OECD offers more guidance on pillar two tax rules

Introduction
Background
Pillar two administrative guidance
Next steps
Comment

Introduction

Canadian large multinationals are advised to review the Organisation for Economic Cooperation and Development's (OECD's) new administrative guidance on pillar two's "global anti-base erosion" (GloBE) rules. The OECD advises that the guidance is intended to help jurisdictions (including Canada) to implement the GloBE rules in their domestic legislation as part of its two-pillar solution to address the tax challenges from digitalisation of the economy. Worldwide implementation of these rules is intended to be effective as early as 2024.

Background

Generally, the OECD/G20 Inclusive Framework contemplates tax proposals under two specific "pillars". Pillar one proposes a new approach to for the allocation of taxing rights. Multinational enterprises (MNEs) with global revenue above €20 billion and profit before tax above 10% of revenue will be covered by the new rules under this pillar, with 25% of profit above the 10% threshold (ie, amount A) to be reallocated to market jurisdictions. Pillar one also outlines a proposed approach to mandatory binding dispute prevention and resolution for amount A.

Pillar one also contemplates simplifying the application of the arm's length principle to in-country baseline marketing and distribution activities (ie, amount B), which would have a broader scope and would not be subject to the revenue and profitability thresholds applicable to amount A.

Pillar two focuses on ensuring large MNEs pay a minimum rate of tax. As part of this pillar, the OECD/G20 Inclusive Framework released model global minimum tax rules in December 2021. The release of the model rules followed the agreement of over 135 countries, including Canada, on several key aspects of the two-pillar framework, in a statement on 8 October 2021. Under these rules, MNEs with revenue above €750 million will be subject to a minimum 15% tax rate under pillar two. Since the release of the GloBE model rules, the OECD has also released additional guidance and launched several public consultations on various aspects of the implementation of the rules.(1)

Pillar two administrative guidance

The OECD advises that this new administrative guidance is intended to facilitate coordinated outcomes and provide greater certainty for businesses.

Specifically, this guidance covers:

• the treatment of global intangible low-taxed income under the GloBE rules;
• the design of qualified domestic minimum top-up taxes;
• the scope, operation and transitional elements of the GloBE rules to help Inclusive Framework members to reflect this guidance in their domestic legislation in a coordinated manner;
• certain technical issues, such as the determination of top-up tax in a jurisdiction in a period where the jurisdiction has no GloBE income; and
• the treatment of debt forgiveness and certain tax credit equity structures.

The OECD advises that this guidance, along with its other recent publications on pillar two, finalises the implementation framework for the OECD's two-pillar solution.

Next steps

The OECD says it intends to incorporate this administrative guidance into a revised version of its commentary that will be released later in 2023. The OECD also advises that the Inclusive Framework will continue to release administrative guidance on the GloBE rules and expects to finalise the model provision for the subject-to-tax rule and the related multilateral instrument to assist in its implementation.

Comment

Finance may turn to the OECD's new guidance as it continues work to enact the pillar two rules in Canada. Although Finance has not yet released draft legislation to implement the pillar two model rules, it launched a public consultation in 2022 on how the model GloBE rules and domestic minimum top-up tax could be implemented in Canada.

Following this consultation, Canada reaffirmed its commitment to enact pillar two in Canada.(2) Large MNEs should consider whether they may be affected by the OECD's two-pillar approach. In particular, given the complexity of these rules and the ambitious timeline for implementation, MNEs should monitor developments and use appropriate assessment tools to model impacts and evaluate interdependencies to prevent double taxation or other inadvertent effects. As part of this assessment, MNEs will need to understand the relevant timelines and requirements of the various legislative and parliamentary processes in different jurisdictions and track when domestic laws will come into effect. MNEs should also consider how these new measures may interact with other international tax proposals in Canada such as new anti-hybrid rules and interest deductibility limitations.

For further information on this topic please contact Sabrina Wong or Sam J Tyler at KPMG Law by telephone (+1 416 777 8000​) or email ([email protected] or [email protected]).The KPMG Law website can be accessed at kpmg.com/ca/en/home/services/kpmg-law.html.

Ronan Carrig, Brian Ernewein, Sharon Szeto and Nadia Virani assisted with the preparation of this article.

This article was originally published by KPMG.

Endnotes

(1) For further details, see:

• "OECD Asks for More Feedback on Pillar One and Two Specifics";
• "OECD Offers Guidance on Global Minimum Tax Rules";
• "OECD Releases Model Global Minimum Tax Rules";
• "OECD Clarifies Global Minimum Tax Plan for 2023"; and
• "OECD Moves Forward with 15% Global Minimum Tax for 2023".

(2) For further details, see "Highlights of the 2022 Federal Fall Economic Update".