Practical Implications of Pillar Two Compliance - Latest OECD Guidance

In January 2025, the OECD provided some much-needed guidance on the operation of the Pillar Two GloBE rules, which can be summarized as follows:

• Each jurisdiction that has enacted Pillar Two must calculate an MNE’s Pillar Two tax liability using the locally enacted Pillar Two legislation;
• These calculations could be different from a similar calculation completed using OECD model rules for several reasons;
• Because of the common approach agreed to by all jurisdictions that have agreed to enact Pillar Two, there is a rule order which means jurisdictions that have enacted a lower priority rule order (e.g., IIR or UTPR) cannot complete their Pillar Two calculations until jurisdictions over which they have taxing rights and which have enacted a higher priority rule order (e.g., QDMTT) have first completed their Pillar Two calculations; and
• The information submitted in the GloBE Information Return must include calculations based on the OECD model rules as well as separate local jurisdiction rules starting from the CbC safe harbor calculations.

January 2025 OECD Guidance on completing the GloBE Information Return (GIR)

Guidance on completing the GloBE Information Return (GIR)

The additional OECD guidance summarized above was included in several documents relating to the GIR. Specifically, the latest OECD guidance requires the GIR to be prepared using calculations completed under the OECD model rules (except where the jurisdiction meets the QDMTT safe harbor or is only subject to the Pillar Two rules of a single jurisdiction). The guidance also requires differences in calculations completed using the OECD model rules and local jurisdiction rules to be reported in three separate tables in the GIR, with the Pillar Two implementing jurisdiction allowed to ask for details of the reported differences via local Pillar Two compliance forms or via direct communication with MNEs. More specifically:

• GIR table 1.4 requires the reporting of the average differences in Top-up Tax (TuT) between the OECD model rules and the Pillar Two rules enacted in local jurisdictions [1];
• GIR table 2.1 requires reporting where any jurisdiction passes/fails the chosen safe harbor/exclusion based on local jurisdiction rules vs. the OECD model rules [2]; and
• GIR table 3.1 requires disclosure of several data points calculated based on the local jurisdiction rules where the ETR calculated is different compared to the OECD model rules [3].

In all these instances, the information for each impacted jurisdiction must be disclosed separately by a jurisdiction’s taxing rights. In other words, the same jurisdiction may need to be entered multiple times (i.e., a jurisdiction could be subject to the taxing rights of multiple Pillar Two implementing jurisdictions based on the charging provisions enacted), and differences in the calculations under each of those implementing jurisdictions compared to the OECD model rules will need to be disclosed starting with the CbC safe harbor test.

Best Practice

Needless to say, and especially after the latest OECD guidance, MNEs will continue to face significant challenges in calculating the top-up taxes payable in the different jurisdictions in which an MNE group operates. The work involved for an MNE to correctly calculate the top-up tax amounts payable includes, at the minimum, tracking the rules for all impacted jurisdictions and determining the MNE entities that each jurisdiction has taxing rights over, which depends on the charging provisions enacted by a particular jurisdiction and the priority of those provisions viz a viz the charging provisions enacted by all other jurisdictions. In other words, an MNE group has to separately apply the Pillar Two rules as implemented by each implementing jurisdiction while also ensuring that exclusions and credits are properly applied so that the same entity is not subject to multiple levels of Pillar Two taxes. This requires that a strict sequence of steps is followed to ensure correct calculations and compliance.

In particular, best practice involves the following sequence of steps:

• Keep track of each jurisdiction's implementation of the Pillar Two rules, including subsequent amendments and updates, and build out separate local jurisdiction calculators;
• Determine which entities are in scope for each jurisdiction based on the taxing rights of each jurisdiction, which depends on the charging provisions enacted (QDMTT, IIR, UTPR);
• Apply the CbC safe harbor rules, if any, enacted by each jurisdiction, which may be based on some or all of the December 2023 administrative guidance;
• Determine if the jurisdiction has adopted any other safe harbors, such as the simplified calculation safe harbor for non-material constituent entities (NMCEs), and apply such other safe harbors accordingly;
• Calculate the QDMTT for each jurisdiction, if enacted, taking into account only entities that are subject to QDMTT after considering any QDMTT de minimis exclusions (if permitted by the domestic jurisdiction);
• Determine if each jurisdiction has taxing rights under the IIR and, if so, consider any GloBE de minimis exclusions and QDMTT safe harbors, with further consideration needed of a credit for QDMTT already incurred for jurisdictions that do not meet the QDMTT safe harbor, which is based on the QDMTT jurisdictions local jurisdiction rules (this means the IIR calculation cannot start until all the local QDMTTs and the subpart F/GILTI calculations are completed); and
• Determine which jurisdictions have UTPR taxing rights and apply the different exclusions and credits, including the UTPR safe harbor and the exclusion for entities where 100% of the UPE’s ownership has been picked up under the IIR, as well as credits for QDMTT/IIR already picked up by jurisdictions that have priority taxing rights.

In addition to the above, an integration process must be conducted where, before the IIR/UTPR can be calculated, QDMTT amounts have to be sent over to be credited against subpart F/GILTI, which then gets updated and brought back to be used as a covered tax when calculating the IIR/UTPR. And of course, the initial step of determining the CbC safe harbor requires the equivalent of a CbC report to be prepared. Given the strict sequencing and interdependencies between the various components within the Pillar Two calculations and the calculations outside of Pillar Two (subpart F/GILTI/Tax Provision), as well as a short time frame for certain calculations, a fully automated process is a must. Any misstep that could lead to pauses or errors in the sequence is not an option [4].

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[1] See GIR XML schema user guide page 35 summary section: Where required to be provided, the DiffDomesticTut element indicates the range in which the average amount of Top-up Tax payable under the domestic legislation falls, if such amount is different from the amount of GloBE Top-up Tax payable, as reported in the GloBETut element. For the purpose of the average, the amounts reported in 3.1.10 are weighted by the relevant jurisdiction's Allocable Share of Top-up Tax as computed under the GloBE Model Rules.

[2] See GloBE Information Return (January 2025) page 55 Note 2.1.5: This row shall be completed separately for each jurisdiction with taxing rights identified in 2.1.4. The Filing Constituent Entity shall report ‘Yes’ for a jurisdiction when either the MNE Group has reported that it is eligible for a safe harbor or exclusion in Section 2 when it is not eligible for the same safe harbor or exclusion under the domestic law of the relevant jurisdiction with taxing rights or, conversely, the MNE Group has reported that it is not eligible for a safe harbor or exclusion in Section 2 when it is eligible for the same safe harbor or exclusion under the domestic law of the relevant jurisdiction with taxing rights.

[3] See GloBE Information Return (January 2025) page 61 Note 3.1.5 to 3.1.10: Each data point should be reported separately for each jurisdiction with taxing rights identified under 3.1.4 ("the relevant jurisdiction with taxing rights"). If there is no difference, the Filing Constituent Entity shall report "No difference". The data points in question that require separate reporting based on local jurisdiction calculations include ETR, Adjusted Covered Taxes, Net GloBE Income or Loss, Substance-based Income Exclusion, Additional Current Top-up Tax, Top-up Tax amount under domestic legislation, Elections, Aggregate current tax expense with respect to Covered Taxes after allocations in Article 4.3, Qualified Refundable Tax Credits or Marketable Transferable Tax Credits (tax expense), Other tax credits (tax expense), Deferred tax expense amount, Qualified Refundable Tax Credits or Marketable Transferable Tax Credits (income), Excess Negative Tax Expense Carry Forward, Transition Rules.

[4] The Orbitax Global Minimum Tax Solution is the only fully automated Pillar Two software solution available that maintains local jurisdiction calculation templates for all jurisdictions that have implemented Pillar Two. It automatically loads the full set of local jurisdiction templates based on an MNE's footprint and includes a fully automated and correctly sequenced step-by-step process. The process starts with the uploading of all MNE data and the automatic determination of the GloBE status of all entities, which includes the very complex calculations regarding the impact of entity changes on GloBE status. The relevant data is then loaded in each local jurisdiction template based on each jurisdiction's taxing rights, which is followed by the calculation of the Transitional CbC safe harbor and NMCE safe harbor (all based on local jurisdiction rules), and the calculation of any QDMTT top-up taxes in each local jurisdiction. The IIR top-up taxes are then calculated after automatically transferring any QDMTT top-up taxes already charged (or excludes the QDMTT jurisdiction from GloBE taxes if the QDMTT safe harbor qualification is met), followed by the UTPR top-up calculation after automatically allowing credits and exclusions for QDMTT/IIR and UTPR safe harbor. The total QDMTT/IIR/UTPR is then aggregated in a report that can be automatically pushed into the MNE's tax provision software. Further, the Q1 2025 release of the Orbitax Global Minimum Tax Solution includes additional functionality that will automatically populate the GIR and all local jurisdiction Pillar Two forms, automatically generate the XMLs (or other fling formats), and e-file (or prepare other submission formats) with tax authorities worldwide.