OECD Issues a List of Jurisdictions with Qualified Status, New Administrative Guidance and Updates to the GIR

Administrative Guidance on Article 9.1

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.

The restriction on deferred tax assets being recognised at a maximum of the 15% global minimum rate prevents an MNE group reducing top-up tax by creating large releases to the P&L on the utilisation of a high tax deferred tax asset.

A special transitional rule in Article 9.1.2 of the OECD Model Rules applies to deferred tax assets that arise from permanent differences that are included in calculating taxable income but not Pillar Two GloBE income.

Note that this can apply to both timing differences and permanent differences where they aren’t reflected in Pillar Two GloBE income.

This will frequently arise from a permanent difference.

Typical examples are many of the tax-specific deductions that don’t apply for accounting purposes, such as a specific enhanced tax deduction.

Where the deferred tax asset is created in a transaction that takes place after 30 November 2021 it is not included in adjusted covered taxes.

This means that on the release of the asset there is no debit to the deferred tax charge in the P&L and no increase in the Total Deferred Tax Adjustment Amount under Article 4.4 (ie adjusted covered taxes).

The new guidance now includes deferred tax assets that are ‘not attributable to the prepayment of tax in relation to income that would or will be included in GloBE Income or Loss’. It also includes ‘tax benefits that are designed to achieve similar effects as the example described above, including tax credits based on future expenditure or activity’.

It also confirms that Article 9.1.2 is not limited to commercial transactions and it includes any agreement, ruling, decree, grant or similar arrangement with a General Government.

The new Section 8.5 inserted in the OECD Commentary by this Administrative Guidance confirms that this will apply to:

a. A deferred tax asset that is attributable to a governmental arrangement concluded or amended after 30 November 2021 where such governmental arrangement provides the taxpayer with a specific entitlement to a tax credit or other tax relief (including, for example, a tax basis step-up) that does not arise independently of the arrangement.

b. A deferred tax asset that is attributable to an election or choice exercised or changed by a Constituent Entity after 30 November 2021 and that retroactively changes the treatment of a transaction in determining its taxable income in a tax year for which an assessment by the tax authority was already made or a tax return was already filed.

c. A deferred tax asset or a deferred tax liability arising from a difference in the tax basis or value and accounting carrying value of an asset or liability if the tax basis or value was established pursuant to a corporate income tax that was enacted by a jurisdiction that did not have a pre-existing corporate income tax and that was enacted after 30 November 2021 and before the Transition Year.

The new Articles 8.8-8.12 of the OECD Commentary inserted by this Administrative Guidance contains a grace period under which the deferred tax expenses, (subject to a cap of 20% of the original deferred tax asset at the lower of 15% or the domestic CIT rate), can be included in the Total Deferred Tax Adjustment Amount under Article 4.4 or Simplified Covered Taxes under the Transitional CbCR Safe Harbour. 

For (a) and (b) above, the grace period applies to DTA reversals in fiscal years beginning on or after 1 January 2024 and before 1 January 2026 but not including a Fiscal Year that ends after 30 June 2027,

For (c) the grace period applies to DTA reversals in fiscal years beginning on or after 1 January 2025 and before 1 January 2027 but not including a Fiscal Year that ends after 30 June 2028.

The grace period does not apply to relevant arrangements that arise after November 18, 2024.

In addition, relevant changes are made to the Transitional CbCR and QDMTT Safe Harbour:

-The Transitional CbCR Safe Harbour is amended to exclude the reversals from the definition of simplified covered taxes

-The QDMTT Safe Harbour is amended to apply the Switch-Off rule to jurisdictions that allow the DTA reversals to be taken into account for adjusted covered taxes (or for Transitional CbCR Safe Harbour purposes).

GloBE Information Return (GIR)

The updated GloBE Information Return and GIR XML Schema includes provisions from the December 2023 and June 2024 OECD Administrative Guidance, as well as other aspects such as notifications under Article 8.1.1 of the OECD Model Rules that the GIR is filed by the UPE or other designated filing entity that has a Qualifying Competent Authority Agreement in place with the domestic jurisdiction.

For instance, the QDMTT Section in Article 3.3.4 of the GIR now includes the Five-year election to use the UPEs currency or the local currency, as provided in the December 2023 OECD Administrative Guidance and Article 1.3.2.1 permits the identification of an entity as a Securitisation entity as provided in the June 2024 OECD Administrative Guidance.

The OECD also released the GIR Multilateral Competent Authority Agreement (MCAA) which provides for the automatic exchange of the GIR between signatory jurisdictions based on the agreed dissemination approach (ie jurisdictions will receive the relevant portion of the GIR dependent on their taxing rights under the GloBE rules).

This would then ensure that if all foreign jurisdictions where an MNE was in-scope of the GloBE rules (and QDMTT-only Jurisdictions) have signed the MCCA (or had another other Qualifying Competent Authority Agreement in place) with the jurisdiction of the UPE or designated filing entity, only one GIR would need to be submitted. The GIR information is then exchanged based on the latest GIR XML Schema.

The information in the UPE/designated filing entity jurisdiction is required to be exchanged within three months after the filing deadline of the sending jurisdiction for the reporting fiscal year to which the information relates (extended to 6 months for the first reporting year).