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Federal Tax

New OECD Guidance Includes Transitional Safe Harbor for Pillar Two Top-Up Tax

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

Updated administrative guidance on the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting’s global minimum tax includes transitional relief to allow member nations more time to prepare by enacting changes to corporate income tax structures.

One component of the OECD’s “Pillar Two” 15% global minimum tax on certain multinational enterprises (MNEs) is the undertaxed profits rule (UTPR), which serves as a backstop to apply if a jurisdiction where an ultimate parent entity (UPE) makes profit does not have a qualified domestic minimum top-up tax (QDMTT).

“MNE Groups that are exposed to the potential application of the UTPR in the UPE jurisdiction have limited ability to change their ownership structure to bring the UPE’s profits within the scope of an [income inclusion rule (IIR)],” the OECD explained in a new section tacked on at the end of a 90-page compendium of guidance (“Tax Challenges Arising from the Digitalisation of the Economy—Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two)”) on the Pillar Two Global Anti-Base Erosion Rules (GloBE).

“The UTPR can also be expected to apply with more frequency in the first years of operation of the GloBE Rules as jurisdictions complete the process of introducing qualified rules, including QDMTTs,” the OECD added.

140 countries, including the United States, have agreed to the OECD’s two-pillar global tax plan, which has evolved over time since 2021 as the international tax community anticipates a uniform approach to address issues such as sourcing of digital sales and the practice of shifting corporate profits to low-tax jurisdictions. Pillar Two aims to ensure that companies pay at least 15% in places where they operate using mechanisms like IIRs, QDMTTs, and UTPRS.

Recognizing that it will take time for governments and companies to adjust to Pillar Two, the new guidance provides a transitional safe harbor. Specifically, the guidance states that for each year of the transition period, the UTPR amount will be zero if a UPE jurisdiction has a corporate tax rate of at least 20%. The transition period is fiscal years “which run no longer than 12 months that begin on or before 31 December 2025 and end before 31 December 2026,” according to the OECD.

“The short transition period is designed to ensure that the safe harbor does not serve as a disincentive for jurisdictions to adopt the GloBE Rules or as an incentive for MNE Groups to invert into a jurisdiction that has not yet adopted a QDMTT or to shift profits into UPE jurisdictions that have lower effective tax rates,” it continued. “Accordingly, the transition period cannot be extended.”

Republican lawmakers have criticized both the global minimum tax and the Biden administration’s collaborative work with the OECD, citing concerns that U.S. companies will be put at an economic disadvantage. Some conservatives, such as House Ways and Means Committee Chair Jason Smith of Missouri, argue that the global intangible low-tax income (GILTI) regime enacted under the Tax Cuts and Jobs Act of 2017 is a good blueprint for other countries to follow if they so chose. However, Smith and others take issue with the prospect of UTPRs being imposed on U.S. companies.

The OECD issued technical guidance on the interaction of Pillar Two with GILTI in February. In late March, Smith called for the U.S. to stop funding its portion to the Paris-based organization.

On July 19, Ways and Means will hold a hearing on this week’s latest guidance. “Today’s ‘administrative guidance’ acknowledges what Republicans have warned for more than two years: the UTPR surtax is unworkable and unlawful,” said Smith and Senate Finance Committee Ranking Member Mike Crapo, Republican of Idaho, in a joint statement July 17. “If other countries move forward to attack U.S. jobs and tax revenues through the UTPR, Congress will be forced to pursue additional remedial measures to protect American interests.”


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