The common understanding on penalties requires that implementing jurisdictions give careful consideration as to the appropriateness of applying penalties or sanctions where an MNE has taken reasonable measures to ensure the correct application of the GloBE Rules.

The term “reasonable measures” is not defined. Rather it should be understood in light of each jurisdiction’s existing rules and practice. An MNE can demonstrate it has taken reasonable measures if it can demonstrate it has, in good faith, put in place the appropriate systems to understand and comply with the rule. Whether a taxpayer has met the standard of taking reasonable measures must be assessed by a tax administration based on the facts and circumstances of the case. For example, a tax administration could waive the imposition of a penalty on the UPE or Filing Constituent Entity if such Entity fully disclosed the impugned GloBE computation to the tax administration. Other examples where tax administrations may waive penalties or sanctions during the Transition Period, include:

a) where there is a mistake of fact that is reasonable in the circumstances;

b) the errors can be reasonably attributed to unfamiliarity with the rules in the initial implementation years (e.g., isolated mathematical or transposition errors);

c) the requirements of the rule are unclear and the MNE’s actions are based on a reasonable interpretation of the rule; or

d) the MNE’s actions do not result in a reduction of top-up tax liability in the current or future year.

In many cases, jurisdictions already provide, as a matter of law or administrative practice, for penalty relief in accordance with the common understanding. Other jurisdictions may need to adapt these penalty relief requirements to fit within their constitutional and legal system. While the common understanding aims to provide relief for all penalties or sanctions in connection with a GloBE Information Return, the requirement that the MNE must take reasonable measures means that, in practice, the transitional penalty relief would not apply to cases of avoidance, fraud, or abuse. Finally, the transitional penalty relief would not impact the requirement to correct any errors and pay any unpaid/underpaid Topup Tax (including any interest) for previous Fiscal Years in accordance with requirements of domestic legislation.