OECD Issues Pillar Two Administrative Guidance, Information Return, and STTR Guidance

OECD Issues Pillar Two Administrative Guidance, Information Return, and STTR Guidance

The OECD on July 17 released a second round of administrative guidance on the Pillar Two GloBE model rules. The new guidance, which follows the first round of administrative guidance issued in February 2023, covers issues under the GloBE rules including currency conversion rules, certain tax credits, the application of the substance-based income exclusion (SBIE), qualified domestic minimum top-up taxes (QDMTT) and transitional UTPR safe harbors. 

The OECD also released an updated version of the GloBE Information Return and a Report with model treaty language to enact the treaty-based subject-to-tax-rule (STTR). 

This guidance provides additional detail on how the GloBE rules and transitional safe harbors are intended to operate for multinational enterprises. Questions remain on how jurisdictions will put this guidance into effect.

UTPR Safe Harbor

The administrative guidance establishes a new transitional safe harbor from the UTPR in the ultimate parent entity (UPE) jurisdiction. Under this rule, the UTPR top-up tax amount for the UPE jurisdiction is deemed to be zero for each year during the transition period if the UPE jurisdiction has a corporate income tax rate of at least 20%. The new transitional safe harbor applies for the first two years in which the GloBE rules are in place. 

If a multinational enterprise (MNE) group qualifies for more than one of the transitional safe harbor rules, it may choose which safe harbor rule to apply for that jurisdiction. However, the transitional UTPR safe harbor does not use the “once out, always out” approach that applies for other GloBE transitional safe harbors. 

Additionally, the administrative guidance provides that the UTPR safe harbor will not be extended, meaning that the transitional CbCR safe harbor will apply for one fiscal year after the transitional UTPR safe harbor.

QDMTT Safe Harbor and Guidance

The administrative guidance provides for a QDMTT safe harbor rule that deems the top-up tax to be zero in a jurisdiction if the MNE group qualifies for the safe harbor in that jurisdiction. An MNE group will qualify for the QDMTT safe harbor rule in a jurisdiction when it meets the QDMTT accounting standard, consistency standard and administration standard as well as the other QDMTT rules. 

The QDMTT accounting standard requires a jurisdiction to base its QDMTT either on the UPE’s financial accounting standard or a local country financial accounting standard. If a local country financial accounting standard is used, certain limitations apply. The consistency standard requires the QDMTT to be computed in a manner provided in the GloBE rules, unless the GloBE rules provide for deviation or optionality in structuring the QDMTT. The administration standard requires the jurisdiction that is imposing the QDMTT to meet the continuous monitoring process prescribed by the GloBE rules. 

If the safe harbor rule applies, the MNE group will not be required to compute a second calculation after completing the QDMTT calculation under the GloBE rules.

In addition to the QDMTT safe harbor rule, the administrative guidance also provides clarifications on the structure of a QDMTT systems for a jurisdiction. The rules provide guidance on joint ventures and flowthrough entities, data collection by jurisdictions and challenges to the constitutionality of QDMTTs.

Substance-based Income Exclusion

The administrative guidance amends the first commentary’s application of the SBIE. It importantly addresses cross-jurisdictional assets and employees, stock-based compensation, and leases, impairment losses and reductions of the SBIE due to a UPE subject to a deductible dividend regime. 

Under the simplified approach in the guidance, if payroll and assets are used in one jurisdiction for more than 50% of the period, then all of the payroll carve-out and asset carve-out can be allocated to that constituent entity’s jurisdiction. Alternatively, if payroll and assets are used in one jurisdiction for less than 50% of the period, a proportionate share of the payroll carve-out and asset carve-out can be allocated to that jurisdiction. The OECD is further considering how to apply a simplified allocation mechanism to certain industries. With regard to the payroll carve-out, the guidance confirms that adjustments to stock-based compensation for a jurisdiction will not be affected by an Article 3.2.2 election. 

Another important provision in the guidance relates to leases. Under these rules, a lessor can include a portion of the carrying value of operating leases in Eligible Tangible Assets for purposes of the SBIE’s asset carve-out if the asset is located in the same jurisdiction as the lessor. The amount allowed is generally equal to the excess of the lessor’s average carrying value of the asset over the average amount of the lessee’s right of use asset. The average carrying value of the asset is determined at the beginning and the end of the entities’ fiscal years.

The administrative guidance also provides rules for impairment losses and UPEs subject to a deductible dividend regime. 

Currency Conversion

The guidance addresses four specific issues in relation to currency conversion for purposes of the calculations required under the GloBE rules. 

The first portion of the guidance addresses which currency the GloBE calculations should be performed in and how to disclose the currency in the GloBE information return. Under these rules, MNE groups are required to perform the GloBE calculations and report the amounts in the GloBE information return using the currency presented in the MNE group’s consolidated financial statements. This is intended to provide a consistent basis of translation for financial statements and the GloBE information return. 

The second portion of the guidance sets out how to translate the amounts relevant to the GloBE calculations into the presentation currency on the GloBE information return. Under these rules, MNE groups are required to use the applicable foreign currency translation rules (i.e., ASC 830 or IAS 21) in the accounting standard used to prepare the MNE group’s consolidated financial statements. 

The third portion of the guidance provides the foreign currency translation rules for translating any top-up tax under an IIR or UTPR from the presentation currency into the currency in which the tax is payable. Under these rules, MNE groups are allowed to use any reasonable basis for translating the foreign currency (certain examples are given). However, the guidance recommends that jurisdictions enact specific rules to provide clarity.

The final portion of the guidance on foreign currency translation sets out the rules for determining GloBE thresholds under domestic law. One of these rules states that the amount must be translated from the presentation currency to the domestic currency based on the average exchange rate for the December prior to the relevant year. The exchange rate used is generally the European Central Bank rate.

Tax Credits

The administrative guidance provides rules on the treatment of tax credits under the GloBE rules. Specifically, the guidance addresses the impact of marketable transferable tax credits (MTTCs). An MTTC is a tax credit that can be used by the credit holder to reduce its liability for a covered tax in the jurisdiction that issued the credit and meets the legal transferability standard and marketability standard in the hands of the holder. MTTCs are treated in a similar manner to qualified refundable tax credits under the GloBE rules. To provide similar treatment to qualified refundable tax credits, MTTCs are treated as income and not as a tax reduction under the GloBE rules.

The legal transferability standard and the marketability standard are met for the originator if the originator can transfer the credit to an unrelated party in the fiscal year in which the credit originates (or within 15 months of the origination year) and the originator transfers the credit to an unrelated party within 15 months of the origination year at a price that equals or exceeds the marketable price floor, which is at least 80% of the net present value of the credit. A similar rule applies to the purchaser of an MTTC. 

The guidance also provides certain clarifying content with respect to other tax credits. It alters the timing for accounting for qualified flow-through tax benefits and the definition of qualified ownership interests from which qualified flow-through tax benefits are received. It provides limited circumstances for which alternative timing for including qualified refundable tax credits are permitted to be included in GloBE income. Additionally, the guidance provides that credits that do not meet the definition of a qualified refundable tax credit or MTTC but are treated as income for financial income reporting purposes should be backed out of the GloBE income or loss calculation. 

GloBE Information Return

In addition to the administrative guidance, the OECD also released the GloBE information return. This updated return provides for a transitional simplified jurisdictional reporting framework for years beginning on or before December 31, 2028, but not ending after June 30, 2030. Under this simplified approach, MNE groups that elect to apply the simplified framework are not required to report adjustments to financial accounting net income or loss, current tax expense or deferred tax expense on a constituent-entity-by-constituent-entity basis if the MNE group does not have a top-up tax liability that arises in the jurisdiction or does not have a top-up tax liability in the jurisdiction that needs to be allocated on a constituent entity by constituent entity basis.

While the simplified framework provides short-term flexibility for MNE groups, questions remain as to whether more permanent simplification will be available in the long-term.


The OECD also released a report on the subject-to-tax-tule (STTR) that provides model treaty language to implement the rule, as well as commentary and a summary of the STTR. 

The STTR is a treaty-based rule that taxes related-party payments that are subject to tax below the minimum rate. It would generally apply to interest, royalties and other defined payments. Under the current framework, the STTR would apply if the recipient of a payment is subject to a corporate nominal tax rate of less than 9% in a jurisdiction. The STTR would apply before the application of the GloBE rules and any tax under an STTR would be considered a covered tax under the GloBE rules.

The OECD report includes seven types of payments made to connected persons that are considered covered income for STTR purposes:

  • Interest.
  • Royalties.
  • Payments for the use of, or right to use, distribution rights in respect of a product or service.
  • Insurance and reinsurance payments.
  • Fees to provide a financial guarantee (or other financing fees).
  • Rents.
  • Income received in consideration for the provision of services.

Certain exceptions apply to the shipping and boating industries.

Under the proposed rules, entities are considered connected persons on the basis of a control relationship of 50% or more direct or indirect ownership or based on the facts and circumstances. However, the STTR does not apply if the recipient of the payment is an individual, nonprofit, government entity fulfilling a governmental function, international organization or certain investment funds. Furthermore, the STTR contains materiality thresholds for the amount of payments and the mark-up on certain payments. The mark-up materiality threshold does not apply for interest and royalties.

The STTR report and associated commentary provide rules for the elimination of double taxation and anti-avoidance rules. 

Next Steps

The releases by the OECD provide additional guidance on the implementation and impact of Pillar Two. 

The administrative guidance will be incorporated into a revised version of the commentary that will be released later this year (and will replace the original version of the commentary issued in March 2022). The examples included in the administrative guidance will be incorporated into a revised set of detailed examples that will be released alongside the revised Commentary. 

The OECD’s Inclusive Framework will continue to consider administrative guidance priorities on an ongoing basis, where more clarity is required, with the aim of releasing guidance throughout the year.