The OECD on December 18 released a third package of administrative guidance on the Pillar Two GloBE model rules, following the first two rounds issued in February and July 2023.
The new guidance covers a number of important issues, including anti-abuse provisions regarding hybrid arbitrage arrangements and the allocation of blended controlled foreign corporation (CFC) taxes.
Hybrid Arbitrage Arrangements
The administrative guidance introduces anti-abuse provisions to prevent multinational enterprise (MNE) groups from entering into hybrid arbitrage arrangements to qualify for the transitional CbCR safe harbor.
Under the new anti-abuse provisions, the transitional CbCR safe harbor is not available to an MNE group if a hybrid arbitrage arrangement results in a tested jurisdiction qualifying for the safe harbor. Adjustments must be made to the tested jurisdiction’s profit before tax and income tax expenses with respect to any hybrid arbitrage arrangements entered into after December 15, 2022, the release date of the safe harbors and penalty relief guidance. As a result of such adjustments, a constituent entity cannot qualify for the transitional CbCR safe harbor where it has entered into a hybrid arbitrage arrangement after December 15, 2022.
The administrative guidance defines a hybrid arbitrage arrangement as (i) a deduction/non-inclusion arrangement; (ii) a duplicate loss arrangement; or (iii) a duplicate tax recognition arrangement.
A deduction/non-inclusion arrangement is an arrangement that results in an expense or loss in the financial statements of a constituent entity when there is either no commensurate increase in revenue or gain in the financial statements of the counterparty, or the counterparty is not reasonably expected to have a commensurate increase in its taxable income over the life of the arrangement.
Similarly, arrangements resulting in the inclusion of the same expense or loss in the financial statements of two or more constituent entities in two or more jurisdictions and arrangements resulting in the inclusion of the same income tax expense in the adjusted covered taxes or simplified ETR of two or more constituent entities, would be caught by these anti-avoidance provisions.
MNE groups that entered into hybrid arbitrage arrangements after December 15, 2022, should perform a detailed analysis of the impact of any adjustments to be made to the profit before tax and income tax expenses on the group’s qualification for the transitional CbCR safe harbor for the tested jurisdictions involved.