OECD Releases Third Installment of Pillar Two Administrative Guidance

OECD Releases Third Installment of Pillar Two Administrative Guidance

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.

Blended CFC Tax Regimes

Under prior administrative guidance, the OECD provided that taxes incurred under a blended CFC tax regime are allocated to entities located in jurisdictions where the jurisdictional ETR is below the applicable rate for the blended CFC tax regime. Generally, the prior guidance defined a blended CFC tax regime as a CFC tax regime that aggregates income, losses, and creditable taxes of all CFCs for purposes of calculating the shareholder’s tax liability and that has an applicable rate of less than 15%. 

The allocation formulas under the prior guidance are below:

Blended CFC Allocation Key
Attributable Income of Entity x (Applicable Rate – GloBE Jurisdictional ETR)


Blended CFC Tax Allocated to Entity
Blended CFC Allocation Key / Sum of All CFC Blended Allocation Keys x Allocable Blended CFC Tax


The allocable blended CFC tax is the tax incurred by the constituent entity owner under the blended CFC tax regime. 

The new administrative guidance addresses three issues that have arisen with regard to the allocation of blended CFC taxes. 

First, in some instances, an MNE group may be required to compute separate GloBE jurisdictional ETRs for different groups of entities located in the same jurisdiction (blending groups). This may occur in the case of a joint venture, a minority-owned constituent entity, or an investment entity. Under the new guidance, if an MNE group computes multiple GloBE jurisdictional ETRs for different blending groups located in the same jurisdiction, the blended CFC allocation key for an entity is calculated using the GloBE jurisdictional ETR that is applicable to the blending group to which the entity belongs.

Second, an MNE group may not be required to compute an ETR for a jurisdiction under Article 5.1. This may apply if the MNE group elects to apply the simplified ETR tested under the transitional CbCR safe harbor, the QDMTT safe harbor, or another jurisdictional safe harbor under Article 5.1 of the GloBE model rules. In the case of the transitional CbCR safe harbor, to allocate blended CFC taxes, the MNE group will need to use the tested jurisdiction’s simplified ETR that is calculated under the transitional CbCR safe harbor guidance when determining the blended CFC allocation key for entities in that tested jurisdiction. If the MNE group has elected the QDMTT safe harbor for a jurisdiction, the GloBE jurisdictional ETR is determined based on the taxes and income used to determine the ETR pursuant to the jurisdiction’s QDMTT. Certain rules apply for creditable QDMTT that is payable. Finally, for any other jurisdiction where the MNE group is not required to calculate the ETR under Article 5.1, the GloBE jurisdictional ETR is computed using the same rules for computing the simplified ETR under the transitional CbCR safe harbor, except that the MNE group takes the profit (loss) before income tax from its qualified financial statements.

Third, if a constituent entity is subject to a blended CFC tax regime on income of non-GloBE entities, an amount of the blended CFC tax must be allocated to such non-GloBE entities. This is done by requiring each non-GloBE entity to compute a blended CFC allocation key using the GloBE jurisdictional ETR for the blending group in the same jurisdiction that has the largest aggregate amount of attributable income and the non-GloBE entity’s blended CFC allocation key will be included in the sum of all blended allocation keys in the blended CFC tax allocated to entity formula (see above).


Simplified Calculation Safe Harbor for Non-Material Constituent Entities 

The administrative guidance provides a simplified calculation safe harbor for non-material constituent entities (NMCEs). An NMCE is defined as a constituent entity that is not consolidated in the ultimate parent entity’s (UPE’s) consolidated financial statements and:

  • Its MNE group prepares consolidated financial statements in accordance with an acceptable financial accounting standard or an authorized financial accounting standard.
  • The MNE group’s consolidated financial statements are externally audited, and the external auditor has excluded the NMCE on materiality grounds.
  • The NMCE’s revenue generally does not exceed EUR 50 million (some exceptions apply).

If a constituent entity meets all of these requirements, then it may be considered an NMCE. The administrative guidance provides simplified calculations for income, revenue, and tax if an annual election is made for each NMCE individually.


Purchase Price Accounting Adjustments 

The administrative guidance provides further clarification on when a constituent entity may use financial accounts that include the effect of purchase price adjustments in the profit (or loss) before tax computation.


Transitional CbCR Safe Harbor

Tested Jurisdictions

The administrative guidance clarifies that in the event an MNE group has both constituent entities and members of a joint venture in the same jurisdiction, for purpose of the transitional CbCR safe harbor tests they are treated as being in separate tested jurisdictions. As a result, (i) all constituent entities in the jurisdiction, (ii) all entities of the same joint venture group located in the jurisdiction, and (iii) each stand-alone joint venture located in the jurisdiction are treated as being in separate tested jurisdictions. 

Qualified Financial Statements

The administrative guidance includes further confirmation on the consistent use of reliable data by an MNE group to apply the transitional CbCR safe harbor. Such consistent use of reliable data is meant to avoid distortion through the use of asymmetric and/or unreliable data. In practice, this means that:

  • All of an entity/PE’s data that is used in the transitional CbCR safe harbor must come from the same qualified financial statements (that is, the use of different financial accounting standards for the same entity/PE is not allowed);
  • All data used to perform the safe harbor computations for entities in a tested jurisdiction must come from the same type of qualified financial statements (i.e., the use of different sources of qualified financial statements for different entities within the same tested jurisdiction is not allowed).
  • A CbC report for some tested Jurisdictions may qualify as a qualified CbCR report, while not qualifying as such for other tested jurisdictions, depending on whether the data in the CbC report is based on data from qualified financial statements for the different tested jurisdictions. This is separately determined for each tested jurisdiction.
  • An MNE group may use different qualified financial statements as the source of data for different tested jurisdictions in a qualified CbC report (i.e., it is allowed to use data from the UPE’s consolidated financial statements for some tested jurisdictions and data from local GAAP accounts for other jurisdictions, as long as they are qualified financial statements).

MNE groups not required to file CbCR

Under the current safe harbor rules, certain MNE groups may be in scope for the GloBE rules but may not be required to file CbC reports for a number of reasons. The additional administrative guidance provides that if an MNE group is in scope for the GloBE rules, but is not required to file CbC reports, it can still qualify for the transitional CbCR safe harbor if it provides the information in Section 2.2.1.3(a) of the GloBE Information Return using data from qualified financial statements that would have been reported in a qualified CbC report.


Simplified ETR Test

The December 2022 safe harbor document will be revised to clarify the treatment of an adjustment to the income tax expense provision of a prior year for purposes of the simplified ETR safe harbor. The revised language in this regard confirms that for the calculation of the simplified covered taxes an adjustment to prior year’s income tax expense is included, other than those adjustments related to uncertain tax position, the effect of which is removed from the simplified covered taxes.

Additionally, the income tax expense on a PE’s income in the jurisdiction in which that PE is located must be allocated exclusively to the PE’s jurisdiction and can only be included in the simplified ETR test for that PE jurisdiction. That income tax expense will not be included in the simplified ETR test for the main entity’s jurisdiction to avoid the inclusion of the same income tax expenses in two jurisdictions.


Routine Profits Test and Calculation of Substance-based Income Exclusion

The administrative guidance confirms that for purposes of the calculation of the substance-based income exclusion as part of the transitional routine profits safe harbor, the same percentages should be used as for the calculation under the GloBE rules. As a result, the higher transitional rates -- 9.8% and 7.8% for 2024 -- are to be used, rather than the standard 5% rate.


Fiscal Year Mismatches

If an MNE group includes constituent entities that maintain their financial accounts based on a different fiscal year than the UPE, the MNE group may apply different accounting conventions in preparing the consolidated financial statements. 

MNE groups may incorporate the financial accounting results of the constituent entity with a different fiscal year for that fiscal period into the consolidated financial statements of the UPE. Thus, the UPE would include in its consolidated financial statements the income and taxes of each foreign constituent entity for its full fiscal year that ends within the UPE’s fiscal year. In that case, some of the income or expenses reported in the consolidated financial statements will be attributable to transactions before the beginning of the UPE’s fiscal year. Other MNE groups may segregate the income of the constituent entity based on the UPE’s fiscal year and combine the amounts from the constituent entity’s two fiscal years that straddle the UPE’s fiscal year. Thus, the constituent entity would combine the income and expenses from all months of its fiscal year that overlap with the UPE’s fiscal year with those of the first months of the next fiscal year that overlaps with the remainder of the UPE’s fiscal year and include the resulting combined amounts in the consolidated financial statements.

In case of any fiscal year mismatches as described above, the GloBE computations for the UPE’s fiscal year will be based on the above method that is applied by the MNE group in its consolidated financial statements to address the mismatch in the fiscal years. Similar rules apply to situations where the fiscal year of a constituent entity does not align with the taxable period of that constituent entity.


Transitional Filing Deadlines for MNE Groups with Short Reporting Fiscal Years

Based on the Commentary to the model rules released in March 2022, transitional relief is provided for the filing and notification obligations. The filing and notification obligations must be fulfilled within 18 months, rather than the normal 15 months, after the end of the reporting fiscal year that is the transition year (the first fiscal year that the MNE group comes within the scope of the GloBE rules). For MNE groups with a calendar year fiscal year, this would mean that the first filing and notification obligations must be fulfilled by June 30, 2026.  

There are scenarios in case of a short fiscal year, where an MNE group would have to fulfil its first filing and notification obligations prior to June 30, 2026. To limit the administrative burden both for MNE groups as well as for tax administrations, the administrative guidance provides relief by confirming that the due date for filing and notification obligations for any fiscal year will not be before June 30, 2026.


Consolidated Revenue Threshold

The GloBE commentary notes that the revenue threshold is based on the revenue included in the CbCR rules and whether certain elements (for example, extraordinary income and gains from investment activities) are included in revenue for CbCR purposes can vary depending on the financial accounting standards and UPE jurisdiction.  

The guidance provides further clarification on the definition of revenue for purposes of the threshold, stating that net gains from investments (whether realized or unrealized) reflected in the profit and loss statement of the consolidated financial statements and income or gains separately presented as extraordinary or non-recurring items are included in revenue.