Below we outline some of the main items of this further Administrative Guidance (July 2023 AG), which is the second set of additional administrative guidance after the one of February 2023 (Feb 2023 AG). 

For more information on the documents made available by the OECD on 17 July 2023 regarding the Subject-to-Tax Rule (STTR) or the GloBE Information Return (GIR), reference is made to our webiste articles here and here.

General Currency Conversion Rules

The financial accounts used to prepare the Consolidated Financial Statements of the Ultimate Parent Entity of an MNE are in principle the starting point for all GloBE calculations of an in-scope MNE. However, so far, neither the GloBE Rules nor the Commentary and Feb 2023 AG provided specific guidance in relation to which currency the relevant GloBE calculations should be made in, including for disclosure purposes in the GIR.  

The July 2023 AG now clarifies this question as well as several other currency conversion related issues:  


Guidance on Tax Credits 

Under the GloBE Rules, there was already a key difference in the treatment of certain tax credits and government grants. A distinction is made between Qualified Refundable Tax Credits (QRTCs), which are refundable in cash or cash equivalents within four years, and Non-Qualified Refundable Tax Credits (Non-QRTCs), which are refundable after four years. A QRTC is treated as an increase to the GloBE Income (denominator), while a Non-QRTC is treated as a reduction to the Covered Taxes (numerator). Both therefore reduce the effective tax rate (ETR), but this effect is (in principle) much stronger for a Non-QRTC. 

As there was still unclarity on the treatment of other kinds of tax credits, especially for tax credits that can be transferred, the July 2023 AG establishes the GloBE treatment of new categories of tax credits: Marketable Transferable Tax Credits (MTTCs), Non-Marketable Transferable Tax Credits (non-MTTCs) and Other Tax Credits (OTCs), regardless of how such tax credits are treated for financial accounting purposes. This comes in addition to the current distinction between QRTCs and Non-QRTCs. All refundable tax credits remain to qualify as QRTCs. MTTCs will be treated the same as QRTCs, i.e., an increase in GloBE Income instead of a decrease in Adjusted Covered Taxes. Non-MTTCs and OTCs reduce the amount of Adjusted Covered Taxes.  

The July 2023 AG also contains further guidance on the Qualified Flow-Through Tax Benefits (QFTBs) that were introduced in the Feb 2023 AG.  

Substance-based Income Exclusion 

The July 2023 AG provides guidance on determining the Substance-based Income Exclusion (SBIE) with respect to Eligible Employees and Eligible Tangible Assets that are deployed outside the jurisdiction of the employer or owner CE, respectively.  

The Inclusive Framework acknowledges that there are a variety of circumstances where an Eligible Employee would perform work activities outside the jurisdiction of their employer or where Eligible Tangible Assets would be located outside of the jurisdiction of their owner. For practicability purposes, the OECD/IF considers a threshold test above which the full payroll carve-out or tangible asset carve-out can be admitted appropriate.  

Specifically, a full payroll carve-out or tangible asset carve-out can be claimed by the CE where: 

  • an Eligible Employee is located within the jurisdiction of its employer more than 50% of their working time; and 
  • an Eligible Tangible Asset is located within the jurisdiction of its owner more than 50% of the time. 

If an Eligible Employee or Eligible Tangible Asset works or is located in the jurisdiction 50% or less of the time, the CE is only entitled to claim a pro rata share of the payroll carve-out and tangible asset carve-out for that Eligible Employee or Eligible Tangible Asset. The July 2023 AG announces that a simplified allocation mechanism with respect to industries with a substantial portion of their employees and assets located outside of the CE’s jurisdiction for a substantial part of the Fiscal Year is being considered as a next step. 

Furthermore, the July 2023 AG clarifies that an MNE can also choose to only claim those Eligible Payroll Costs and Eligible Tangible Assets for which it was willing to undertake the relevant compliance work.  

The July 2023 AG also provides further guidance on the following topics related to the SBIE: 

The calculation of the stock-based compensation expenses to be taken into account under the definition of Eligible Payroll Costs; 

  • The calculation of the stock-based compensation expenses to be taken into account under the definition of Eligible Payroll Costs; 
  • the treatment of leased tangible assets at the level of lessor and lessee; 
  • how impairment losses and reversals on tangible assets shall be taken into consideration. 

Qualified Domestic Minimum Top-up Tax  

The July 2023 AG contains further specific guidance to the design and operation of a QDMTT. This follows the Feb 2023 AG in which the two guiding principles for implementing a QDMTT were set out. Below we focus on a number of specific topics set out in the July 2023 AG: 

Safe Harbours  

The July 2023 AG contains further guidance on the design of a permanent QDMTT Safe Harbour and introduces a temporary Transitional UTPR Safe Harbour.  

QDMTT Safe Harbour 

Under the GloBE Rules, a QDMTT is creditable for the application of the IIR and UTPR. However, this means that at least two Top-up Tax calculations are required for the same jurisdiction (i.e., in the IIR/ UTPR jurisdiction and in the QDMTT jurisdiction). The QDMTT Safe Harbour intends to provide a practical solution for this issue. Under the QDMTT Safe Harbour, the Top-up Tax payable is deemed to be zero for a jurisdiction applying the IIR or UTPR with respect to another jurisdiction, if a QDMTT is levied by this other jurisdiction and certain conditions are met. It is important that the QDMTT is actually paid.   

In order for a QDMTT to qualify for this permanent safe harbour, the QDMTT should meet the following three standards: 

Transitional UTPR Safe Harbour 

The UTPR is designed to operate as backstop to the GloBE Rules to encourage jurisdictions to introduce a QDMTT or IIR. The OECD recognizes that it would become the primary mechanism to levy Top-up Tax from a UPE jurisdiction that has not introduced a QDMTT.  The Inclusive Framework acknowledges that this is undesirable because (i) the Top-up Tax allocated under the UTPR related to a UPE jurisdiction will often be disproportionate to the profits in the UTPR jurisdictions and (ii) there are more possibilities for disputes to arise under the UTPR. 

The July 2023 AG therefore introduces the Transitional UTPR Safe Harbour which aims at providing relief for years commencing on or before the end of 2025 and ending before 31 December 2026. This means that for taxpayers for which the financial year corresponds to the calendar year, the Transitional UTPR Safe Harbour can be applied to FY 2025 at the latest.  

Under the Transitional UTPR Safe Harbour, the Top-up Tax for the UPE jurisdiction would be deemed to be zero provided that the UPE jurisdiction has a nominal corporate income tax rate of 20%.  

It will be interesting to monitor how the EU / EU Member States will implement this Transitional UTPR Safe Harbour rule, since there are EU Member States that have a nominal corporate income tax rate of less than 20%.  

The Transitional UTPR Safe Harbour will notably provide welcome relief for the domestic operations of US based MNEs, given the fact that the US currently does not plan to introduce a QDMTT and has a nominal corporate income tax rate of at least 20%. It is also a welcome relief for jurisdictions that will implement the GloBE Rules but only do so after 31 December 2024.  

What’s next? 

The July 2023 clarifies various practical implementation questions, in particular also regarding the long-awaited details for the design of local QDMTT legislation and QDMTT Safe Harbour. It also provides some transitional relief, in particular introducing the temporary UTPR Safe Harbour which may be welcomed in particular by US MNEs. At the same time, the Inclusive Framework acknowledges that further clarification work will need to be done in the upcoming months. We will keep close track of these developments and provide respective updates. 

In parallel to the additional adminstrative guidance, the OECD also released an updated GIR (see our website article) and a model treaty provision for the Subject-to-Tax Rule (see our website article). 

We will keep you informed of further developments. In case of any question, please contact an author of this tax newsletter or your trusted Loyens & Loeff adviser.