- Katten attorneys examine OECD's latest Pillar Two guidance
- Documents provide more details, clarify unique situations
Three OECD documents published in May and June clarify the interpretation of Global Anti-Base Erosion Model Rules in certain areas. They aim to provide guidance to jurisdictions when implementing Pillar Two in domestic legislation to promote consistency with the Model Rules.
The fourth set of administrative guidance on the global anti-base erosion model rules; additional guidance on country-by-country reporting implementation; and a question and answer document on qualified status under the global minimum tax aim to clarify Pillar Two application.
Administrative Guidance
The administrative guidance covers several topics, including deferred tax liability recapture, treatment of securitization vehicles, and allocation of profits and taxes in structures such as flow-through entities.
The guidance provides criteria for determining the scope of the DTL category and methodologies for determining whether the DTL accruals in question have reversed within the five-year time frame. It also explains the impact of imposing a top-up tax liability and treatment of profits or losses arising in a securitization special purpose vehicle.
This matters because the guidance acknowledges that a top-up tax liability could arise in a securitization SPV, which isn't commensurate with the SPV's economic profit. This runs counter to the top-up tax's objectives. The guidance introduces further commentary in the Pillar Two Commentary on the meaning of domestic minimum tax to deal with this issue.
It also shows how the relevant articles of the framework apply in various scenarios—for example, where an ultimate parent entity owns a flow-through entity directly or indirectly through a tax-transparent structure.
The guidance clarifies how profits should be allocated under the Model Rules where there is inconsistency between jurisdiction as to entity classification. This clarification is necessary to ensure that the Model Rules are allocated appropriately and consistently between jurisdictions in such situations.
The guidance's detail on how different articles of the Pillar Two framework intersect, and how the framework applies to unique structures and scenarios where application can be cumbersome will be incorporated into the Pillar Two Commentary, making it easier to interpret the Model Rules.
Safe Harbor
Country-by-country reporting requires companies to publish a report in an EU business register based on the Organization for Economic Cooperation and Development's template.
The BEPS Action 13 report requires dividends from other constituent entities—broadly, entities included in the consolidated financial statements of the MNE group and any permanent establishment—to be excluded from revenue in completing the report, but there are no specific instructions as to whether dividends from constituent entities are excluded from profit (loss) before income tax disclosure.
This new guidance clarifies that profit (loss) before income tax should exclude payments received from other constituent entities that are treated as dividends in the payer's tax jurisdiction. It further states that "payments received from other Constituent Entities that are treated as dividends in the payer's tax jurisdiction," refers to payments that are treated as dividends in the source of data used for completion of the report concerning the tax jurisdiction of the payer.
The latest guidance clarifies how the report should be completed in a specific context that wasn't previously addressed in the guidance—namely whether dividends paid by constituent entities should be included in profit (loss) before income tax in the payee's report and how to interpret the expression "payments received from other Constituent Entities that are treated as dividends in the payer's tax jurisdiction."
In the report, payments between constituent entities should be treated consistently in the tax jurisdictions of the payer and the recipient. In practice, this means that a payment is excluded from revenue and profit (loss) before income tax in the recipient's tax jurisdiction if the data source used to complete the report for the payer's tax jurisdiction treats such payment as a dividend. The payment is included if the data source of the payer treats it as something else, such as an interest expense.
The guidance aims to ensure consistency across countries: The country-by-country reports are less valuable if items such as dividends are treated inconsistently. The guidance helps to achieve this consistency in the context of dividends, but other reporting inconsistencies may stem from the differing treatment of source data across jurisdictions, resulting in the need for further specific guidance.
Qualified Status
The Pillar Two framework relies on the recognition of the qualified status of jurisdictions' domestic rules to ensure coordinated outcomes and provide tax certainty for MNE groups.
It isn't possible in the short term to conduct and finalize a full legislative review for each jurisdiction that is implementing the income inclusion rules and/or domestic minimum top-up tax legislation. The Inclusive Framework has developed a simplified procedure for an initial transitional qualification mechanism that allows quick recognition of the qualified status of implementing jurisdictions' Pillar Two legislation on a temporary basis.
The OECD has published a Q&A document that summarizes the main features of the mechanism, which relies on a self-certification process.
The Q&A document outlines which rules can be considered as qualified, when the transitional qualified status applies, whether it's possible to prepare a self-certification, and the circumstances in which transitional qualified status can be lost.
This mechanism is only a temporary fix to enable implementation of the global minimum tax. Each implementing jurisdiction needs to be able to identify the qualified status of other implementing jurisdictions' legislation for the agreed rule order to be followed.
The transitional qualification allows the rule order to be applied during the full peer review of the qualified rule status of the IIR, UTPR and DMTT, and QDMTT safe harbor eligibility of each implementing jurisdiction.
The Q&A guidance describes the first steps in what will be a long process to achieve the coordinated implementation of the rule order across every jurisdiction that has agreed to adopt the Pillar Two framework. This is key to the global minimum tax ensuring a minimum level of tax is paid on an MNE's excess profits in each jurisdiction in which it operates, but without imposing excess taxation.
Originally published by Bloomberg Tax
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