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OECD ISSUES ADDITIONAL ADMINISTRATIVE GUIDANCE FOR PILLAR TWO

The OECD on June 17 released additional administrative guidance on the Pillar
Two GloBE model rules. The fourth set of administrative guidance follows three
rounds of administrative guidance that were issued in February 2023, July 2023,
and December 2023. This guidance covers a number of issues under the GloBE rules
including:

 1. The application of the recapture rule applicable to deferred tax liabilities
    (DTL), including how to aggregate DTL categories and methodologies for
    determining whether a DTL reversed within five years.
 2. Clarification on how to determine deferred tax assets and liabilities for
    GloBE purposes when the rules result in divergences between GloBE and
    accounting carrying value of assets and liabilities.
 3. The cross-border allocation of current and deferred taxes, allocation of
    profits and taxes in certain structures involving flow-through entities, and
    the treatment of securitization vehicles.
    
    

The new guidance provides additional detail on how the GloBE rules are intended
to operate for multinational enterprises. This administrative guidance will be
incorporated into the commentary to the GloBE model rules.





DTL RECAPTURE

Article 4.4.4 of the GloBE model rules provides that the accrual of a DTL that
is claimed in adjusted covered taxes for the relevant year is subject to
recapture if it does not reverse within the subsequent five years. The DTL
recapture rule does not apply to DTLs that qualify as recapture exception
accruals, under Article 4.4.5 or to an unclaimed accrual under Article 4.4.7. 

Generally, the DTL recapture rule requires the adjusted covered taxes and the
effective tax rate (ETR) for the year in which the DTL was accrued and claimed
to be recomputed without such DTL, which may result in an additional top-up tax
if the recomputed ETR is below the minimum rate. The DTL recapture rule
generally applies to certain categories of DTLs, and compliance with the DTL
recapture rule requires each constituent entity to (i) identify categories of
DTLs that are in scope of the DTL recapture rule and (ii) determine the year in
which, and the extent to which, each identified DTL accrual reverses. 

The main objectives of the administrative guidance on DTLs are (i) to clarify
how to manage the DTL recapture rule in a practical way that is in line with the
policy objective of the rule, and (ii) to minimize the administrative and
compliance burden for tax administrations and multinational enterprise (MNE)
groups. The guidance provides rules on the criteria for determining the scope of
a DTL category and methodologies for determining whether the DTL accruals in a
category have reversed within five years.  The guidance also provides a roadmap
to determining whether DTL reversals are attributable to recaptured DTLs or
pre-GloBE DTLs (that is, DTLs that originated before the transition year) that
are not subject to the recapture rule.

Additionally, the guidance provides that a constituent entity may make an
unclaimed accrual five-year election for a DTL category that it does not expect
to reverse within five years. This simplifying approach allows a constituent
entity to not claim DTL accruals in determining its adjusted covered taxes. If
this election is made, the constituent entity will not need to determine when a
DTL reverses.





DIVERGENCES BETWEEN GLOBE AND ACCOUNTING CARRYING VALUES

The June 2024 administrative guidance provides rules on how MNE groups should
account for adjusted covered taxes of constituent entities when there is a
divergence between GloBE and accounting carrying values. Divergences between
GloBE and accounting carrying values may result from a number of the provisions
under the GloBE rules. When there is a divergence between the carrying value of
assets and liabilities for GloBE and accounting purposes, the total deferred tax
adjustment amount is determined on the basis of the GloBE carrying value rather
than the accounting value. 

The administrative guidance also provides that a cross-border, intragroup asset
transfer is subject to the GloBE arm’s length price, which is relevant for
calculating the GloBE income or loss of the disposing entity and determining the
GloBE carrying value of assets and liabilities and related deferred taxes at the
level of the acquiring entity.





ALLOCATION OF CROSS-BORDER TAXES

The June administrative guidance provides a four-step process for allocating a
parent entity’s current taxes to its permanent establishments when its domestic
tax system allows for cross-crediting of taxes. This process is intended to
apply to allocations related to permanent establishments, hybrid entities,
controlled foreign corporation (CFC) taxes (excluding blended CFC taxes such as
global intangible low-taxed income (GILTI)), and taxes on distributions. The
guidance also provides a five-step process for allocating cross-border deferred
taxes. Further, the guidance provides that the substitute loss carryforward DTA
rules also apply to hybrid and permanent establishment regimes.





OTHER ISSUES

The administrative guidance also provides commentary on the allocation of
profits and taxes in certain structures involving flow-through entities, and the
treatment of securitization vehicles. 





NEXT STEPS

The release by the OECD provides additional guidance on the implementation and
impact of Pillar Two. The additional administrative guidance will be
incorporated into the commentary to the GloBE model rules.

Have Questions? Contact Us
Article July 11, 2024
AUTHOR(S)
Matt Williams
Principal, International Tax Services
Wilson Brakefield
Experienced Manager, International Tax Services
Bella Verdiyan
Principal, National Tax Office, ASC 740
AUTHORS
ADD

Matt Williams
Principal, International Tax Services
Wilson Brakefield
Experienced Manager, International Tax Services
Bella Verdiyan
Principal, National Tax Office, ASC 740
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BDO USA uses third party cookies and similar technologies to deliver targeted
advertisements, also known as data “sharing” and/or “selling” under California
law, as further detailed in our Privacy Policy. In accordance with applicable
law, we provide you with the ability to opt out of these activities. If you
opt-out below, we will no longer send you targeted advertisements based on
information we collect when you visit this website from your web browser. Please
note that if you visit this website from a different browser or device, or if
you “clear” your cookies or otherwise reset your browser settings, you may need
to re-submit your opt out preference.
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These cookies are necessary for the website to function and cannot be switched
off in our systems. They are usually only set in response to actions made by you
which amount to a request for services, such as setting your privacy
preferences, logging in or filling in forms. You can set your browser to block
or alert you about these cookies, but some parts of the site will not then work.
These cookies do not store any personally identifiable information.

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Please use the toggle at the right to disable targeted advertising technologies.

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