1. Clarification of the treatment of transferable tax credits
- For Pillar Two purposes, a distinction already had to be made between, amongst others, a (i) qualified refundable tax credit (‘QRTC‘) and a (ii) non-qualified refundable tax credit (‘NQRTC’). A QRTC is a tax credit that is refundable in cash or cash equivalents within four years, whereas a NQRTC is refundable after four years.
- QRTC and NQRTC are treated differently in the effective tax rate (‘ETR’) calculation for Pillar Two purposes. The ETR is determined by dividing the (adjusted) covered taxes (‘P2 Tax’) by the income for P2 purposes (‘P2 Income’). A QRTC is treated as P2 Income, resulting in an increase in the denominator. NQTRC decreases the amount of P2 Tax and, thus, the numerator. A QRTC generally gives rise to a more beneficial outcome under Pillar Two.
New OECD Guidance
- The OECD released multiple new documents in relation to its Two-Pillar solution, including further Administrative Guidance on the GloBE rules. This Administrative Guidance, amongst others, provides welcome relief for US MNEs. We have summarized the key takeaways for US MNEs below.
- Transferability condition: the tax credit can be transferred to an unrelated party in the fiscal year of origination or ultimately within 15 months after the end of that year.
- Marketability condition: the tax credit is transferred to an unrelated party in said period for a price of at least 80% of the net present value of the tax credit. If the tax credit is not transferred to an unrelated party in that period, this condition is assessed based on the market prices of similar credits.
Relevance for US MNEs
- The new Administrative Guidance is good news for US MNEs that benefit from transferable renewable energy tax credits introduced by the Inflation Reduction Act. If these credits meet the two requirements mentioned above, they will be treated as P2 Income.
2. Introduction of a Transitional UTPR Safe Harbour
- The Undertaxed Profits Rule (‘UTPR’) becomes effective if the top-up tax is not (fully) imposed under a Qualified Domestic Minimum Top-up Tax (‘QDMTT’) or Income Inclusion Rule (‘IIR’). A reason for this could be that the country of the ultimate parent entity (‘UPE’) has not adopted the Pillar Two rules. This is relevant in the case of a US parent company with an ETR in the US of less than 15% (e.g., because it benefits from tax incentives in the US such as FDII and/or R&D tax credits, for which the favorable treatment described above likely does not apply). Under the UTPR, group companies located in countries in which the Pillar Two rules are effective could, in that case, levy (any remaining) top-up tax on a pro-rata share of the undertaxed profit of the US parent company. This pro-rata share of the profit is determined pursuant to an allocation key based on employees and tangible assets in countries that have adopted the UTPR.
- Based on the OECD model rules, the UTPR will enter into force for book years starting on December 31, 2024.
New OECD Guidance
- The Transitional UTPR Safe Harbour temporarily eliminates top-up tax under the UTPR in relation to UPE jurisdictions that have a statutory corporate income tax rate of at least 20%. This safe harbour applies to years commencing on or before the end of 2025 and ending before December 31, 2026.
Relevance for US MNEs
- The Transitional UTPR Safe Harbour applies to US parent entities falling within scope of the UTPR as the US has a statutory corporate income tax rate of 21%. It means that such US parent companies with a book year equal to the calendar year can effectively benefit from the UTPR Safe Harbour in the year 2025 (i.e., one additional year when compared to the date of entry into force of the UTPR).
- It is good to keep in mind that either the UTPR Safe Harbour or the Transitional CbC Safe Harbour can be applied. In case a US parent company MNE can make use of both options with respect to the US, we suggest to carefully analyse the choice considering the ‘once out, always out’ approach under the Transitional CbC Safe Harbour.
Please refer to Administrative Guidance July 2023 for our initial observations.
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