16 January 2024 - International tax regulations bring an array of new definitions that become a must-know and must-handle for Multinational Enterprise (MNE) groups as they grapple with enhanced governance and compliance requirements. As of 1 January 2024, the OECD’s so-called Pillar 2 minimum taxation project will be implemented in a substantial number of jurisdictions for MNEs that meet the minimum requirement of a consolidated revenue threshold of €750m per annum.
On 17 July 2023, the OECD released a standard template for the Global Anti-Base Erosion Information Return (GIR). The GIR document includes the information considered necessary for tax authorities to perform a risk assessment and to evaluate the correctness of a Constituent Entity's Top-up Tax (TuT) liability under the Global Anti-Base Erosion (GloBE) Rules, with the aim of ensuring that multinational companies pay a minimum level of tax, using the TuT as the tool to achieve this objective.
An entity is considered a constituent one when it is part of an MNE group as a separate legal entity or branch that is included within the MNE group's consolidated financial statements.
The TuT is generally applicable when a Constituent Entity of a multinational company is subject to a lower Effective Tax Rate (ETR) than 15%. This can occur when income is subject to low or no taxation in a particular jurisdiction due to preferential tax regimes, tax incentives, or other tax planning arrangements.
The specific rules and mechanisms for calculating and allocating the TuT liability vary by jurisdiction. However, some common features may include:
- Calculation of TuT: Jurisdictions may determine the TuT liability by comparing the ETR of the Constituent Entity with the minimum tax rate set under the GloBE Rules. The difference between the two rates may be subject to taxation.
- Reporting and Compliance: Constituent Entities are required to report their income, taxes paid, and other relevant information to tax authorities to determine their compliance with the GloBE Rules. This may involve additional reporting obligations beyond the regular tax filings.
- Payment and Penalties: If a Constituent Entity is found to have a tax liability under the TuT provisions, they are generally required to make the necessary tax payments. Failure to comply with the TuT obligations may result in penalties, interest, or other enforcement measures.
As such, it is important to understand the GIR and to highlight the compliance requirements that come with it.
The GIR document includes:
- A standard template for the GIR;
- An approach for dissemination of the GIR; and
- A transitional simplified jurisdictional reporting framework.
What sort of information is included in the standard template for the GIR and how is it set?
The GIR comprises three sections:
- MNE Group Information: In this section, the Filing Constituent Entity is identified, information for the MNE is added as well as details of the Reporting Fiscal Year and accounting standards used in the MNE Group. In addition, it requests identification of the jurisdictions with taxation rights1.
- Jurisdictional Safe Harbors: Safe harbors can be understood as provisions within tax regulations that offer predefined rules or thresholds to simplify tax compliance and provide certainty for taxpayers, designed to provide a level of predictability and reduce the burden of complex calculations or subjective judgments. Where safe harbors apply, only limited information would then be required. Such information is available in Financial Statements and within the Country by Country report.
- GloBE Computation: Where safe harbors do not apply, the MNE Group will have to provide ETR and TuT computations, including the GloBE Income adjustments, as well as the details of Adjusted Covered Taxes, and TuT allocations where required.
In other words, jurisdictional information of the company's operations will cover ownership structures; taxes paid in each jurisdiction (including corporate income tax and withholding tax); and other relevant taxes and business activities (including the products or services provided, the number of employees, and the physical assets employed in each jurisdiction).
An approach for dissemination of the GIR
In an effort to ensure only the relevant information in the GIR ends up with the right tax administration, the Inclusive Framework adopted the dissemination approach. Following this approach, the information in the GIR is categorized and made available (or not) to tax administrations.
- All implementing jurisdictions are provided with:
- General information relating to the identification of the MNE Group, including the Filing Constituent Entity, the Reporting Fiscal Year and details of the Consolidated Financial Statements of the UPE
- The corporate structure
- able detailing the ETR in all jurisdictions
- Table explaining if a QDMTT, IIR or QDMTT applies
- A jurisdiction with taxing rights obtains information regarding:
- Computation of the ETR and (allocation of) TuT
- Applicable safe harbors and exceptions
- The jurisdiction of the UPE is provided with the whole GIR.
Transitional simplified jurisdictional reporting framework
The transitional period2 provides time for MNE groups to develop the accounting systems and/or processes that will facilitate information collection and reporting on a Constituent Entity by Constituent Entity basis for GloBE purposes.
Upon expiration of the transitional period, it is expected that in-scope MNE Groups should be in a position to complete the GIR. During this period, the MNE group can elect to provide information at a jurisdictional level, rather than on a Constituent Entity basis, if one of two conditions is met:
- No TuT liability arises in the jurisdiction; or
- TuT liability arises in the jurisdiction, but it does not need to be allocated on a Constituent Entity-by-Constituent Entity basis.
When does a GIR need to be lodged?
The GIR needs to be lodged up to 15 months after the last day of the reporting period.
What about payment times, amendments, penalties and sanctions?
Jurisdictions have broad flexibility to apply domestic rules for the administration of GIRs including payments, penalties and amendments. This may lead to a divergence of procedures which MNEs may need to manage on a case by case basis, adopting the necessary deadlines and obligations accordingly.
Are there additional compliance requirements?
It is important to note that the obligation to prepare a GIR is separate from the requirement to declare and pay taxes under a tax return. Therefore, each implementing jurisdiction will determine its tax return filing and payment procedures for GloBE. MNEs should have a clear understanding of what that means for them in each jurisdiction.
Another important note with regard to the filing of the GIR is that the tax payer can choose between:
- Filing the GIR in each jurisdiction: Under this approach and depending on the legislation in the jurisdiction, it may be possible for MNE to prepare and file separate GIRs for each jurisdiction in which they have a presence or conduct business and even appoint one entity in the jurisdiction that files the GIR on behalf of all domestic entities; or
- Filing one global GIR with either the Ultimate Parent Entity or a Designated Filing Entity: This approach means the MNE will prepare a consolidated GIR that will cover the MNE global operations and activities providing a comprehensive overview of the global allocation of income, taxes paid and other economic activities. This will allow for a streamlined and standardized approach to reporting.
An important requirement for one global filing is that a “Qualifying Competent Authority Agreement” must be in effect by the filing deadline to exchange the GloBE information with the jurisdiction of the Constituent Entities. If such an agreement is in place, the administration of the UPE or Designated Filing Entity will disseminate the return and forward the relevant sections to the other tax administrations through automatic exchange of information mechanisms.
With regard to the global filing, tax administrations around the world would have to be notified of the UPE / Designated Filer and the jurisdiction in which either is located (similar to the Country by Country notifications that apply in many jurisdictions).
The choice of whether to file in each jurisdiction or globally will depend on several factors, including the specific reporting requirements of each country, the complexity of the company's operations, and even the resources available for such a compliance task. Some jurisdictions may require separate filings, while others may accept and prefer a consolidated report.
It is therefore important for MNEs to carefully assess the regulations in each jurisdiction in which they have a presence and consult with tax professionals to determine the most appropriate approach for GIR filing to ensure compliance with the OECD Pillar 2 regulations.
MNEs should focus on the GIR being accurate and consistent as tax authorities may conduct audits or request additional details if discrepancies are identified.
1Jurisdictions where the MNE Group is not only subject to the GloBE Rules but is also required to apply the GloBE Rules in accordance with the rule order, i.e. Qualifying Domestic Minimum Top-Up Tax (QDMTT), Income Inclusion Rule (IIR) or UnderTaxed Profit Rule (UTPR). Where a QDMTT applies this would be the entity itself; where there is an Ultimate Parent Entity (UPE) and/or a Partially Owned Parent Entity (POPE) the IIR may apply.
2The Fiscal Years covered by this are those beginning on or before 31 December 2028, but not including a Fiscal Year that ends after 30 June 2030.