stakeholders on the amount and type of GloBE information that MNE Groups should be expected to collect, retain and report to tax authorities (whether through a local filing or through exchange of information). Moreover, the OECD IF seeks to obtain feedback from stakeholders on possible simplifications that could be incorporated in the GloBE Information Return and the ability of MNE Groups to provide alternative data points.

With this consultation document, it appears that the OECD IF seeks to find a balance between (i) requiring MNE Groups to file sufficient information to allow tax administrations to evaluate the correctness of a tax liability under the GloBE Rules, and (ii) not imposing a significant burden on MNE Groups. Taking this balance into account, it appears that the OECD IF is also exploring the possibility to segment the GloBE Information Return in such a way that different tax authorities will receive the information that is relevant to them. Feedback on this and other ways of minimizing the burden are sought from stakeholders through the consultation.

Consultation on Tax Certainty for the GloBE Rules

The GloBE Rules are premised on their being implemented and administered across the world in a consistent manner. The Tax Certainty consultation document proposes dispute prevention mechanisms and dispute resolution mechanisms to avoid or swiftly resolve any divergences. The OECD IF’s clear preference is to prevent disputes at an early stage, be that through the development of a common approach to address issues under the Commentary to the GlobE Rules, a coordinated multilateral program to identify risk areas, or through a mechanism like advance pricing arrangements in the context of bilateral tax treaties. Where these fail, MNE Groups could resolve disputes through an adapted version of the existing mutual agreement procedures provision contained in Article 25 of the OECD Model Tax Convention.

This could potentially apply to circumstances where there are differences in interpretation even where this does not give rise to double taxation. It could also enable the dispute resolution procedure to override domestic law interpretations (considering that the GloBE Rules will be implemented locally) in specific circumstances. In the consultation, various instruments are proposed to implement such a dispute resolution procedure, including a new multilateral convention, the existing Convention on Mutual Administrative Assistance in Tax Matters (MAAC), relying on existing bilateral tax treaties, or creating a dispute resolution provision in domestic law. The consultation document invites thoughts on possible scenarios where two or more jurisdictions could interpret or apply the rules in a different manner, instances where there might be different interpretations of the rules even without double taxation, and whether there are any other options that could help achieve tax certainty for the GloBE Rules that have not been proposed in the consultation.

Safe Harbours and Penalty Relief

Building on a public consultation held in April 2022, the Inclusive Framework has published Safe Harbours and Penalty Relief on the design of (i) a Transitional CbCR Safe Harbour, (ii) a Permanent Safe Harbour and (iii) a regulatory framework for the development of a potential permanent safe harbour as well as a common understanding for a transitional penalty relief regime. The development of some safe harbours and simplifications, such as a Qualified Domestic Minimum Top-up Tax (QDMTT) safe harbour, seem to be work in progress still.

1. Transitional Country by Country Report (CbCR) Safe Harbour

The Transitional CbCR Safe Harbour has been designed as a temporary measure aimed at excluding an MNE’s operations from the scope of the GloBE Rules in lower-risk jurisdictions where certain tests are met during the initial years1. The top-up tax in such a lower-risk jurisdiction will be zero where, based on simplified jurisdictional revenue and income information included into the MNE’s Qualified CbCR and financial accounting data:

  • The revenue of the MNE Group is lower than EUR 10 million and the profit is less than EUR 1 million (“de minimis test”); or
  • The MNE Group has an ETR, simplified based on the profit (loss) information as reported on the MNE Group's CbCR2, equal or greater than a pre-determined transition rate3 (“ETR test”); or
  • There are no excess profits in the jurisdiction after excluding routine profits i.e., after having calculated the Substance-based Income Exclusion per the GloBE rules (“routine profits test”).

This short-term measure will use CbCR and financial accounting data as a way of simplifying the compliance obligations during the initial years, due to which compliance and administration costs should be significantly reduced.

It is important for MNE Groups to consider the Transitional CbCR Safe Harbour from the outset. If the exemption is not applied with respect to a jurisdiction in a fiscal year where the MNE is subject to GloBE rules, the MNE Group will not be able to apply it in a subsequent year.

The guidance also provides specific rules for certain entities and groups (e.g., joint ventures or tax neutral ultimate parent entities), certain elements of the calculations (e.g., fair value losses should be excluded from the profit/loss calculation where these exceed EUR 50 million) and exclusions from the application of the Transitional CbCR Safe Harbour (e.g., stateless constituent entities).

2. Regulatory development of a permanent Safe Harbour

The guidance also describes a framework for the implementation of a permanent safe harbour, subject to further Administrative Guidance to be issued by the Inclusive Framework.

The so-called “Simplified Calculations Safe Harbour” would permit MNE Groups to rely on simplified income, revenue, and tax calculations in determining whether they meet the de minimis, routine profits or ETR test under the GloBE Rules. Separate from the Transitional CbCR Safe Harbour, which relies on CbCR and financial accounting data, the Simplified Calculations Safe Harbour would be based on different calculations as an alternative to the GloBE income or loss, Globe revenue and covered taxes calculations required under the GloBE rules. This means that, where an MNE’s operations in a jurisdiction do not meet the requirements of the Transitional CbCR Safe Harbour, they may still qualify for the terms of a permanent safe harbour.

3. Transitional Penalty Relief Regime

The transitional penalty relief regime is intended to provide a “soft landing” during the initial years in which the rules are being introduced. The guidance recommends that no penalties or sanctions should apply in connection with the filing of a GloBE Information Return where an MNE Group has taken "reasonable measures" to ensure the correct application of the GloBE rules. Without defining the term, reference should be made to existing rules and practices, with jurisdictions carefully considering the appropriateness of penalties. The transition period will apply to any fiscal year beginning on or before 31 December 2026, but not including a fiscal year ending after 20 June 2028.

With special thanks to our additional contributors to this material:  

1 The transition period covers all the fiscal years beginning on or before 31/12/2026 but not including a fiscal year that ends after 30/6/2028.
2 This ETR is based on CbCR information and considering the so-defined Simplified ETR, which is calculated considering the jurisdiction's income tax expense, as reported on the MNE Group's financial statements, after eliminating any taxes that are not Covered Taxes and uncertain tax positions reported in the MNE Group's financial statements.
3 15% for fiscal years beginning in 2023 and 2024; 16% for fiscal years beginning in 2025; and 17% for fiscal years beginning in 2026.


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