New Pillar 2 guidance clarifies key rules


The Organisation for Economic Co-Operation and Development (OECD) unveiled further Administrative Guidance on Dec. 15, 2023, related to Pillar 2, offering significant clarifications for U.S. multinationals amid global legislative adoption (December 2023 Administrative Guidance). This latest installment continues the OECD's commitment to refining the proposed framework previously released. See our prior stories for the latest on the OECD implementation and its impact:

The new release represents the third set of administrative guidance released by the OECD, following the first and second sets of guidance that were published in February 2023 and July 2023, respectively. As the GloBE Rules take effect in 2024, this third set of administrative guidance includes further clarifications on a number of key areas that will help multinational groups transition into the GloBE Rules, such as the application of the Transitional CbCR Safe Harbor, the definition of revenues for purposes of determining whether an MNE Group is within scope of the GloBE Rules, and transitional relief to file the GloBE Information Return and notifications for in-scope MNE Groups that have short Reporting Fiscal Years. The guidance is intended to promote a consistent and common interpretation of the GloBE Model Rules in order to provide certainty for multinational groups and facilitate coordinated outcomes under the rules.




Transitional CbCR Safe Harbors 


The Transitional CbCR Safe Harbors are short-term tests performed to exclude a multinational group's operations in lower-risk countries from the computation. The transitional safe harbor identifies lower-risk jurisdictions through the application of three quantitative tests taking information primarily from a business’s country-by-country report.


The administrative guidance clarifies (and in some cases modifies) the application of the Transitional CbCR Safe Harbor. The additional guidance addresses items such as the consistent use of data from qualified financial statements being used, the impact of purchase price accounting, and includes a prohibition on making adjustments to the data in the qualified financial statements. The guidance also provides clarification regarding the ETR computation and the routine profit test.


Finally, the guidance includes an anti-abuse rule targeting “hybrid arbitrage arrangements.” Hybrid arbitrage arrangements are those that are designed to arbitrage differences in the source of financial information or differences between tax and financial accounting treatment to produce inconsistencies between Constituent Entities in the way they account for income, expenses and taxes that are contrary to the purpose of the GloBE Rules. The guidance provides that a Constituent Entity cannot qualify for the Transitional CbCR Safe Harbour as a result of entering into a hybrid arbitrage arrangement after Dec. 15, 2022.




Application of GloBE Rules 


The administrative guidance includes clarification on how revenues are to be defined for the purpose of the consolidated revenue threshold of 750 million euros. It also addresses challenges that arise from mismatches between the fiscal and tax years of entities operating in different jurisdictions, offering solutions to align these to ensure consistent calculations.




Allocation of blended CFC taxes 


The administrative guidance includes additional direction on the allocation of Blended Controlled Foreign Corporation (CFC) Tax Regimes, including methodologies to compute an entity’s Blended CFC Allocation Key when multiple GloBE Jurisdictional ETRs are computed for a jurisdiction, and to Compute an entity’s Blended CFC Allocation Key when it is not otherwise required to compute an ETR.




Simplified Calculation Safe Harbor for Non-Material Constituent Entities 


The guidance provides Simplified Income, Revenue and Tax Calculations for Non-material Constituent Entities (Simplified Calculations for NMCEs) as part of the Simplified Calculations Safe Harbor. The Simplified Calculations Safe Harbor provides a framework for the subsequent development of simplified calculations that will avoid detailed adjustments that would otherwise be required under the GloBE Rules. These simplified calculations apply only to Non-material Constituent Entities (NMCEs) as defined in the Simplified Calculations for NMCEs.


This latest guidance marks another step in the OECD's journey to facilitate a smooth transition to the new tax norms under Pillar 2, ensuring that multinational enterprises are well-equipped to adapt to these changes. Many jurisdictions are implementing key aspects of Pillar 2 into local law.



Cory Perry

Washington DC, Washington DC

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