QDMTT and UTPR Safe Harbours

QDMTT Safe Harbour

1. A Qualified Domestic Minimum Top-up Tax (QDMTT) is a domestic minimum tax imposed by a jurisdiction on those Constituent Entities of an MNE Group that are resident, or constitute a permanent establishment in, that jurisdiction. The QDMTT operates as a Top-up Tax that is calculated in line with the jurisdictional ETR calculation under Chapter 5 of the GloBE Rules. Although some features of the QDMTT may vary from those provided for under the Model Rules the overall design and outcomes under the QDMTT must be consistent with those provided for under the GloBE rules.

2. The possibility of variations between the QDMTT and the GloBE Rules (such as the ability to apply a local financial accounting standard under a QDMTT) means that there may be particular fact patterns where the Top-up Tax imposed under the QDMTT is less than the amount that would have been due under the GloBE Rules. This possibility of an MNE Group paying less Top-up Tax under a QDMTT than it would have incurred under the GloBE Rules, does not, however, give rise to any integrity risks because the credit mechanism in Article 5.2 ensures that any shortfall in domestic Top-up Tax payable under the QDMTT will simply result in additional tax being payable under the GloBE Rules.

3. The application of the credit mechanism does require, however, at least two separate Top-up Tax calculations in respect of the same jurisdiction: the first calculation, based on the QDMTT legislation in the jurisdiction and further calculations based on the GloBE Rules (e.g. under the legislation of the UPE Jurisdiction). Inclusive Framework members have observed that the requirement to undertake separate Top-up Tax calculations in respect of the same Constituent Entities under parallel rules will result in increased compliance costs for MNE Groups and administrative burdens for tax authorities.

4. The QDMTT Safe Harbour is intended to provide a practical solution to address this issue. Where an MNE Group qualifies for a QDMTT Safe Harbour, Article 8.2 excludes the application of the GloBE Rules in other jurisdictions by deeming the Top-up Tax payable under the GloBE Rules to be zero. A QDMTT Safe Harbour will therefore allow the MNE Group to undertake one computation under the QDMTT and then rely on Article 8.2 of the Model Rules to automatically reduce the Top-up Tax to zero in a jurisdiction applying the GloBE Rules, thereby avoiding the need to undertake a further calculation under those rules. However, the fact that an MNE Group is not required to make the second calculation under the safe harbour may give rise to integrity risks because any potential shortfall in the domestic Top-up Tax payable under the QDMTT will not result in additional tax being payable under the GloBE Rules.

5. To address this risk, a QDMTT must meet an additional set of standards to qualify for the safe harbour. In particular, and given the ability of a QDMTT to depart from the design of the GloBE Rules, a QDMTT that qualifies for a safe harbour must meet following three standards:

a.) the QDMTT Accounting Standard which requires a QDMTT to be computed based on the UPE’s Financial Accounting Standard or a Local Financial Accounting Standard subject to certain conditions;

b.) the Consistency Standard which requires the QDMTT computations to be the same as the computations required under the GloBE Rules except where the Commentary to the QDMTT definition in Article 10.1 as modified by the Administrative Guidance (hereafter the QDMTT Commentary) 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; and

c.) the Administration Standard which requires the QDMTT jurisdiction to meet the requirements of an on-going monitoring process similar to the one applicable to jurisdictions implementing the GloBE Rules.

6. The Inclusive Framework will rely on the peer review process to determine whether a QDMTT meets these additional standards and thereby qualifies for the safe harbour. Qualification for the safe harbour may be determined at the same time the Inclusive Framework undertakes a review of the rules’ “qualified” status. These standards will be tested based on the jurisdiction’s QDMTT legislation and how it administers the QDMTT and not based on how the QDMTT legislation may apply to particular Groups. This ensures that the QDMTT Safe Harbour is simple to apply and maximizes taxpayer certainty.

7. These standards applicable to the safe harbour should not be confused with the requirements for qualified status for a QDMTT. The requirements for a minimum tax to be considered a QDMTT are set out in the QDMTT Commentary developed by the Inclusive Framework. The standards set out in this note are based on the premise that the minimum tax is already considered a QDMTT. Thus, the minimum tax has to be considered first a QDMTT and then tested under these standards to qualify for the safe harbour. For example, a minimum tax that takes into account the allocation of cross-border taxes, such that it is not in accordance with paragraphs 118.28 to 118.30 of the QDMTT Commentary is not considered a QDMTT, and therefore, cannot benefit from the QDMTT Safe Harbour. The standards set out in this note, however, do not prejudge whether particular elements of such standards should be required to obtain a QDMTT status. Where the Inclusive Framework determines that the same standard should be required for a minimum tax to be considered a QDMTT, then this would be reviewed as part of the first stage of the QDMTT peer review process that deals with the general QDMTT status rather than the second stage that determines whether such QDMTT obtains a safe harbour status.

UTPR Safe Harbour

1. The UTPR is designed to operate as a backstop to the IIR by encouraging jurisdictions to adopt the GloBE rules and MNEs to structure their group holdings in a way that brings their operations within the charge of the IIR. However, the operation of the rule order under GloBE rules means that the UTPR effectively operates as the primary mechanism for imposing top-up tax in the UPE jurisdiction where that jurisdiction has not introduced a Qualified Domestic Minimum Top-up Tax (QDMTT). MNE Groups that are exposed to the potential application of the UTPR in the UPE jurisdiction have limited ability to change their ownership structure to bring the UPE’s profits within the scope of an IIR. The UTPR can also be expected to apply with more frequency in the first years of operation of the GloBE Rules as jurisdictions complete the process of introducing qualified rules, including QDMTTs.

2. Applying the UTPR to the UPE Jurisdiction before jurisdictions have sufficient time to get their QDMTT in place is undesirable for several reasons. First, the Top-up Tax allocated to jurisdictions under the UTPR will often be disproportionate to the profit arising in those jurisdictions. Many MNE Groups will have a significant portion of their operations and profits in the UPE Jurisdiction and smaller operations in other jurisdictions. Second, there are more possibilities for disputes to arise under the UTPR because it relies on more information and a higher degree of co-ordination than the IIR. Implementation and coordination of the UTPR will benefit from a proven dispute prevention and resolution mechanism and possibly an advance certainty mechanism.

3. An MNE Group can avoid application of the UTPR in jurisdictions other than the UPE Jurisdiction by transferring ownership of those operations into a foreign holding company that is subject to a qualified IIR. However, as a practical matter, many MNEs will not be able to invert their holding structure to avoid application of the UTPR in the UPE Jurisdiction. The inability of the UPE to structure out of the UTPR means that low-taxed profits in the UPE Jurisdiction will be subject to the UTPR unless the UPE Jurisdiction makes changes to its existing corporate income tax or adopts a Domestic IIR or a QDMTT. This Transitional UTPR Safe Harbour therefore provides additional time for jurisdictions to assess the impact of the GloBE rules and reform their existing corporate income tax so that it will routinely produce GloBE ETRs at or above the Minimum Rate or to adopt a qualified domestic minimum tax such as a Domestic IIR or a QDMTT.

4. This Transitional UTPR Safe Harbour is designed to provide transitional relief in the UPE Jurisdiction during the first two years in which the GloBE rules come into effect. Under the Transitional UTPR Safe Harbour, the UTPR Top-up Tax Amount calculated for the UPE Jurisdiction shall be deemed to be zero for Fiscal Years which run no longer than 12 months that begin on or before 31 December 2025 and end before 31 December 2026.

5. The corporate income tax rate for each jurisdiction is the nominal statutory tax rate generally imposed on in-scope MNE Groups on a comprehensive measure of income. This rate may take into account sub-national taxes provided that such taxes are structured so that in the case of all sub-national jurisdictions, the combined rate generally applicable to in-scope MNE Groups will be equal to or greater than 20%. The nominal 20% rate test ensures that only MNE Groups whose UPEs are located in a jurisdiction with a corporate income tax system and sufficiently high corporate income tax rate benefit from this safe harbour. Each implementing jurisdiction may take into account the OECD’s Statutory Corporate Income Tax Rates table for the relevant Fiscal Year in making its determination as to which jurisdictions are eligible for the Transitional UTPR Safe Harbour. The Inclusive Framework shall provide, upon request, further Administrative Guidance identifying whether a jurisdiction has met the 20% rate test for the relevant Fiscal Year.

6. The short transition period is designed to ensure that the safe harbour does not serve as a disincentive for jurisdictions to adopt the GloBE Rules or as an incentive for MNE Groups to invert into a jurisdiction that has not yet adopted a QDMTT or to shift profits into UPE jurisdictions that have lower effective tax rates. Accordingly, the transition period cannot be extended.

7. An MNE Group that qualifies for more than one transitional safe harbour may choose which safe harbour to apply for that jurisdiction. When an MNE qualifies for both a transitional CbCR and UTPR safe harbour in a jurisdiction in a Fiscal Year, the MNE may elect to apply the Transitional CbCR Safe Harbour, rather than the UTPR safe harbour, in order to avoid losing the benefit of the Transitional CbCR Safe Harbour in a subsequent Fiscal Year under the “once out, always out” approach.

1. A QDMTT complies with the requirements of the QDMTT Safe Harbour if it meets the QDMTT Accounting Standard, the Consistency Standard, and the Administration Standard.

2. A QDMTT meets the QDMTT Accounting Standard if the QDMTT legislation adopts one of the following:

(a) provisions that are equivalent to Articles 3.1.2 and 3.1.3 of the GloBE Model Rules; or

(b) the Local Financial Accounting Standard Rule.

3. Under the Local Financial Accounting Standard Rule:

(a) the QDMTT shall be computed based on the Local Financial Accounting Standard of the QDMTT jurisdiction where all of the Constituent Entities located in that jurisdiction have financial accounts based on that standard and:

i. are required to keep or use such accounts under a domestic corporate or tax law; or ii. such financial accounts are subject to an external financial audit;

(b) the Local Financial Accounting Standard is a financial accounting standard permitted or required in the QDMTT jurisdiction by the Authorised Accounting Body or pursuant to the relevant domestic legislation that is an:

i. Acceptable Financial Accounting Standard; or

ii. Authorised Financial Accounting Standard adjusted to prevent Material Competitive Distortions; and

(c) in case where not all Constituent Entities located in the jurisdiction meet the requirements of subparagraph (a) or the Fiscal Year of such accounts is different to the Fiscal Year of the Consolidated Financial Statements of the MNE Group, the QDMTT shall be computed based on the provisions that are equivalent to Articles 3.1.2 and 3.1.3 of the GloBE Model Rules.

4. A QDMTT meets the Consistency Standard if the computations under the QDMTT are the same as the computations required under the GloBE Rules, except where the QDMTT Commentary explicitly requires the QDMTT to depart from the GloBE Rules. The Consistency Standard is met notwithstanding that the QDMTT:

(a) does not include or has a more limited Substance-based Income Exclusion;

(b) does not include or has a more limited De Minimis Exclusion; or

(c) has a minimum tax rate above 15% for purposes of applying the Top-up Tax Percentage to the Profits or Excess Profits for the jurisdiction.

5. A QDMTT meets the Administration Standard if it meets the requirements provided under the ongoing monitoring process applicable to the GloBE Rules.

1. The UTPR Top-up Tax Amount calculated for the UPE Jurisdiction shall be deemed to be zero for each Fiscal Year during the Transition Period if the UPE Jurisdiction has a corporate income tax that applies at a rate of at least 20%.

2. Transition Period means the Fiscal Years which run no longer than 12 months that begin on or before 31 December 2025 and end before 31 December 2026.

Operation of the QDMTT Safe Harbour

8. Article 8.2.1 of the GloBE Rules states that, at the election of the Filing Constituent Entity, the Topup Tax for a jurisdiction shall be deemed to be zero where the Constituent Entities located in this jurisdiction, or otherwise subject to that jurisdiction’s QDMTT, are eligible for a GloBE Safe Harbour. The Inclusive Framework has agreed to provide for a GloBE Safe Harbour with respect to jurisdictions that have implemented a QDMTT that meets the standards described in paragraphs 1 to 5 in the box below. Whether a QDMTT meets these standards would be determined by the Inclusive Framework as part of the peer review process of the QDMTT.

9. Jurisdictions implementing the GloBE Rules (i.e. GloBE jurisdictions) shall include mechanisms in their law that reduces another jurisdiction’s Top-up Tax to zero where the QDMTT of that jurisdiction (i.e. QDMTT jurisdiction) meets the standards described in the box below. The way in which the QDMTT Safe Harbour is legislated or introduced in the GloBE jurisdiction depends on the legal structure of the GloBE jurisdiction. GloBE jurisdictions must recognize the decision taken by the Inclusive Framework, as part of the peer review process, on whether a QDMTT meets the requirements of the QDMTT Safe Harbour.

10. The QDMTT Safe Harbour operates by allowing an MNE Group to make an election to apply the QDMTT Safe Harbour for each subgroup or standalone Entity subject to a separate QDMTT calculation. For example, three Constituent Entities of the main group, two members of the same JV Group, and one Investment Entity subject to Article 7.4 of the GloBE Rules are located in a jurisdiction with a QDMTT that meets the standards of the safe harbour. In this case, the Filing Constituent Entity would need to make a separate election for the three Constituent Entities, the two members of the JV Group, and for the Investment Entity.

11. A Filing Constituent Entity can only elect to apply the QDMTT Safe Harbour where the Top-up Tax computed under the QDMTT would be treated as “Qualified Domestic Minimum Top-up Tax payable” under Article 5.2.3 if the safe harbour did not apply. Therefore, an MNE Group cannot elect to apply the safe harbour if its liability under a QDMTT is subject to a challenge or deemed not assessable as described in paragraph 20.1 of the Commentary to Article 5.2.3. Such an MNE Group cannot elect to apply the QDMTT Safe Harbour for that jurisdiction irrespective of whether such QDMTT meets the standards set out below.

12. Paragraph 20.1 of the Commentary to Article 5.2.3 provides guidance on the meaning of the term “Qualified Domestic Minimum Top-up Tax payable” and identifies cases in which an amount of the QDMTT is not payable. If an amount of QDMTT is not payable because it is subject to a challenge or deemed not assessable in accordance with paragraph 20.1, then the MNE Group cannot apply the QDMTT Safe Harbour for that jurisdiction. For instance, a QDMTT jurisdiction may be prevented or restricted from imposing some or all of the Top-up Tax computed under the QDMTT in the circumstances described in paragraph 20.1. Although this does not affect the ability of the jurisdiction’s QDMTT to satisfy the Consistency Standard, in these cases, the QDMTT Safe Harbour election that relates to such Entities is not available for the MNE Group because the QDMTT is not a “Qualified Domestic Minimum Top-up Tax payable” with respect to such Entities.

13. In some cases, the QDMTT of a jurisdiction will meet the standards set out below but the MNE Group will not be able to apply the safe harbour with respect to the QDMTT of that jurisdiction because such QDMTT might be subject to the Switch-off Rule. The section of this document on Consistency Standards explains in detail the operation of the Switch-off Rule.

The QDMTT Accounting Standard

14. 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 (UPE’s Financial Accounting Standard). The definition of a QDMTT under the Model Rules expressly permits, however, that the calculations may be based on a Local Financial Accounting Standard. While recognizing that the option of using a Local Financial Accounting Standard is available for purposes of the QDMTT, Inclusive Framework members have noted that this creates an additional administrative burden for MNE Groups if they were required to apply the QDMTT based on the local standard in cases in which they do not prepare accounts based on such standards.

15. In these cases, requiring the use of a local accounting standard has the potential to undermine the main objective of the QDMTT Safe Harbour which is to reduce the administrative burden of MNE Groups. It also creates an integrity risk because if the accounts are prepared solely for purposes of computing the income or loss under the QDMTT, such accounts may not be consistent with the accounting standards applied by the MNE Group as a whole and may not be subject to an external audit.

16. To address this concern, the QDMTT Accounting Standard limits the application of the Local Financial Accounting Standard by replicating the requirement of Articles 3.1.2 and 3.1.3 of the GloBE Rules. This means that the QDMTT calculations would need to be based on the accounts and the financial accounting standard used for purposes of the Consolidated Financial Statements of the UPE, except where it is not reasonably practicable to use such accounts.

17. However, the QDMTT Accounting Standard allows for a variation for jurisdictions that want to introduce a QDMTT computed in accordance with a Local Financial Accounting Standard. In accordance with paragraph 2(b) of the box above, a QDMTT jurisdiction can substitute Articles 3.1.2 and 3.1.3 for a special provision referred as the Local Financial Accounting Standard Rule.

18. The Local Financial Accounting Standard Rule is described in paragraph 3 of the box above. This rule requires the QDMTT computations to be based on the Local Financial Accounting Standard of the QDMTT jurisdiction where all the Constituent Entities located in that QDMTT jurisdiction are already preparing financial accounts based on the local standard. This condition is also met by a Constituent Entity if that Constituent Entity’s financial accounting net income or loss is included in a consolidated financial statement based on the local standard and has been prepared by another entity in the MNE Group. This prevents a QDMTT jurisdiction from requiring the use of the Local Financial Accounting Standard where the MNE Group does not prepare financial accounts based on that standard. The objective of this restriction is to avoid increasing the compliance costs of MNE Groups by requiring them to create local accounts solely for purposes of the QDMTT. Therefore, the QDMTT jurisdiction must require the QDMTT to be computed based on the financial accounting standards required under provisions equivalent to Articles 3.1.2 and 3.1.3 of the GloBE Rules where the Constituent Entities do not prepare financial accounts based on the Local Financial Accounting Standard.

19. The QDMTT jurisdiction’s legislation must only allow the use of the Local Financial Accounting Standard where all the Constituent Entities in the MNE Group located in the QDMTT Jurisdiction meet the requirements of paragraph 3(a). This requirement is applied separately for JV Groups (which includes a standalone Joint Venture). Accordingly, the JV Group can itself satisfy the requirements of paragraph 3(a) and therefore be subject to the Local Financial Accounting Standard. For example, if all the Constituent Entities of an MNE Group located in the jurisdiction meet the requirements of paragraph 3(a) but the MNE Group holds an interest in a JV Group in the same jurisdiction which is subject to a different accounting standard, the Local Financial Accounting Standard can be used to calculate the QDMTT for the Constituent Entities of the MNE Group but equivalent provisions to Articles 3.1.2 and 3.1.3 will apply to the JV Group. Where the conditions of paragraph 3(a) are not met with respect to all the Constituent Entities of the MNE Group, or the members of the JV Group, the legislation must require the QDMTT to be computed based on provisions equivalent to Articles 3.1.2 and 3.1.3.

20. In the case of Constituent Entities that are Permanent Establishments, a QDMTT jurisdiction can apply the Local Financial Accounting Standard Rule only where the nonresident prepares separate financial accounts based on the local standard for a Permanent Establishment located in that jurisdiction. This condition is still met where the nonresident produces the relevant financial accounting information based on the local standard for local tax purposes and not a complete set of separate financial accounting statements, provided that the information needed for GloBE is available. This is consistent with paragraphs 186 and 189 of the Commentary to Article 3.4 that states that the starting point to compute the Financial Accounting Net Income or Loss of a Permanent Establishment is its financial accounts (if they exist) prepared for tax or management purposes. As part of the future work on the allocation of Financial Accounting Net Income or Loss between Main Entities and Permanent Establishments, the Inclusive Framework will consider the case where the source jurisdiction has a QDMTT that applies the Local Financial Accounting Standard Rule in order to determine whether a special allocation rule is needed.

21. In some cases, the Fiscal Year of the local accounts can be different to the one of the Consolidated Financial Statements which could create a mismatch between the QDMTT computations and the computations that would have been required under GloBE. In these situations, the QDMTT jurisdiction must require the use of the UPE’s Financial Accounting Standard to ensure consistency between the GloBE Rules and the QDMTT.

22. Where a QDMTT jurisdiction adopts the Local Financial Accounting Standard Rule, it shall require the MNE to apply the standard consistently which means that it must require the use of the Local Financial Accounting Standard where the conditions are met. The QDMTT legislation must not give the option to MNE Groups to choose which standard to use. This addresses the risk of tax planning where an MNE Group can choose which Financial Accounting Standard provides a better outcome under the QDMTT.

23. In order to meet the requirements of the Safe Harbour, the Local Financial Accounting Standard must be either an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard as defined by the GloBE Rules. In the case of local accounts based on an Authorised Financial Accounting Standard, these must be adjusted to prevent Material Competitive Distortions in accordance with Agreed Administrative Guidance to be developed by the Inclusive Framework.

24. The definition of Local Financial Accounting Standard of paragraph 3(b) above includes any financial accounting standard that meets the terms of that paragraph. Therefore, a QDMTT jurisdiction can have more than one Local Financial Accounting Standard where it is permitted or required in the QDMTT jurisdiction by the Authorised Accounting Body or pursuant to the relevant domestic legislation. For example, the domestic law of a QDMTT jurisdiction may require Entities to prepare separate financial statements based on local GAAP and have accounts used in the preparation of Consolidated Financial Statements in accordance with IFRS for Entities of large MNE Groups or MNE Groups whose ownership interests are traded in a stock exchange. In this situation, in addition to local GAAP, IFRS is considered as a Local Financial Accounting Standard in accordance with paragraph 3(b) of the box above. Where an Entity is required to keep or use such accounts under a domestic corporate or tax law but has the choice between multiple Local Financial Accounting Standards, paragraph 3(a)(i) will be satisfied.

25. Where the Constituent Entities located in the jurisdiction prepare financial accounts using more than one financial accounting standard, the QDMTT jurisdiction should determine in its QDMTT legislation which accounts and financial accounting standards should be used for purposes of the QDMTT computations without giving the optionality to the MNE Group (that is, the QDMTT jurisdiction must provide a tie-breaker rule to determine which financial accounting standard must be used for the purposes of applying the QDMTT).

26. While this guidance does not include any adjustments for differences between the Constituent Entities’ Financial Accounting Net Income or Loss as determined under the Local Financial Accounting Standard and as calculated under the UPE’s Financial Accounting Standard, the Inclusive Framework will consider providing further guidance on asymmetrical treatment of items of income, expense or transactions between different accounting standards and tax rules including those used with respect to the transitional and permanent GloBE Safe Harbours.

Consistency Standard

27. In accordance with the QDMTT Commentary a domestic minimum top-up tax is considered as a QDMTT when it is computed in accordance with the Model Rules and Commentary and produces the same outcomes as those under the GloBE Rules. However, the Commentary goes on to allow or require some degree of customization to the QDMTT provided that any variation between QDMTT and the GloBE Rules produces equivalent or greater tax liabilities, or does not produce lower tax liabilities on a systematic basis. This ability of a jurisdiction to customize a QDMTT means that a QDMTT might not be fully aligned with the GloBE Rules.

28. The objective of the Consistency Standard is to ensure QDMTTs are only eligible for the safe harbour when they are aligned with the GloBE Rules, except as explicitly allowed under the safe harbour. This ensures that the QDMTT Safe Harbour does not undermine the objective of the GloBE Rules to require a minimum level of taxation in each jurisdiction by reference to a common measure.

29. As a general principle, in order for a QDMTT to be eligible for the safe harbour, it must first meet the conditions to be a QDMTT and must comply with the elements of the QDMTT Commentary which require the QDMTT to adhere to the Model Rules and Commentary for the IIR and UTPR.6 The fact that a QDMTT is subject to a challenge or deemed not assessable as described in paragraph 20.1 of the Commentary to Article 5.2.3 does not affect the Consistency Standard. However, in some cases, the QDMTT Commentary either requires or allows for certain variations from the GloBE Rules. As described in the following paragraphs, these variations can be classified into Mandatory variations and Optional variations, and their treatment under the Consistency Standard depends on the type of variation.

Mandatory variations

30. In some cases, the QDMTT Commentary explicitly requires the QDMTT to depart from the GloBE Rules and requires a different rule (e.g. different computations). These variations need to be included in the design of the domestic minimum top-up tax to be considered a QDMTT in the general peer review process.

31. The QDMTT Commentary currently identifies two mandatory variations. The first variation is included in paragraphs 118.28 to 118.30 of the QDMTT Commentary and requires the QDMTT not to take into account the allocation of cross-border taxes, such as CFC taxes incurred by a Parent Entity or taxes incurred by the Main Entity with respect to profits attributable to a PE. The second variation is included in paragraph 118.54 of the QDMTT Commentary and requires the QDMTT to be computed using local currency where the QDMTT is based on financial statements prepared in accordance with the Local Financial Accounting Standard and the local financial statements of all Constituent Entities in that jurisdiction are using the local currency.

32. Given that these variations are a pre-requisite for a domestic minimum top-up tax to be considered a QDMTT, the Consistency Standard equally requires such variations as part of the general design of the QDMTT. A domestic minimum top-up tax without these variations would not be considered a QDMTT and thus, would not meet the minimum requirements of the QDMTT Safe Harbour.

Optional variations

33. The QDMTT Commentary allows a QDMTT to depart from the GloBE Rules where the variation produces functionally equivalent or greater tax liabilities, or does not produce lower tax liabilities on a systematic basis. These variations have to be analysed on a case-by-case basis, however the QDMTT Commentary also identifies a number of specific cases where the QDMTT jurisdiction has the option to depart from the GloBE Rules.

34. In the case of optional variations, the general principle is that the Consistency Standard will only be met where the QDMTT jurisdiction chooses the option that aligns with the outcomes provided for under the Model Rules and Commentary for the IIR and UTPR. If the QDMTT jurisdiction chooses an option that departs from the Model Rules and Commentary for the IIR and UTPR, the QDMTT will not meet the Consistency Standard, unless the Inclusive Framework has agreed that this variation is acceptable and that the variation will not prevent the QDMTT from qualifying for the safe harbour.

35. The Inclusive Framework has agreed that the following list of optional variations that depart from the GloBE Rules are acceptable because they will always produce equivalent or greater outcomes:

a.) no, or a more limited, Substance-based Income Exclusion;

b.) no, or a more limited, De Minimis Exclusion; and

c.) a minimum tax rate above 15% for purposes of computing the Top-up Tax Percentage for the jurisdiction.

36. The Inclusive Framework will monitor whether other variations that depart from the GloBE Rules can be included in the future on the list above as part of the Consistency Standard. A variation will only be considered where it will produce equivalent or greater liabilities in all circumstances, or where an omitted rule is not relevant in the jurisdiction implementing the QDMTT and therefore cannot alter the outcomes. For example, if the implementing jurisdiction designs a QDMTT that computes its ETR and Top-up Tax on an Entity-by-Entity basis and it can demonstrate that this design ensures that such a QDMTT will always produce equivalent or greater tax outcomes on a jurisdictional basis then the Inclusive Framework could agree to include the design of the QDMTT in the list above. A QDMTT that met these design requirements would qualify for the safe harbour provided it met the other requirements set out in this guidance.

Switch-off Rule

37. The QDMTT legislation and administrative practice of the QDMTT jurisdiction will be evaluated in the peer review process based on the three standards set out in this document. Thus, whether a QDMTT meets the requirements of the safe harbour is a jurisdictional evaluation that takes place in the peer review process and is not specific to any MNE Group. However, it is recognized that, in some cases, a QDMTT jurisdiction could be subject to certain restrictions on imposing the QDMTT with respect to a particular Constituent Entity or corporate structure. These limitations could affect the QDMTT jurisdiction’s ability to satisfy the Consistency Standard which seems disproportionate because they impact on a small number of Entities or particular corporate structures.

38. To strike the right balance between having a QDMTT Safe Harbour that applies on a jurisdictional basis and avoiding that particular restrictions affect the ability of a QDMTT to meet the Consistency Standard, the Inclusive Framework agreed that the following cases should not affect a QDMTT from meeting the Consistency Standard:

a.) A QDMTT jurisdiction decides not to impose a QDMTT on Flow-through Entities created in its jurisdiction.

b.) A QDMTT jurisdiction decides not to impose a QDMTT on Investment Entities subject to Articles 7.4, 7.5, and 7.6 of the GloBE Rules.

c.) A QDMTT jurisdiction decides to adopt Article 9.3 in a QDMTT legislation with no limitation (i.e. option three of paragraph 118.51 of the QDMTT Commentary).

d.) A QDMTT jurisdiction includes members of a JV Group (which includes Joint Ventures) 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 as permitted under paragraph 118.11 of the QDMTT Commentary.

39. Where a QDMTT jurisdiction adopts one of the approaches above, it will need to notify the Inclusive Framework of the restriction during the peer review process and any such restrictions would be determined as part of the agreement that a QDMTT meets the standards of the safe harbour.

40. In these specific scenarios, the MNE Group will be subject to a Switch-off Rule which prevents the MNE Group from applying the safe harbour in relation to either all or, as in examples 5 and 7, a subset of Constituent Entities located or created in the QDMTT jurisdiction and requires the MNE Group to switch to the credit method for QDMTT provided under Article 5.2.3 of the GloBE Rules. The following examples provide further guidance on the application of the Consistency Standard and the Switch-off Rule.

Example 1 – Stateless Flow-through Entities

41. Certain QDMTT jurisdictions may not bring Flow-through Entities within the scope of a QDMTT because they are not tax residents in accordance with their Corporate Income Tax Law. Such Entities are Stateless Entities under the GloBE Rules unless they are the UPE of the MNE Group or required to apply an IIR in accordance with Article 2.1. However, paragraph 118.8.1 of the QDMTT Commentary provides QDMTT jurisdictions with the option of imposing a QDMTT, computed on a standalone basis, on these Stateless Entities provided that they are created in the QDMTT jurisdiction. Thus, while the general rule is that QDMTT jurisdictions are not required to impose a QDMTT on Flow-through Entities that are Stateless Entities, the Consistency Standard will remain unaffected regardless of whether a QDMTT jurisdiction imposes a QDMTT on such Flow-through Entities. Where the QDMTT does not apply to such Stateless Flow-through Entities, the MNE Group will apply the GloBE Rules with respect to all of those Flow-through Entities created in a QDMTT jurisdiction.

Example 2 – Flow through UPEs

42. As discussed in Example 1, many QDMTT jurisdictions might not impose a QDMTT on Flowthrough Entities because they are not tax residents in accordance with their Corporate Income Tax Law. However, in the case of the GloBE Rules, a Flow-through UPE is considered to be located in the jurisdiction where it is created and paragraph 118.8.2 of the QDMTT Commentary states that the QDMTT must take into account these Entities in the jurisdictional computations even if the QDMTT jurisdiction decides not to impose a QDMTT charge directly on these Entities. A QDMTT will meet the Consistency Standard irrespective of whether the QDMTT jurisdiction decides to impose the QDMTT charge on these Entities as long as these Entities are included in the jurisdictional computations of the QDMTT. In this case, the MNE Group will apply the Switch-off Rule with respect to a QDMTT jurisdiction where the UPE Flow-through Entity is located if such jurisdiction does not impose a QDMTT charge on these Flow-through Entities. Where the QDMTT jurisdiction does not impose a QDMTT charge on Flow-through UPEs, the Switch-off Rule must be applied with respect to the jurisdiction where the UPE is located notwithstanding that the QDMTT jurisdiction reallocates the Top-up Tax attributable to the Flow-through UPE to other Constituent Entities located in the jurisdiction.

Example 3 – Flow Through Entities that apply the IIR

43. A Flow-through Entity that is required to apply the IIR is located in the jurisdiction where it is created for purposes of Articles 2.1 to 2.3 and related provisions. Following the same rationale as in Example 2, paragraph 118.8.3 of the QDMTT Commentary allows a QDMTT jurisdiction to elect whether to impose a QDMTT charge on such Entities. The Consistency Standard will remain unaffected irrespective of whether a QDMTT jurisdiction decides to impose a QDMTT charge on these Entities as long as these Entities are included in the jurisdictional computations of the QDMTT, in the jurisdiction where they are created. In this case, the MNE Group will apply the Switch-off Rule with respect to the QDMTT jurisdiction where the Flowthrough Entity is located if that jurisdiction does not impose a QDMTT charge on these Flow-through Entities. Where the QDMTT jurisdiction does not impose a QDMTT charge on Flow-through Entities required to apply the IIR, the Switch-off Rule must be applied with respect to the jurisdiction where such Flow-through Entity is located notwithstanding that the QDMTT jurisdiction allocates the Top-up Tax attributable to these Flow-through Entities to other Constituent Entities located in the jurisdiction.

Example 4 – MNE Groups in the initial phase of their international activity

44. Article 9.3 provides a transitional exclusion under the UTPR where MNE Groups are in their initial phase of their international activity. This provision is part of the UTPR and does not affect the operation of the IIR. Paragraph 118.51 of the QDMTT Commentary provides three options to jurisdictions in relation to the adoption of Article 9.3 in their QDMTT legislation. Option one allows the jurisdiction not to adopt Article 9.3 in their QDMTT legislation. Option two allows the jurisdiction to adopt Article 9.3 limited to cases where a Qualified IIR does not apply. Option three allows the jurisdiction to adopt Article 9.3 without the limitations in Option two. The Consistency Standard will be met regardless of which of these three options the QDMTT jurisdiction chooses. In this case, the MNE Group that applies Article 9.3 to a QDMTT will apply the Switchoff Rule with respect to all of its Constituent Entities located in a QDMTT jurisdiction where that jurisdiction has adopted option three. However, the Switch-off Rule will not apply if the QDMTT jurisdiction has adopted options one or two.

Example 5 – Investment Entities

45. A QDMTT jurisdiction may decide not to impose a QDMTT on Investment Entities subject to Article 7.4, 7.5 or 7.6 located in their jurisdiction because its tax system is designed to preserve the tax neutrality of these Entities. In these cases, the QDMTT will still meet the Consistency Standard notwithstanding it is not imposed on these Investment Entities. The MNE Group will apply the Switch-off Rule with respect to these Investment Entities because the QDMTT does not apply to these Investment Entities.

Example 6 – Constituent Entities

that are not wholly owned 46. Paragraph 118.10 of the QDMTT Commentary states that a QDMTT should be imposed on 100% of the Jurisdictional Top-up, Tax which will allow that jurisdiction’s Top-up Tax to be reduced to zero under the GloBE Rules. Alternatively, paragraph 118.10 gives the option to QDMTT jurisdictions to turn off their QDMTT where not all the Constituent Entities of the jurisdiction are 100% owned by the UPE or a POPE for the entire Fiscal Year. In this case, a QDMTT will meet the Consistency Standard only where the QDMTT is imposed on 100% of the Jurisdictional Top-up Tax notwithstanding the UPE or POPE’s ownership interests in the Constituent Entities. In other words, jurisdictions that take advantage of the option to exclude partially-owned Entities from their QDMTT will not meet the Consistency Standard and will therefore not qualify for the Safe Harbour. In this last case, the Switch-off Rule is not relevant because the QDMTT did not qualify for the Safe Harbour.

Example 7 – Joint Ventures

47. Paragraphs 118.8 and 118.10 of the QDMTT Commentary state that a QDMTT jurisdiction has the option not to apply the QDMTT to MNE Groups that have a member of a JV Group (which includes a Joint Venture) located in the jurisdiction. The Consistency Standard will only be met in cases where the QDMTT jurisdiction decides to apply the QDMTT to MNE Groups that have a member of a JV Group located in such jurisdiction. The Consistency Standard will remain unaffected regardless of whether the liability for the QDMTT charge is imposed on the members of a JV Group or a Constituent Entity of the main group located in the same jurisdiction as permitted by paragraph 118.11 of the QDMTT Commentary. However, the MNE Group is subject to the Switch-off Rule with respect to the members of the JV Group where 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. Note that the Switch-off Rule is not relevant where a QDMTT jurisdiction decides not to include Joint Ventures and JV Subsidiaries within the scope of the QDMTT because the QDMTT will not meet the Consistency Standard and therefore will not qualify for the safe harbour.

Example 8 – Adjustments to GloBE Income

48. Paragraph 118.21 of the QDMTT Commentary states that jurisdictions have the option not to include all the adjustments in Chapter 3 where those adjustments are not relevant for their domestic tax system. As an example, this paragraph says that a QDMTT jurisdiction that follows the accounting treatment of stock-based compensation has the option not to include in its QDMTT the adjustment required by Article 3.2.2 of the Model Rules. A QDMTT will not meet the Consistency Standard where the QDMTT legislation does not include all the adjustments required in Chapter 3. However, many of these adjustments could be included in the list in paragraph 35 above in the future if the Inclusive Framework determines that they produce equivalent or greater outcomes. In the case where the Consistency Standard is not met and the QDMTT does not qualify for the Safe Harbour, the Switch-off Rule is not relevant.

Example 9 – Eligible Distribution Tax Systems

49. Eligible Distribution Tax Systems are subject to special rules in accordance with Article 7.3 of the GloBE Rules. These tax systems are those that were in force on or before 1 July 2021. Paragraph 118.40.2 of the QDMTT Commentary says that a jurisdiction with an Eligible Distribution Tax System shall include Article 7.3 in their QDMTT legislation. It further states that a QDMTT jurisdiction that does not have an Eligible Distribution Tax System by 1 July 2021 is not required to have this provision in their QDMTT legislation because it will not have any effect. In the case of a jurisdiction without an Eligible Distribution Tax System, the Consistency Standard will remain unaffected regardless of whether a QDMTT jurisdiction incorporates this provision into their QDMTT legislation. The Switch-off Rule is not applicable in this case because it is not included in the list of cases where such rule applies.

The Administration Standard

50. The QDMTT Safe Harbour eliminates the need to make the calculations in the GloBE jurisdiction and the GloBE jurisdiction will instead rely on the calculations in the QDMTT jurisdiction to ensure that the MNE Group is subject to the minimum level of taxation in the QDMTT jurisdiction. In this context, the Administration Standard ensures that the administration of the QDMTT is the same as the one that would have applied under qualified GloBE Rules of another jurisdiction.

51. The Administration Standard requires a QDMTT jurisdiction that benefits from a Safe Harbour to be subject to the same ongoing monitoring process as the GloBE Rules. This is because all implementing jurisdictions will be reducing the QDMTT jurisdiction’s Top-up Tax to zero and therefore, relying on the effective application of the rules in the QDMTT jurisdiction. The ongoing monitoring process will include a review of the information collection and reporting requirements under the QDMTT to ensure that they are consistent with the equivalent requirements under the GloBE Rules and the approach set out in the GloBE Information Return. As an exception, a jurisdiction that has introduced a QDMTT which qualifies for the QDMTT Safe Harbour may choose not to apply the simplified jurisdictional reporting framework provided in the GloBE Information Return:

a.) when Top-up Tax arises under the QDMTT (even if that Top-up Tax does not need to be allocated among Constituent Entities); or

b.) where the financial information used for the purposes of the QDMTT Safe Harbour is already reported at the Constituent Entity level and the compliance rules in the jurisdiction require taxable entities to file information returns or tax returns for each entity for local tax purposes.

In this case the jurisdiction applying the QDMTT may require the MNE Group to report adjustments to GloBE Income or Loss and Adjusted Covered Taxes for each local Constituent Entity on a separate entity basis (including separate reporting of the additions and reductions for each adjustment) in accordance with the accounting standard used under the QDMTT.

Peer Review Process for a QDMTT Safe Harbour

52. A Peer Review Process will determine whether a minimum tax can be considered a QDMTT. The Peer Review Process is still to be developed under the GloBE Implementation Framework. However, this Peer Review Process will also incorporate a transitional and permanent review processes to determine whether a QDMTT meets the standards of the QDMTT Safe Harbour. 53. The first question to be answered by the Peer Review Process is whether a minimum tax meets the criteria to be considered a QDMTT. This determination would be based on the Agreed Administrative Guidance on the QDMTT published in February 2023 and further guidance to be developed by the Inclusive Framework. 54. If the minimum tax meets the criteria of the QDMTT, then the next step in the Peer Review Process would be to determine whether such QDMTT meets the standards of the QDMTT Safe Harbour. This analysis would be based on the criteria set out by this document. Thus, a QDMTT would need to meet the Accounting Standard, the Consistency Standard, and the Administration Standard in order to benefit from the safe harbour. 55. Finally, the QDMTT should meet the general requirements of the QDMTT and the standards of the QDMTT Safe Harbour where a jurisdiction computes its QDMTT in accordance with the legislation applicable to its Qualified IIR or Qualified UTPR subject to the mandatory variations identified in paragraph 31 above. This will reduce the complexity and length of the legislation which will also facilitate the peer review process. Further guidance on how this review will be undertaken would be provided by the Inclusive Framework as part of the work on the peer review process.

The QDMTT and UTPR Safe Harbour Rules were introduced as part of the Agreed Administrative Guidance of 17 July 2023.

Country Profile – Japan

|0 Comments

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi.

Model Rules – QDMTT and UTPR Safe Harbours

|0 Comments

QDMTT and UTPR Safe Harbours QDMTT Safe Harbour 1. A Qualified Domestic Minimum Top-up Tax (QDMTT) is a domestic minimum tax imposed by a jurisdiction on those Constituent Entities of an MNE Group [...]

Introduction to the GloBE Rules – OECD Commentary

|0 Comments

Introduction to the GloBE Rules - OECD Commentary 1. The Global Base Erosion rules (GloBE Rules) have been developed as part of the solution for addressing the tax challenges of the digital economy. [...]

Model Rules – Globe Information Return

|0 Comments

<< Go back to overview Next article>> Globe Information Return (GIR) The GloBE Information Return (GIR) contains the information a tax administration needs to perform an appropriate risk assessment [...]

Model Rules – Transitional Penalty Relief

|0 Comments

<< Go back to overview Next article>> Transitional Penalty Relief The penalty relief described in this Chapter is designed to provide transitional relief for MNE groups in the initial [...]

Model Rules – Permanent Safe Harbour

|0 Comments

<< Go back to overview Next article>> Permanent Safe Harbour Where an MNE’s operations in a jurisdiction do not meet the requirements of a transitional safe harbour, they may [...]