Global Minimum Tax (GMT) on track for a 1st Jan 2024 launch: Agreed Administrative Guide released in Feb 2023

[Vivek Jalan]

The OECD/G20 Inclusive Framework (IF) on BEPS released “technical guidance” to assist governments with implementation of the GMT, which will ensure Multi-National Entities (MNEs) will be subject to a 15% effective minimum tax rate. The guidance was approved by the OECD/G20 Inclusive Framework on BEPS (IF) and is therefore not subject to public consultation. Implementing jurisdiction will apply the GloBE Rules consistent with Agreed Administrative Guidance, subject to any requirements of domestic law. The Administrative Guidance is expected to play an important role in promoting certainty under the GloBE Rules by clarifying the interpretation of the GloBE Rules and by providing guidance to tax administrations on how to apply the GloBE Rules.

Among other issues, the administrative guide provides guidance on Conversion of Euro/ Non-Euro Based thresholds. Jurisdictions should rebase their non-Euro denominated thresholds annually, based on the average foreign exchange rate for the month of December determined by the foreign exchange reference rates as quoted by the European Central Bank (ECB) and apply the rebased thresholds to any Fiscal Year that starts on (or by reference to) any day of the following calendar year. Where the local currency of the jurisdiction is not quoted in the foreign exchange reference rates of the ECB or the jurisdiction faces legal or practical impediments to using such exchange rate when setting their own monetary thresholds under domestic legislation, the jurisdiction should rebase their non-Euro denominated thresholds based on the average foreign exchange rate for the month of December as quoted by the jurisdiction’s Central Bank.

Further the guidance allows for variation in design of Qualifying Domestic Minimum Top-Up Tax (QMDTT) vis-à-vis GloBE Rules, stating that “some degree of customization of a QDMTT in each jurisdiction is to be expected” and “variations in outcomes between the minimum tax and GloBE Rules will not prevent that tax from being treated as a QDMTT if those variations systemically produce a greater incremental tax liability.”

India is likely to implement Pillar 2 as IF member, active participant in development of GloBE rules. It holds that 15% MTR is just and fair, and it should be ensured that companies don't go to tax havens. Further, Pillar 2 proposal vindicates India’s stand on addressing the issue of cross border profit shifting. For MNEs in India, it is expected that the GMT should be studied, and an “Impact Analysis” should be done in the Indian scenario to start with so that one is prepared for the change. On the other hand, this is a new area in International Taxation and professionals world-wide are looking forward to work in this area. Readers may go through the following publications of OECD to have an in-depth understanding of this new area -

A. Feb 2023 : Agreed Administrative Guidance for the Pillar Two GloBE Rules 

B. Dec 2022: Safe Harbours and Penalty Relief document 

C. Commentary to the GloBE Model Rules: approved and released by the Inclusive Framework on 14 March 2022

D. Public consultations on the GloBE Information Return 

E. October 2021 Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.