OECD releases fourth tranche of Administrative Guidance to the GloBE Model Rules providing clarifications on technical matters
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) recently released additional Administrative Guidance on the Global Anti-Base Erosion (GloBE) Model Rules, in order to clarify a series of technical issues under the GloBE Rules. As with prior tranches of Administrative Guidance, the June 2024 Administrative Guidance (June 2024 AG) will be incorporated in the Commentary to the GloBE Model Rules.
This is the fourth tranche of Administrative Guidance approved by the Inclusive Framework, following the release of earlier tranches of Administrative Guidance in July 2023, December 2023, and February 2024.
DTL recapture
To avoid Adjusted Covered Taxes being overstated due to a Deferred Tax Liability (DTL) that has a long-term reversal horizon, Article 4.4.4 forces its recapture if it has not reversed within five fiscal years. The DTL recapture rule is meant to apply to “categories” of deferred tax liabilities. The previous version of the Commentary to Article 4.4.4 did not provide enough guidance on the scope of these categories.
The June 2024 AG clarifies the criteria for DTL categories and proposes different methods for tracking the five-year reversal requirement and that facilitate MNEs existing accounting processes. They are as follows:
- On an item-by-item basis, individually tracking DTLs related to each single asset or liability
- On a General Ledger account basis, grouping DTLs related to all assets or liabilities related to a specific General Ledger account, and
- On an Aggregate DTL Category basis, grouping DTLs related to two or more General Ledger accounts that fall under the same balance sheet account or sub-balance sheet account.
The new guidance provides for several limitations that parties may want to monitor, such as DTLs related to certain assets and liabilities that cannot be aggregated with other General Ledger accounts (eg, non-amortizable intangible assets or related party receivables or payables).
Finally, the June 2024 AG extends the application of the Unclaimed Accrual election rule for DTL categories that are not expected to reverse within five fiscal years. As a result, accrual of those DTL categories will not be claimed in the first instance, relieving the taxpayer from tracking its reversal.
Divergences between GloBE and accounting carrying values
The June 2024 AG also clarifies how MNE Groups should determine Adjusted Covered Taxes of Constituent Entities in cases where the accounting and GloBE carrying value, and the
DTA/DTL determined therefrom, diverge. Guidance is also provided in relation to the GloBE treatment of intragroup transactions accounted for at cost by the acquiring Constituent Entity.
The GloBE Rules generally rely on the amounts reflected in the financial accounts of a Constituent Entity used in the preparation of the Consolidated Financial Statements as the starting point for determining the GloBE Income or Loss and Adjusted Covered Tax. However, there are cases where the GloBE Rules require a Constituent Entity to determine its GloBE Income or Loss and Adjusted Covered Taxes in reference to a carrying value that may be different from the carrying value reflected in financial accounts otherwise used for GloBE purposes. The June 2024 AG lists all the affected articles of the GloBE Model Rules.
If the GloBE Income or Loss of a Constituent Entity is calculated based on an asset's or liability's carrying value that differs from that used to determine the deferred tax expense accrued in the financial accounts of a Constituent Entity, any deferred tax expense or benefit accrued in connection with a DTA or DTL related to the asset or liability is no longer appropriate for computing the Total Deferred Tax Adjustment Amount under Article 4.4 of the GloBE Model Rules to determine the Adjusted Covered Taxes of the Constituent Entity.
The June 2024 AG further clarifies that for the determination of the Total Deferred Tax Adjustment Amount, any DTA or DTL must be computed based on the GloBE carrying value and then adjusted in accordance with the relevant accounting standard. The deferred tax expense or benefit in respect of such DTA or DTL and its subsequent adjustment must then be used to compute the Total Deferred Tax Adjustment Amount.
In this chapter further clarifications are provided concerning the effect of divergences between GloBE and accounting carrying value and Transition Rules as well as intra-group transactions accounted for at cost.
In addition, the new guidance provides that any adjustment to the carrying value of an asset for GloBE purposes does not affect the carrying value for the Substance-based Income Exclusion.
Allocation of cross-border current taxes
The June 2024 AG provides further guidance on the allocation of Covered Taxes. Particular focus is given to current cross-credited taxes that must be allocated between a Main Entity and its Permanent Establishments or a Parent Entity and its CFCs, Hybrid Entities or Reverse Hybrid Entities. The newly introduced guidance is a four-step process for allocating current taxes which have been accrued under a tax system which “blends together” income from multiple sources and allows the cross-crediting of tax credits within the relevant category of income. The new arrangement intends to accommodate differing treatments of foreign source income under various corporate tax systems and regimes.
The residual taxes of the main entity (defined as “allocable covered taxes”) that are allocable to the PEs are computed as follows: i) a main entity’s net foreign source income is computed by deducting from foreign source income all allocable expenses; ii) allocable covered taxes are determined by subtracting tax liability on domestic income, as well as any blended CFC taxes, from all total current tax expense; iii) the cross-crediting allocation key for a PE is calculated by multiplying the PE’s taxable income by the main entity’s applicable tax rate, and then reducing the product by the creditable foreign taxes accrued with respect to such taxable income, and iv) the allocation to each PE is taken by multiplying the main entity’s allocable covered taxes by a fraction in which the numerator is the PE’s cross-crediting allocation key and the denominator is the sum of all cross-crediting allocation keys. By analogy, the same four-step method is applicable to CFCs and flow-through entities.
Allocation of cross-border deferred taxes
Chapter 4 applies the “substitute loss carryforward DTA” to foreign PEs, hybrid entities or reverse hybrid entities. This guidance, introduced in the February 2023 AG, had been applicable only to CFCs. This includes special rules ensuring that a parent/main entity under a worldwide tax regime with a domestic loss that offsets foreign income (which requires that foreign source income offset the parent/main entity’s domestic losses prior to applying FTCs against the foreign source income) is not disadvantaged under the GloBE rules, as compared with a parent/main entity operating under a territorial tax regime.
Absent the special rules in the AG, a loss-making parent/main entity under a territorial regime would create a DTA recognized under the GloBE rules with respect to its loss, but a counterpart parent/main entity in a jurisdiction like the United States, which requires that foreign source income offset the parent/main entity’s domestic losses prior to applying FTCs against the foreign source income, would not create a DTA with respect to its loss. Instead, the loss would be offset by any foreign source income (prior to utilization of any creditable foreign taxes accrued with respect to the foreign source income), and the parent/main entity would not create a DTA, even if there is a mechanism to recapture any unused FTCs. In these circumstances, the rules provide that such parent/main entity can create a “Substitute Loss Carry-forward DTA.”
Allocation of profits and taxes in structuring including Flow-Through entities
The GloBE rules seek to achieve that income and taxes are attributed to the entities that trigger them. Existing GloBE rules already guide the allocation of income and taxes for Constituent Entities and provide specific guidance with respect to the allocation of income and taxes to and from such Flow-Through entities. Nevertheless, the updated guidance makes new clarifications that affect Flow-Through entities, including the following:
The June 2024 AG introduces the concept of a Reference Entity that determines the classification of a Flow-Through entity under the GloBE rules. A Flow-Through entity can be a Tax Transparent entity or a Reverse Hybrid entity for GloBE purposes. This June 2024 AG clarifies that the classification of a Flow-Through entity is determined by the domestic rules of the Reference Entity (ie whether the Flow-Through tax transparent or opaque). The Reference Entity is the entity in the ownership structure that is closest to the Flow-Through entity that itself is not tax transparent in its jurisdiction of incorporation.
The June 2024 AG also clarifies that Covered Taxes allocated to a Tax Transparent entity in principle follow the allocation on income of such Tax Transparent entity to its owner. Specific guidance is provided for certain situations in relation to Reverse Hybrids as well as guidance in relation to the allocation of Blended CFC taxes.
Further, Covered Taxes of an indirect owner in a Hybrid Entity may be allocated to the indirectly owned Hybrid Entity. The guidance also clarifies that under certain circumstances an entity that is located in a jurisdiction without a corporate income tax may be considered a Hybrid Entity.
Finally, the June 2024 AG clarifies that Covered Taxes of an indirect owner of a Reverse Hybrid entity may, in certain circumstances, be allocated to the Reverse Hybrid should the indirect owner consider all intermediate constituents tax transparent.
Treatment of securitization vehicles
Additional guidance has been issued on the treatment of groups with special purpose vehicles used for the purposes of securitization transactions in particular with respect to the potential of QDMTT application to securitizations SPVs. The new guidance allows implementing jurisdictions to exclude qualifying securitization SPVs from the scope of the QDMTT. This is called the "switch-off rule." Qualifying securitization SPVs must meet certain criteria including having non-group investors. The guidance would either (i) allow a jurisdiction to exclude the securitization SPV but at the expense of not being able to benefit from the QDMTT safe harbor in that jurisdiction or (ii) design their QDMTT such that the top-up tax in relation to the securitization SPV is allocated to other constituents in that jurisdiction. In the latter case the QDMTT safe harbor may remain available in that jurisdiction.
Companies with securitization SPVs are encouraged to monitor if their jurisdictions of residence will adopt their QDMTT rules accordingly.
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