Are you ready for the GloBE tax challenges?

On 14 March 2022, the OECD published a comprehensive commentary and illustrative examples of how implementing the Global Anti-Base Erosion Model Rules (GloBE rules) could look. In this blog, we discuss the GloBE rules and examine how the rules apply and filing requirements.

On 20 December 2021, the OECD published model rules that member countries are expected to adopt to give teeth to the 15% global minimum tax known as the Pillar 2 Global Anti-Base Erosion Model Rules (GloBE rules).  Fiscal authorities were expected to follow with part-implementation into domestic law in 2022 with effect from 2023 and more complete implementation in 2023 with effect from 2024. So far, 137 countries have signed up in principle to be GloBE countries.

The GloBE rules apply to groups with revenue greater than €750m in their global consolidated financial statements in more than one tax jurisdiction over two of the four years before the one being considered.  The EU is proposing to apply the GloBE rules to wholly domestic entities. A de minimis exception can apply if turnover and profit in a particular jurisdiction are below certain thresholds, and entity-level exemption can also apply.

What are the GloBE rules?

If the ultimate parent company is in a GloBE jurisdiction that has implemented the income inclusion rule (IIR), it will pay a ‘top-up tax’ for the difference between the effective tax rate per jurisdiction and the 15% minimum rate of tax in each jurisdiction for which it owns a controlling interest in any other entity. The highest GloBE sub-holding company pays for its sub-group based on its ownership share in the low-taxed entity. The application of the IIR takes a top-down approach. Jurisdictions can opt for in-country entities to pay the extra tax.

Any top-up tax not collected under the IIR will be charged to other group entities under the undertaxed payments rule (UTPR). Countries adopting this rule will apply any top-up tax required in respect of low-taxed constituent entities if the IIR does not get to a minimum of 15% for each jurisdiction in the group. Top-up tax is allocated between UTPR countries by reference to the proportion of UTPR country employees and the proportion of UTPR country tangible net assets. There is also a subject to tax rule (STTR), which will allow countries to charge a top-up withholding tax on certain types of outbound payments.

Navigating calculations

The calculations can get very complex and need to be done for each constituent entity and then aggregated by the jurisdiction. Constituent entities in jurisdictions that contain any of the following features may give rise to IIR or UTPR in any year:

  • A tax rate lower than 15%, whether or not an exemption under current Controlled Foreign Company (CFC) rules apply;
  • Significant reductions to valuation allowances, such as increases to deferred tax assets;
  • Substantial uncertain tax position provisions made in a year;
  • Untaxed permanent items in income that do not fall within a GloBE exclusion;
  • After five years, reductions to deferred tax arise if timing differences from non-excluded items have not unwound.

Filing requirements

GloBE returns will need to be filed no later than 15 months from the end of the reporting period. If implementation runs to schedule, the first return benefits from an extension to this period to 18 months and would be due by 30 June 2024 for 31 December 2022 year- end groups.  The EU and the UK have announced that their introduction of the GloBE rules will commence for accounting periods beginning on or after 31 December 2023.  For these regions, if the first return relates to the year ended 31 December 2024, the first report would be due by 30 June 2026.

Pillar 2 complexities

The Pillar 2 rules are complex and will cause an administrative burden on Multinational Enterprise (MNE) groups. Pillar 2 requires each entity to recast their deferred tax amounts at the minimum tax rate. It does not provide recognition for the actual tax rate in relation to the underlying timing difference when determining the annual ETR.  This will result in top-up tax in respect of both timing and permanent differences. The outcome of this is double taxation. In certain cases, Pillar 2 applies top-up tax when there is no net GloBE income.

Calculation simplifications

There is the option to elect for a de minimis by the jurisdiction of an average of the current and last two years GloBE revenue of less than €10m or GloBE profit of less than €1m. While this does not decrease the compliance burden, it sets the top-up tax in that jurisdiction to zero.

Pillar 2 includes a formulaic substance-based carve-out designed to approximate the level of substance in the jurisdiction. This is based on 5% of the MNE group’s payroll costs and tangible assets in the jurisdiction. An increased percentage amount applies in the transition period from commencement and lasts for ten years.  In the first year, the carve-out for payroll costs is 10% and for tangible assets, it is 8%. There are proposals for safe harbours which would reduce the GloBE calculations. 

Next steps

If your group is within scope by having more than €750m consolidated gross income, you will need to carry out a high-level impact analysis to determine whether there are likely to be in-scope jurisdictions within your group and the size of any potential top-up tax.

Other considerations include identifying data sources and collection mechanisms and procedures. Determine whether computations will be carried out at the local or group level and that aggregated and top-up taxes are agreed, paid, and charged, taking into account how different jurisdictions implement the rules. Also, identify whether there are benefits to applying for the GloBE elections, review transfer pricing methodology and adjustments and consider whether excess tax is being suffered, and restructure if appropriate.

Designing a roadmap and implementation plan

Over the next year or so, more detail will emerge from the OECD and more local jurisdictions will implement laws. Heads of tax are being asked to provide an assessment of the impact of the new rules. It’s therefore essential to calculate the potential top-up tax due under existing arrangements and review your country-by-country reporting (CbCR) processes and controls. It will also be important to assess Pillar 2 readiness and identify gaps, highlight key risk areas and potential Pillar 2 impact, and summarise proposals and prioritisation.

Creating a Pillar 2 impact and readiness report provides a compliance-ready blueprint including a report for the board and other management stakeholders. Finally, an impact and readiness report should also cover an ETR assessment and impact analysis, highlighting areas of attention and operating model options. The attached article provides further information together with an illustrative example to show how the various calculations work. Further commentary and illustrative examples are available to download from the OECD website here.