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In its simplest form, the OECD’s global minimum tax proposal involves paying a ‘top-up tax’ at the level of the parent company if income made further down the ownership chain has been taxed below the global minimum rate. This will therefore impact the bottom line of large multinational companies. Proper planning and timely implementation of this regime is key to manage this exposure and gain a competitive advantage.
In this edition, we have covered key provisions within the GloBE Rules on Safe Harbour.
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Chapter 8 of GloBE Rules covers administrative aspects of the GloBE Rules that includes the application of Safe-Harbours.
GloBE Safe Harbour would allow an MNE Group to avoid the ETR and Top-up Tax calculation in respect of its constituent entities in jurisdictions that are likely to be taxable at or above the Minimum Rate. This exception is mainly provided to limit unnecessary compliance and administrative costs/burden for MNE Groups as well as tax administrations in respect of the application of the GloBE Rules (viz. MNE Groups need to collect, adjust and aggregate information on a jurisdictional basis in order to identify and allocate Top-up Tax in respect of LTCEs whilst tax administrations need to analyse the return information, assess risk areas, audit taxpayers, collect Top-up Tax, etc.).
As per Article 8.2.1 of the GloBE Rules, the effect of the GloBE Safe Harbour would be to exempt the MNE Group from the need to compute the jurisdictional ETR and allow the tax administration to deem the Top-up Tax for the Constituent Entities located in the Safe Harbour jurisdiction to be zero for a Fiscal Year for which the MNE Group can demonstrate that those Constituent Entities meet the requirements of the GloBE Safe Harbour.
Therefore, if a Filing Constituent Entity elects to apply any GloBE Safe Harbour to the MNE Group’s operations in a jurisdiction that would be eligible for the GloBE Safe Harbour, then the Top-up Tax for this jurisdiction would be deemed to be zero for the Fiscal Year of the election.
The election for a GloBE Safe Harbour has to be made on an annual basis.
An MNE Group that elects to apply the GloBE Safe Harbour in respect of its Constituent Entities in a jurisdiction (the safe harbour jurisdiction) should provide a record of the election to use the GloBE Safe Harbour, identify all the Constituent Entities in the safe harbour jurisdiction and provide any other relevant information, as part of the GloBE Information Return, consistent with Article 8.1 “Filing Obligation”.
While Article 8.2.1 allows the tax administration to treat such Constituent Entities as having zero Topup Tax for the year, Article 8.2.2 provides for a specific framework under which another tax administration could assess the reasonableness of underlying data used for purposes of GloBE Safe Harbour and challenge the taxpayer’s election in circumstances that may have materially affected the eligibility of the Constituent Entities for the relevant GloBE Safe Harbour. The only jurisdictions that could challenge the use of a GloBE Safe Harbour are those that are affected by their use, that is those jurisdictions that would otherwise be allocated a Top-up Tax if not for the use of a GloBE Safe Harbour.
The tax administration that wishes to challenge the use of a GloBE Safe Harbour notifies the Liable Constituent Entity (or Entities) within 36 months after the GloBE Information Return is filed.
The Liable Constituent Entity (or Entities) is/are invited by the tax administration to clarify, within six months, the effect of those facts and circumstances on the application of the GloBE Safe Harbour.
If the Liable Constituent Entity (or Entities) fails to demonstrate that the facts and circumstances identified by the tax administration did not affect materially the eligibility of the MNE for the GloBE Safe Harbour for this jurisdiction within the 6-month response period, the GloBE Safe Harbour would not be applicable.
Under Article 10.1, Liable Constituent Entities are those that could be liable for Top-up Tax (or subject to an adjustment under Chapter 2 of the GloBE Rules) in the jurisdiction of such tax administration if the GloBE Safe Harbour in Article 8.2.1 did not apply.
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