Article 3.2.3 of the OECD Model Rules applies an arms-length requirement for transactions between constituent entities in different jurisdictions. This should generally apply in any case due to transfer pricing policies under domestic tax laws.
Although these transactions may be eliminated in the consolidated financial accounts, given the Pillar Two GloBE income or loss is based on the entity’s financial accounts they would need to be considered.
If the financial accounts agree to an arms-length basis no adjustment would need to be made unless for tax purposes a different value is used to apply the arms-length basis.
Note that this only applies to the value of intra-group transactions, not the timing of intra-group transactions. Therefore, no adjustment is required to adjust the timing of an item in the financial accounts to the timing under domestic tax law.
The arms-length basis doesn’t generally apply to transactions between group entities in the same jurisdiction, as the jurisdictional blending rules will generally eliminate them anyway. For more information on jurisdictional blending, see ETR calculation and top-up tax.
There are two exceptions to this:
1. a transfer of an asset between group entities in the same jurisdiction that gives rise to a loss that is included in the Pillar Two GloBE income or loss. In this case the arms-length basis needs to be applied otherwise an MNE could artificially manufacture losses.
2. Transactions between a minority-owned constituent entity or investment entity and other constituent entities aren’t subject to the standard jurisdictional blending and their ETR is calculated on a standalone basis. As such the transactions wouldn’t be eliminated in the jurisdictional blending calculation. Therefore, an arms-length requirement applies to these transactions. For more information, see minority-owned entities.
MNECo1 is located in Country A, which has a corporate income tax rate of 20%.
MNECo2 is located in Country B, which has a 0% rate of corporate income tax.
MNECo1 and MNECo2 are both wholly owned by UPE, and this is an MNE group within the scope of Pillar Two.
MNECo2 provided group marketing services to MNECo1. The financial accounts of both MNECo1 and MNECo2 reflect expenses and income of 5,000,000 euros.
However, for tax purposes, MNECo1 deducts 7,500,000 euros.
In this case, 2,500,000 euros is effectively not subject to tax in Country A and is not subject to top-up tax in Country B.
As such, to apply the arms-length requirement MNECo1 is required to add back 2,500,000 euros of its expense for the Pillar Two GloBE income calculation, and MNECo2 is required to reflect additional income of 2,500,000 euros in its Pillar Two GloBE income calculation.
Adjustments can also apply when there is a unilateral transfer pricing adjustment.
For instance, if in the above example MNECo1 had deducted an expense of 3,000,000 euros for tax purposes as a result of a unilateral transfer pricing adjustment, this would increase taxable income subject to corporate income tax by 2,000,000 euros in MNECo1, but that 2,000,000 of income is also subject to top-up tax in MNECo2.
Therefore, MNECo1 is required to reduce its expense in the calculation of Pillar Two GloBE income by 2,000,000 euros and MNECo2 is required to reduce its Pillar Two GloBE income by 2,000,000 euros.
Note that if the result of an adjustment to the arms-length basis would result in double taxation or non-taxation, then no adjustment is made.
For instance, if in the example above MNEco2 reflected income of 4,000,000 euros for tax purposes and the corporate income tax rate was 10%, no adjustment would be required.
Although the deduction in MNECo1 is 5,000,000 euros, this is included in Pillar Two GloBE income and is subject to top-up tax in MNECo2. Therefore, no adjustment is permitted.
On December 23, 2024, Australia issued the Taxation (Multinational—Global and Domestic Minimum Tax) Rules 2024 (the ‘Rules’) to provide for the detailed application of the Pillar 2 GloBE rules in Australia.
On January 15, 2025, the OECD issued Administrative Guidance that includes a list of jurisdictions that have transitional qualified status for the purposes of the income inclusion rule and domestic minimum tax (including the QDMTT Safe Harbour).
On January 15, 2025, the OECD issued an updated GloBE Information Return (GIR) and GIR XML Schema. In this article we look at the changes to the previous GIR.
On January 3, 2025 the Law on Global Minimum Corporate Income Tax was published in the Official Gazette to implement the EU Global Minimum Tax Directive.
On January 15, 2025, the OECD issued a list of jurisdictions that have transitional qualified status, further Administrative Guidance on the application of the Article 9.1 transitional rules, and an updated GloBE Information Return and GIR XML Schema, as well as the GIR MCAA.
On December 31, 2024, Law No. 20612, was published to amend the International Tax Adjustment Act for the 2025 Tax Reform provisions. This includes some amendments to the Global Minimum Tax provisions.
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 deferred taxation.
The Ministerial Decree of December 27, 2024 published in the Official Gazette on December 31, 2024 provides for a number of miscellaneous, but important aspects of the OECD Administrative Guidance that were not included in the original Minimum Tax Law.
The Dutch Minimum Tax Executive Decree 2024 was published in the Government Gazette on December 23, 2024 to implement various aspects of the OECD Administrative Guidance.
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