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The key points to note are:
A QDMTT must apply to domestic Constituent Entities of MNE Groups that meet the EUR 750 million threshold.
However, the QDMTT could be extended to:
– groups whose UPE is located in the jurisdiction but that are not within the scope of the GloBE Rules because their revenues are below the EUR 750 million threshold
– purely domestic groups
The definitions of Ultimate Parent Entity, MNE Group, and Constituent Entity in the QDMTT need to correspond with the definitions in the GloBE Rules.
The QDMTT must compute the tax liability in the jurisdiction by taking into account the income and covered taxes of constituent entities that are located in the jurisdiction as determined under the GloBE Rules.
Top-up Tax that is subject to the QDMTT is based on the whole amount of the Jurisdictional Top-up Tax calculated, irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group. Jurisdictions may, however, design their QDMTT legislation to apply only where all the domestic Constituent Entities in the jurisdiction are 100% owned by the UPE or a POPE for the entire Fiscal Year.
(Note, if a jurisdiction excludes partially-owned Entities from their QDMTT for the purposes of the QDMTT Safe Harbour it would not meet the Consistency Standard and would therefore not qualify for the Safe Harbour.)
For the purposes of a QDMTT, Minority Owned Constituent Entities (MOCEs) and Joint Ventures (JVs) must determine a separate ETR and top-up tax as is the case with the GloBE Rules.
Just as for Constituent Entities Top-up Tax under a QDMTT in respect of Joint Ventures and Minority-Owned Constituent Entities is the whole amount irrespective of the fact that the UPE would only be subject to tax on its share of the Top-up Tax arising from Joint Ventures, JV subsidiaries, MOCEs. If a jurisdiction designed its QDMTT regime to apply only where all the domestic Constituent Entities in the jurisdiction are 100% owned by the UPE or a POPE for the entire Fiscal Year, the QDMTT would then not apply to Joint Ventures and JV subsidiaries located in the jurisdiction
The QDMTT tax liability does not need to be allocated to constituent entities in any particular way providing it is allocated to at least one constituent entity subject to tax in the jurisdiction that is legally liable for the tax.
(For the purposes of the QDMTT Safe Harbour, if a QDMTT jurisdiction includes members of a JV Group within the scope of the QDMTT but imposes the liability on Constituent Entities of the main group instead of directly on the members of the JV Group, the Switch-Over Rule applies. If the QDMTT Regime does not include Joint Ventures and JV Subsidiaries within the scope of the QDMTT, the QDMTT Safe Harbour would not apply at all as the Consistency Standard would not be met).
The Second Set of OECD Administrative Guidance provides that the QDMTT tax charge could, for instance, be allocated using the general top-up tax allocation formula in Article 5.2.4 of the GloBE Rules or based on the ratio of the Excess Profits of the Constituent Entity to the Excess Profit of all Constituent Entities located in the jurisdiction. As noted above, to prevent minority owners bearing the QDMTT tax charge, jurisdictions could also decide to allocate it soley to wholly-owned Constituent Entities.
The GloBE Rules generally require the MNE Group to base its GloBE calculations on the accounts used for preparing the Consolidated Financial Statements of the UPE for the purposes of computing the GloBE Income or Loss of each Constituent Entity.
However, the definition of a QDMTT under the Model Rules expressly permits the calculations to be based on a Local Financial Accounting Standard.
Note that for the purposes of the QDMTT Safe Harbour there are restrictions on the use of a Local Financial Accounting Standard (see below).
It is not permitted to provide any benefits related to the QDMTT or the GloBE Rules (eg a refund or credit against other taxes).
The underlying calculations to calculate the QDMTT should be based on the same currency as the one used for the GloBE Information Return.
The underlying calculations for the QDMTT should be the same as the GloBE Rules, however, they can differ where:
– the QDMTT is to be more restrictive than the GloBE Rules where this is consistent with local tax rules; or
– GloBE income adjustments are not relevant due to the design of the domestic tax law. (Note if the QDMTT legislation does not include all GloBE income adjustments the QDMTT Safe Harbour may not apply as the Consistency Standard would not be met).
Although a jurisdiction may have a taxable branch regime, its QDMTT must exclude the income or loss of a foreign permanent establishment from the income or loss of the main entity as under the GloBE Rules.
The calculation of adjusted covered taxes needs to be the same as the GloBE Rules or more restrictive. However, there is no requirement to provide for a GloBE Loss Election.
A QDMTT must include additional top-up tax as under Article 4.1.5 of the Model Rules. This applies where a domestic tax loss is greater than the Pillar Two GloBE loss. The Pillar Two GloBE loss derives from the financial accounts of the constituent entity (with GloBE adjustments), and therefore a difference in the tax treatment locally could give rise to a different domestic tax loss. This could occur for instance if for domestic tax purposes certain income is exempt, but is not for calculating Pillar Two GloBE income.
The QDMTT top-up tax calculation should be slightly different to the GloBE top-up tax calculation as the GloBE top-up tax calculation deducts the QDMTT. Therefore, the QDMTT should be calculated by simply multiplying the domestic QDMTT income by the jurisdictional top-up tax percentage and then adding any additional QDMTT top-up tax in the jurisdiction.
Excess top-up tax cannot be carried forward or carried back to previous fiscal years.
The tax rate applicable under a QDMTT must be equal to or higher than the 15% global minimum rate.
The GloBE rules for corporate reorganizations would need to be included in a domestic QDMTT to the extent that they are relevant under the domestic tax regime.
The GloBE elections should be included in a QDMTT (to the extent relevant under domestic tax law).
A QDMTT is not required to have a substance-based income exclusion. However, if it does have one it can’t have a wider scope than under the GloBE rules. This is not to say it couldn’t have a narrower scope and, for instance, the carve-out rate could be lower than under the GloBE rules.
A QDMTT is not required to have a de minimis exclusion. However, if one is included it must be based on average revenue and average income or loss, and the relevant thresholds need to be equal to or lower than the GloBE rules.
A QDMTT must allocate the income and taxes of a tax transparent entity to a constituent entity-owner or a permanent establishment located in the jurisdiction in the same way as the GloBE Rules.
A QDMTT must also include the income and taxes of a tax transparent UPE in the minimum tax calculation if it is located in the jurisdiction.
Taxes of the Constituent Entity owner of foreign CFCs are excluded as under the GloBE rules. The exception to this is for taxes subject to the pushdown limitation.
However, the QDMTT rules go one step further and requires that covered taxes in a QDMTT ETR calculation should not include taxes paid to another jurisdiction under a CFC regime that otherwise would be allocable under the GloBE rules to a constituent entity located in the jurisdiction.
This rule also applies to any taxes paid by an owner of a permanent establishment in the jurisdiction.
The Second Set of OECD Administrative Guidance also provides that a QDMTT must exclude:
Article 7.1 of the Model Rules provides for a number of reductions in the GloBE income of the UPE. The broad intention is that if the owners of the UPE pay tax at or above the 15% minimum rate, the UPEs GloBE income should also be reduced.
This is required to be included in a QDMTT regime. The Second Set of OECD Administrative Guidance provides that jurisdictions with Flow-through entities need this provision otherwise it can alter the GloBE calculations. Similarly, jurisdictions that do not have Flow-through Entities should have this provision because Article 7.1.4 applies to a Permanent Establishment that could be located in those jurisdictions.
Therefore, income attributable to the UPE cannot be subject to a QDMTT to the extent this applies.
If a jurisdiction has a Deductible Dividend Regime, it is required to include a provision similar to Section 7.2 of the Model Rules in its QDMTT. Income attributable to the UPE would then not be subject to a QDMTT to the extent this provision applied.
A jurisdiction that has an Eligible Distribution Tax System must include a provision that mirrors Article 7.3 of the OECD Model Rules in its QDMTT legislation. If it doesn’t have an Eligible Distribution Tax System (i.e., a distribution tax system in force on or before 1 July 2021) this is not required.
Special rules apply to investment entities as minority interests are taken into account when calculating the ETR and the top-up tax.
Importantly, when it comes to allocating the top-up tax for payment (eg to the UPE to account for the tax under an IIR) the top-up tax determined for the investment entity needs to be taken into account. As noted above, usually the parent entity is allocated its allocable share of the top-up tax. However, as this has already been adjusted for in the investment entity’s top-up tax calculation, all of the top-up tax can then be allocated.
This must also apply for QDMTT purposes.
(Note, if a jurisdiction opts not to impose a QDMTT on these Investment Entities, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).
Article 7.5 of the GloBE rules provides that an entity can make a tax transparency election in respect of its ownership interest in an investment entity. This then changes the default tax treatment under the Pillar Two rules.
The election is a five-year election and treats the GloBE income of the investment entity as accruing to the constituent entity owner in proportion to its ownership interest.
It is only available where the constituent entity owner is subject to tax on a fair value accounting method on its interest in the investment entity (such as under a mark-to-market accounting policy) and the tax rate levied on the income for the owner is at least 15%.
A QDMTT must reflect this treatment and treat an Investment Entity (or Insurance Investment Entity) as a Tax Transparent Entity when an Election under Article 7.5 was made by the MNE Group.
(Note, if a jurisdiction opts not to impose a QDMTT on these Investment Entities, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).
The taxable distribution method election is an election available for investment entities and is an alternative to making a tax transparency election.
This is available where the constituent entity owner can be reasonably expected to be subject to tax on distributions at a rate of 15% or above.
As with the tax transparency election, the purpose of this is to reflect domestic tax treatment that preserves tax neutrality for investment entities and investment funds.
Rather than the investor being taxed directly on the fund income (as under a tax transparency regime) the investor is taxed on a deductible dividend paid by the investment fund or investment entity.
A QDMTT must include a provision similar to the taxable distribution method election. The QDMTT will then take into account the distributions of the Investment Entity or Insurance Investment Entity to compute the GloBE Income or Loss of Constituent Entity-owners located in the jurisdiction and impose a Top-up Tax on the Investment Entity or Insurance Investment Entity in respect of any Undistributed Net Income.
(Note, if a jurisdiction opts not to impose a QDMTT on these Investment Entities, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).
A jurisdiction will need a rule similar to Article 6.5.1 to ensure that same ETR and Top-up Tax computational rules apply to Constituent Entities of Multi-Parented MNE Groups located in the jurisdiction as they apply under the GloBE Rules.
A QDMTT should include the agreed GloBE safe harbours including the transitional safe harbours.
The transitional rules for deferred tax must be included in the QDMTT. For GloBE purposes, these rules apply to the year the MNE Group is first subject to the GloBE rules.
However, the Fiscal Year for which the MNE Group is first subject to the GloBE Rules can be different from the Fiscal Year for which the MNE Group is first subject to a QDMTT.
The Second Set of OECD Administrative Guidance provides that jursidictions should apply either a first-in-time rule or a refreshing rule.
Under a first-in-time rule, the Transition Year would be determined based on the first set of rules (GloBE Rules or QDMTT) that the MNE Group becomes subject to in the jurisdiction. Under a refreshing rule, the QDMTT could provide for a new Transition Year when the GloBE Rules come into effect for the jurisdiction in a subsequent year. Another approach could be to refresh the Transition Year irrespective of which set of rules comes into effect last.
When a new Transition Year is required because the GloBE Rules come into effect for Constituent Entities in the jurisdiction, certain tax attributes that arose under the QDMTT will need to be eliminated or re-stated to ensure coordination in and after the transition year, including:
– DTL Recapture. The Constituent Entities will not be required to recapture any deferred tax liabilities that were taken into account in the ETR computations prior to the new Transition Year.
– GloBE Loss Election. Any GloBE Loss Deferred Tax Asset that arose in a year preceding the Transition Year must be eliminated. The Filing Constituent Entity may make a new GloBE Loss election in the new Transition Year.
– Excess Negative Tax Expense Carry-forward. Any Excess Negative Tax Expense Carry-forward amount must be eliminated at the beginning of the new Transition Year.
Art. 9.1.3 of the GloBE rules provides a limitation on intragroup asset transfers occurring after 30 November 2021 and before the commencement of a Transition Year by requiring the transferred assets to be recorded at their historic carrying value for GloBE purposes. A QDMTT must have a provision similar to Article 9.1.3 that applies to the acquiring Constituent Entity where the disposing Constituent Entity was neither subject to the GloBE Rules nor a QDMTT.
The transitional rules for the substance-based income exclusion do not need to be included in a QDMTT.
The UTPR exclusion for MNEs in their initial phase of international activity does not need to be included in a QDMTT, however, it can be included. The Second Set of OECD Administrative Guidance provides jurisdictions with three options regarding the temporary UTPR exclusion in their QDMTT legislation.
Option one allows the jurisdiction not to adopt it.
Option two allows the jurisdiction to adopt it but limits it to cases where no Parent Entity is required to apply a Qualified Income Inclusion Rule with respect to Constituent Entities of an MNE Group located in the QDMTT jurisdiction.
Option three allows the jurisdiction to adopt it without any limitations. (Note, if a jurisdiction opts for Option three, for the purposes of the QDMTT Safe Harbour the Switch-Over Rule would apply).
The extended filing deadline for the first GloBE income return does not need to apply to a QDMTT.
The Second Set of OECD Administrative Guidance provides some specific rules relating to the currency to be used for calculating the QDMTT.
The general rule is that where the QDMTT requires a local accounting standard and all the Constituent Entities in the jurisdiction use the local currency as their functional currency, the QDMTT should require the relevant computations in the local currency.
However, if not all Constituent Entities in the jurisdiction use the local currency as their functional currency, the the Filing Constituent Entity may make a Five-Year Election to undertake the QDMTT computations for all Constituent Entities in the jurisdiction either:
– in the presentation currency of the Consolidated Financial Statements; or
– in the local currency.
If the QDMTT liability is determined in the presentation currency, it can then be translated into the local currency for purposes of payment.
The Second Set of OECD Administrative Guidance includes a QDMTT Safe Harbour.
The QDMTT Safe Harbour excludes the application of the GloBE Rules in other jurisdictions by deeming the Top-up Tax payable under the GloBE Rules to be nil where top-up tax is levied under a QDMTT. The MNE Group therefore only needs to undertake one calculation.
The QDMTT Safe Harbour is subject to some additional specific requirements, however, in general in order to qualify for the Safe Harbour, the tax would need to meet the above requirements to be a QDMTT first.
Consistency Standard
The Consistency Standard requires the QDMTT computations to be the same as the computations required under the GloBE Rules except where the Commentary to the QDMTT definition explicitly requires a QDMTT to depart from the GloBE Rules or where the Inclusive Framework decides that an optional variation that departs from the GloBE Rules still meets the standard.
There are various cases noted above where the Consistency Standard would not be met by the design features of a QDMTT.
There is also a ‘Switch-Off Rule’ that prevents an MNE Group from applying the safe harbour to all or some Constituent Entities located or created in the QDMTT jurisdiction and requires the MNE Group to switch to the general credit method for the offset of the QDMTT. This can also be triggered by the specific design features of the QDMTT.
Accounting Standards
One significant deviation is that the GloBE Rules generally require the MNE Group to base its GloBE calculations on the accounts used for preparing the Consolidated Financial Statements of the UPE for purposes of computing the GloBE Income or Loss of each Constituent Entity.
However, the definition of a QDMTT under the Model Rules expressly permits the calculations to be based on a Local Financial Accounting Standard.
The use of a Local Financial Accounting Standard is restricted for the purposes of the QDMTT Safe Harbour. In particular the Local Financial Accounting Standard of the QDMTT jurisdiction can only be used where all of the Constituent Entities located in that jurisdiction have financial accounts based on that standard and:
– are required to keep or use such accounts under a domestic corporate or tax law; or
– such financial accounts are subject to an external financial audit
If this requirement wasn’t met the domestic minimum tax may still be a QDMTT but the QDMTT safe harbour would not apply.
The Fourth Set of OECD Administrative Guidance (issued on June 17, 2024) includes guidance on the treatment of Securitization Entities.
It notes that SPVs used in securitisation transactions are generally structured so that any surplus cash recognised by the SPV will be paid to the originator (essentially the creator of the securitization transaction) so that the SPV would not make more than a negligible profit from the arrangement. As such the SPV would not be expected to give rise to significant GloBE top-up tax even if that negligible profit was untaxed.
However, fair value movements, for example in relation to hedging arrangements, can give rise to significant profits or losses in a given Fiscal Year.
In addition, many securitization SPVs do not recognise deferred tax. This can be because the SPV is exempt from Corporate Income Tax or because the hedged profits and losses are excluded from the tax base and the SPV is only subject to Corporate Income Tax on the negligible profit it has made in the Fiscal Year. Where deferred tax is not recognised, there will not be an amount in the Adjusted Covered Taxes to offset the impact of the GloBE Income or Loss attributable to the hedge. This could lead to a top-up tax in relation to the Fiscal Years where fair value profits arise from the hedge, even though the SPV will not recognise more than a negligible profit from the overall transaction.
If a top-up tax liability was imposed on the SPV this could impact the solvency of the SPV and lead credit rating agencies to downgrade its credit rating, which could affect the viability of the securitisation transactions.
New Guidance
As such, the OECD has issued new guidance to target these issues.
Jurisdictions implementing QDMTTs may exclude a Securitisation Entity from its scope (such that the Securitisation Entity is not treated as a Constituent Entity for the purposes of that QDMTT).
Where it does apply a QDMTT to securitization entities, the QDMTT is not required to impose top-up tax liabilities on SPVs used in securitisation transactions and any QDMTT liability in respect of a Securitisation Entity should generally be imposed on other Constituent Entities located in the jurisdiction.
For the purposes of the QDMTT safe harbour, the Switch-off rule will be amended so that QDMTTs that impose the top-up tax liability computed for a Securitisation Entity on other Constituent Entities located in the jurisdiction or that exclude Securitisation Entities from the scope of the tax would both still meet the Consistency Standard.
For the purposes of the UTPR, under the existing guidance jurisdictions may exclude Securitisation Entities from liability to top-up taxes under the UTPR.
In the unlikely scenario where the UTPR jurisdiction would be allocated UTPR Top-up Tax in a year when a Securitisation Entity is the only Constituent Entity located in the jurisdiction, this jurisdiction would be excluded from the UTPR allocation mechanism in subsequent Fiscal Years if the top-up tax remains uncollected.
As a Securitisation Entity would not be expected to be a Parent Entity within a MNE Group, it would not in practice be liable to a top-up tax charge under the IIR.
New definitions
The guidance includes new definitions to provide for the QDMTT changes:
A “Securitisation Entity” is defined as an Entity which is a participant in a Securitisation Arrangement, and which satisfies all of the following conditions:
An Entity is not treated as a Securitisation Entity unless any profit referred to in paragraph 148.2(c)(i) above for a given Fiscal Year is negligible relative to the revenues of the Entity.
A Securitisation Arrangement is defined as an arrangement which satisfies the following conditions:
Further guidance
The OECD is to issuing further Administrative Guidance to ensure that the use of securitisation transactions (and arrangements of the kind entered into by SPVs that give rise to fair value movements) do not result in MNE Groups paying top-up taxes that are not commensurate with the economic profit that the SPV has made from the activities.
This will include considering whether a Securitisation Entity should be treated as being deconsolidated from the MNE Group for the purposes of the GloBE Rules and whether these issues could be addressed by making an adjusted realisation basis election available in relation to the profits of SPVs. Further consideration will also be given to the treatment of any distributions received by the originator or any Constituent Entities in the MNE Group from the SPV.
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