Italy Issues a Ministerial Decree to Implement Amended Pillar 2 Deferred Tax Transition Rules

On December 31, 2024, Ministerial Decree of December 27, 2024 was published in the Official Gazette. This implements Article 4.1-4.3 of the February 2023 OECD Administrative Guidance and some aspects of the June 2024 OECD Administrative Guidance on the treatment of deferred taxation generated in the period prior to the implementation of the GloBE rules.

Articles 2-4

The general rule under Article 9.1.1 of the OECD Model Rules, is that in the transition year, deferred tax assets and liabilities of the entity are recognised at the lower of:

-the domestic tax rate used in the accounts; and

-the 15% global minimum rate.

Deferred tax assets and liabilities are based on the amounts in the financial statements.

However, when calculating the standard deferred tax adjustment amount, deferred tax relating to tax credits is excluded.

The February 2023 OECD Administrative Guidance confirms that this exclusion does not apply to the transitional rule for deferred tax, so deferred tax relating to tax credits is included.

However, as recasting deferred tax assets relating to tax credits can be complex, the guidance provides for a a simplified approach where the domestic tax rate is equal to or higher than 15%.

In addition, given the different treatment under the GloBE rules for qualifying refundable tax credits, and other tax credits, splitting them out for the calculation of the transitional deferred tax rules could be complex. It therefore, provides that QRTCs and non-QRTCs are treated in the same way for the transitional rule for tax credit carry forwards (as income, not a reduction to the current tax expense).

Article 5

Article 5 of the Decree provides for restriction for deferred tax attributes that originate before the application of the provisions on the Global Minimum Tax but after 30 November 2021 and which, under the current regime, would not have been considered.

It also applies a provision of the June 2024 OECD Administrative Guidance which provides that Deferred Tax Assets existing at the beginning of the Transitional year are not relevant if these have been recognized in the accounts as a result of a “Blended CFC Tax Regime”, i.e. a CFC regime not applied to the single subsidiary and which applies tax rate lower than 15 percent.

Articles 6/7

Articles 6 and 7 provide transitional rule for asset transfers.

The Pillar Two treatment of intra-group asset transfers generally follows the financial accounting treatment.

This generally values the transfer of assets at fair value.

Therefore any gain or loss recognised for accounting purposes would also flow through to the GloBE income calculation.

However, the Article 9.1.3 of the OECD Model Rules provides that if an asset is transferred between group entities after November 30, 2021 and before the first year the GloBE rules apply to the group, the asset is recorded at its historic cost providing the entities would have been subject to the Pillar Two GloBE rules had they been in-scope.

The reason for this is to prevent an uplift in the base cost of assets (with potentially additional tax relief and reduced gains on a future disposal) when any original gain on the intra-group transfer was not taken into account for Pillar Two GloBE purposes as the group was not subject to the rules.

This would also mean that any deferred tax assets or liabilities would also need to be recast to the historic value (eg if tax relief for the assets was given over a shorter period than for financial accounting purposes).

Article 4.2 of the February 2023 OECD Administrative Guidance provides that all transactions and corporate restructurings that are accounted for similar to an asset transfer (eg where the MNE Group creates or increases the carrying value of an asset), regardless of their form are to be classed as an “transfer of asset” for the purposes of Article 9.1.3.

Article 6 of the Decree also provides that the acquiring Entity may take into account a deferred tax asset to the extent that the disposing Entity paid tax in respect of the transaction and to the extent of any deferred tax asset that would have been taken into account under Article 9.1.1 but was reversed or was not created by the disposing Entity because the gain from the disposal was included in the taxable income of the disposing Entity.

A deferred tax asset created under this rule cannot exceed the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset.

Article 7 provides that where an acquiring Constituent Entity recorded an asset acquired in a transaction subject to Article 9.1.3 at fair value in its financial accounts, it may instead use the carrying value of that asset reflected in its financial accounts for GloBE purposes in all subsequent years if it would otherwise be entitled to take into account a deferred tax asset equal to the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset determined under Article 9.1.3.