OECD's Pillar Two Guidance Targets Implementing Jurisdictions

This article was originally published on Bloomberg Tax, March 2025 and is reproduced with permission from the publisher.

 

With its latest administrative guidance, the OECD is adding more guardrails to the use of pre-Pillar Two deferred tax assets in the global anti-base erosion, or GloBE, calculations.

The guidance is part of a broader effort by the Organization for Economic Cooperation and Development to address situations where multinational enterprises or governments interpret the GloBE rules in ways that the OECD believes compromise their integrity. The OECD can address this through additional specific technical guidance or clearer anti-abuse guidance.

The specific guidance on pre-Pillar Two DTAs aims to address arrangements made by governments that allowed multinationals to account for DTAs shortly before the GloBE rules took effect, improving the jurisdictional GloBE effective tax rate through these DTAs’ future release.

The guidance is broadly formulated, so it’s important for all multinational enterprises - and jurisdictions - to assess the impact.

For many multinational enterprises, the treatment of DTAs is a crucial factor in calculating the GloBE effective tax rate for any given jurisdiction.

The OECD’s original Model Rules included a transition measure that allowed companies to incorporate existing DTAs - that originated before the GloBE rules came into effect—into their GloBE calculations.

This transition rule was welcomed because, without it, companies would have had to recalculate every existing DTA against the GloBE rules to determine if each one would qualify as a “good” DTA for GloBE purposes. The transition rule avoided this hassle and allowed qualifying DTAs to be included in the GloBE calculations.

So, what does it mean for a DTA to be included in the GloBE calculations, why is it important, and how does it impact the GloBE effective tax rate calculation in a jurisdiction?

For GloBE purposes, the release of a DTA is considered an adjustment to covered taxes. In other words, the amount of the DTA release is seen as an increase in covered taxes for GloBE purposes. This increase boosts the numerator of the GloBE effective tax rate calculation in a jurisdiction, raising the GloBE effective tax rate there.

The transition rule in Article 9.1.1 and 9.1.2 of the GloBE model rules allowed these existing DTAs to be included in the GloBE calculations, albeit with some guardrails. The DTAs had to be recorded at a rate of 15%, and DTAs related to transactions excluded from the GloBE calculations and occurring after Nov. 30, 2021, weren’t eligible for the transition rule. The transition rule in the model rules still was relatively liberal.

Based on the new guidance, DTAs that originated after Nov. 30, 2021, and that meet certain criteria will be excluded from the application of Article 9.1.1. This means that the reversal of such DTAs won’t create additional covered taxes and therefore won’t improve the GloBE effective tax rate in that jurisdiction. The relevant criteria to fall within the scope of this guidance are:

• DTAs that can’t be accounted for in the authorized financial accounts - for example, a DTA from a tax loss carryforward not recognized in financial statements
• DTAs linked to non-economic expenses or losses for tax purposes - such as a large tax deduction for asset depreciation that exceeds the actual cost of the asset, creating a tax loss
• DTAs not related to the prepayment of tax on income that would be included in GloBE - such as prepaying taxes on income not subject to GloBE rules, resulting in a DTA
• DTAs related to tax credits based on future expenses or activities - such as a tax credit for future research and development expenses, creating a DTA

The OECD highlights three specific transactions that result in DTAs falling under Article 9.2 that are excluded from GloBE calculations:

• DTAs from a government agreement granting a tax credit or other relief that wouldn’t have otherwise arisen
• DTAs from a government agreement allowing a retroactive change in the treatment of a transaction already assessed
• DTAs from a step-up granted by a government before introducing a new corporate income tax framework where there was none before

The OECD acknowledges that some jurisdictions have already put certain arrangements in place: The guidance therefore allows for a grace period during which part of the benefit can continue for a limited number of years.

Looking forward, the OECD announced once more that additional guidance on so-called related benefits is coming. “Related benefits” are tax incentives that may be considered not in line with the objectives of the GloBE rules and are in essence designed to “give back” top-up taxes. This additional guidance has been pending for some time, and many companies and jurisdictions are eager to learn the direction that the OECD sets out in this respect.

 

First Targeted Guidance

The new guidance in relation to DTAs and article 9.1.1 and 9.1.2 in particular is the first targeted guidance from the OECD addressed primarily at implementing jurisdictions. It demonstrates that the OECD is willing to require jurisdictions to stay in line with what the OECD considers the integrity of the GloBE rules.

The guidance is very specific in nature and may have a material impact (retroactively) on those companies that have DTAs that fall within the scope of the guidance.

Based on the announcements from the OECD, more guidance is also coming, addressed at implementing jurisdictions as well as taxpayer behavior.

 

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