OECD Sets Out GILTI Tax Allocation Formula Under GLOBE Rules

  • By:Melissa Speigner

The OECD has published administrative guidance to address several issues arising under a new global minimum tax framework, including the treatment of the U.S. global intangible low-taxed income regime under the rules.

The February 2 guidance responds to 27 concerns about the framework from countries involved in developing a two-pillar plan to modernize the global corporate tax system for the 21st century. All but four of the 142 member jurisdictions of the inclusive framework on base erosion and profit shifting have agreed to implement the plan, which follows up on action 1 of the BEPS project.

Pillar 2 would ensure that large multinational enterprises pay a minimum level of corporation tax in all jurisdictions in which they operate, primarily through the global anti-base erosion (GLOBE) rules. The main features of the GLOBE rules are the IIR and the UTPR, formerly known as the income inclusion rule and undertaxed payments rule, although some countries call the latter the undertaxed profits rule.

The GLOBE rules establish a system of top-up taxes that are calculated and applied on a jurisdictional basis. Under the regime, an in-scope MNE must pay a top-up tax to bring its effective tax rate on the income in those jurisdictions up to 15 percent, after accounting for a substance-based carveout.

The IIR takes priority over the UTPR and charges the top-up tax attributed to an entity using a top-down approach, applying to the ultimate parent entity if it is based in a jurisdiction that has adopted an IIR, then applying down the ownership chain. But if a jurisdiction has adopted a qualified domestic minimum tax, then that takes priority over the IIR.

The OECD published model GLOBE rules in December 2021 and related commentary in March 2022. The GILTI regime had inspired the IIR’s design, but needed reforms to be a compliant, or qualified, IIR. The Biden administration had tried and failed to pass those reforms in the Build Back Better Act (H.R. 5376) which had called for applying GILTI rules on a jurisdictional, rather than worldwide, basis. As a result, stakeholders were left uncertain how the GILTI regime would co-exist with the new rules.

The administrative guidance confirms that all countries adopting the GLOBE rules would treat the GILTI system as a “blended controlled foreign corporation tax regime.” As a result, in-scope U.S. MNEs would have to account for their worldwide GILTI taxes when calculating their effective tax rates in the jurisdictions where they have operations but would need a method to allocate those taxes to individual jurisdictions.

To that end, the administrative guidance provides a mechanical allocation formula, which is a major achievement in coordinating the GLOBE system with the GILTI regime, according to U.S Treasury officials. The approach will cut compliance costs and disputes while also mitigating double taxation risks, the officials added.

The guidance provides that the formulaic allocation key will apply for 2024 and 2025 and will be reassessed after that. The timing syncs with a scheduled GILTI tax rate increase at the end of 2025.

In addition to the treatment of GILTI taxes under the rules, the guidance clarifies that low-income housing and renewable energy tax credits, including those in the Inflation Reduction Act, will be protected for noncontrolled partnerships. It also sets out the hallmarks of a qualified domestic minimum top-up tax, if countries decide to pursue one.

The OECD plans to publish a revised commentary document later in 2023 containing the administrative guidance, replacing the March 2022 commentary.

Source: Tax Notes

Posted in: International Taxation