Additional administrative guidance

Further administrative guidance has been provided in respect of currency conversion, treatment of tax credits, substance-based income exclusion and qualified domestic minimum top-up tax. Please see a short summary below:

• Currency conversion:
  • Pillar Two calculations and the information return should generally be prepared using the presentational currency of the ultimate parent entity’s consolidated financial statements. Any amounts that are not already translated into this currency should be translated based on the foreign currency translation rules of the relevant accounting standard used to prepare the consolidated financial statements.
  • Countries can determine their own translation rules to convert the amount calculated in the information return to the currency in which the top-up tax will be paid.
  • Pillar Two thresholds expressed in a country’s domestic legislation in a non-EUR currency will be rebased annually using the average foreign exchange rate for the December month of the previous fiscal year.
• Treatment of tax credits:
  • Qualified refundable tax credits are considered to be broadly equivalent to government grants and therefore treated as income under the Pillar Two rules, provided the credits are refundable (i.e., payable as cash or cash equivalent) within four years.
  • “Marketable transferable tax credits” (broadly, tax credits which can be transferred to an unrelated party and meet specific legal transferability and marketability criteria) are considered to have similar features and will also be treated as income, irrespective of whether they are refundable.
  • Other tax credits that do not meet the criteria to be qualified refundable tax credits or marketable transferable tax credits will be treated as reducing tax.
• Substance-based income exclusion:
  • Further guidance has been provided regarding the substance-based income exclusion, including in respect of “eligible employees” and “eligible tangible assets” who / that spend time outside of the country of the constituent entity which is the employer / asset owner. A threshold test will apply such that the full payroll / tangible asset carve-out can be claimed if the employee / asset spends more than 50% of the time in the location of the constituent entity. Where 50% or less of the time is spent in the location, the constituent entity will only be entitled to claim a share of the carve-out amount in proportion to the time spent in the location.
• Qualified domestic minimum top-up tax (“QDMTT”):
  • Additional guidance has been issued in respect of QDMTT, including in respect of the application of the rules to specific types of entities (e.g., joint ventures, minority-owned constituent entities, stateless constituent entities, flow through entities).

Additional safe harbours

Agreement has been reached on two additional safe harbours:

• Undertaxed payment rule (“UTPR”) safe harbour:
  • Under a transitional UTPR safe harbour, no top-up tax will be payable under the UTPR in respect of any undertaxed profits of a business in its ultimate parent entity country if that country applies a nominal statutory corporate income tax rate of at least 20%. This is a temporary safe harbour and will defer the application of the UTPR to such profits until 2026 (i.e., for years beginning on or before 31 December 2025).
• QDMTT safe harbour:
  • A permanent QDMTT safe harbour will allow businesses to elect to prepare a single QDMTT computation for a country. Where the safe harbour applies, no additional top-up tax will arise under the Income Inclusion Rule (“IIR”) or UTPR. In order for the QDMTT safe harbour to apply, the domestic minimum tax must not only be “qualified,” but the domestic legislation must also meet an additional set of safe harbour standards. In order for a QDMTT to qualify for the QDMTT safe harbour, the QDMTT must meet three standards: the QDMTT accounting standard, the consistency standard, and the administration standard.

Information return

Further guidance has provided some simplifications of the information required for the information return for Pillar Two. These include a streamlining of the information required on changes to the group, single reporting for tax consolidations that result in one combined tax liability and, for the first five years only, an election for the reporting of information by country rather than by entity.

Subject to tax rule (“STTR”)

The package includes an STTR for developing countries to include in their treaties. It is a gross-level top-up tax (albeit at a lower minimum rate of 9%) and applies to a wide scope of intragroup payments, including interest, royalties, insurance premiums, financing charges, and services. It includes a complex anti-avoidance rule that is not based on usual treaty concepts such as beneficial ownership. The STTR has not had the benefit of a public consultation, and a number of questions on how it will work in practice remain.