Episode Transcript
[00:00:00] Foreign.
[00:00:05] And welcome to our podcast series A and M Tax Talks Tax Policy Updates, where we bring you insights into the latest developments in the global tax policy and controversy space.
[00:00:16] My name is Bruno Nicet da Silva and I'm a senior advisor on the tax Policy Pillar two and tax controversy practice of A and m.
[00:00:24] So the September 2026 Pillar 2 package was released just around two weeks ago and with it came the 2026 Global Information Return, the full legislative review framework that establishes terms of reference and methodology for pillar 2 implementing jurisdictions, and finally, a new piece of administrative guidance. So this podcast is the first of a series of podcasts that we will dedicate to the September 2026 Pillar 2 package. Today I will focus on one part of the administrative guidance, the explicitly conditional taxes.
[00:00:58] So what I would like to do is to address four practical questions. First, what these taxes are. Second, why they matter? Third, how can they affect multinational groups? And finally, what we should expect next.
[00:01:14] So let's start with the first question.
[00:01:16] What are explicitly conditional taxes? The starting point is the distinction between an ordinary tax and a tax whose application is tied directly to to pillar 2 exposure in another jurisdiction.
[00:01:29] So what the new guidance provides is that the tax which is an explicitly conditional tax is a tax that it applies to a constituent entity, joint venture or a member of a joint venture group because of a qualified income inclusion rule, the IIR, or a qualified in the tax profits rule, UPR, and it applies to that entity in another jurisdiction.
[00:01:51] So the same result applies where the law works in reverse. The tax is switched off so it does not apply when no qualified IIR or a TPR is applicable elsewhere, or when the side by side safe harbor is available as it also turns off the IIR NTPR application.
[00:02:08] So let's try to make it in simple terms. The drafting technique doesn't matter. A jurisdiction may impose the tax only on the globe taxpayer, which is through inclusionary drafting. Alternatively, it may impose a broader tax but exempt the non globe taxpayer, which is exclusive generic drafting. Both approaches may create an explicitly conditional tax.
[00:02:31] So in practical terms what we see is that if a tax is designed to distinguish between what the guidance calls the globe taxpayer that I just mentioned and the non globe taxpayer, then we have the discriminatory element and is explicitly because the legislation clearly makes the distinction that it applies or doesn't apply depending on being a globe or non globe taxpayer. So a globe taxpayer of course means a taxpayer which is exposed to the IIR or TPR and cannot elect for the side by side safe harbor and a non globe taxpayer is not exposed to top up tax or has zero top up tax because it elects and can benefit from the side by side safe harbor. There is however an important element that it should be stressed here. So let's imagine a situation of a surcharge or an additional no levy or tax. So if a jurisdiction imposes a general applicable tax and as the guidance provides an example at a 10% rate, and then it adds a distinct 5% surcharge or additional rate only for taxpayers exposed to the IAR or TPR elsewhere, so globe taxpayers, then the 10% tax can remain as a covered tax while the conditional 5% surcharge is excluded. If the conditional feature is not a separate levy or surcharge, then the tax as a whole may end up being treated as explicitly conditional.
[00:03:58] Now finally, before moving to the next question, I also want to add an additional point and it's a point that has been raising a lot of questions.
[00:04:10] So the new paragraph 23.3 of the revised Commentary and the Revised Commentary following up the release of this guidance adds an important clarification. A text is not explicitly conditional merely because it applies only to M and E groups above a consolidated revenue threshold. In other words, the fact that the jurisdiction imposes a two layer of or a dual structured approach to its corporate income tax system. Let's assume they have a reduced rate or even an exemption in general to corporate income taxpayers and then they impose a 15% rate for M and E groups that meet the consolidated revenue threshold of 750 million euros or more. This is not an expressly conditional tax as the distinctive character is not based on tax being applied depending on our top up tax exposure. Or in other words, the tax is not applied based on being a globe or a non globe taxpayer, but the distinctive criteria is merely the group size and that the guidance clearly clarifies with a specific paragraph that is not conditional. Moving to question two so we know already what conditional taxes are. We know already that the distinction is between a global and non globe taxpayer. Now why are they relevant? So why there was the need to come up with this guidance?
[00:05:36] They matter because as we all know, cover taxes are central to the globe effective tax rate calculation.
[00:05:42] So if a local levy qualifies as a cover tax, it can increase the effective tax rate and reduce the top up tax exposure that would be collected elsewhere under the IIR or the utpr.
[00:05:56] Now the possibility of these explicitly conditional taxes raised the policy concern and the policy concern is what the guidance aims to address. So conditional tax may allow the local jurisdiction to collect an amount that would otherwise be paid as top up tax in another jurisdiction while avoiding the same burden for groups that are not exposed to the GLOBE rules.
[00:06:17] So again you see here the discrimination.
[00:06:19] Discrimination means that I'm providing a different treatment in identical circumstances. There's always a comparative element and we have it here. We have groups in which the distinctive criteria for applying on other tax is the top up tax exposure under the IIR on the TPR and this is considered as discriminatory or conditional. Why? Because economically the additional local tax may be broadly offset by a reduction in IIR or ETPR liability, so its cost is largely shifted to the jurisdiction that would otherwise have collected the top up tax.
[00:06:55] And so the inclusive framework as I mentioned saw this conditionality element as discriminatory.
[00:07:02] And what the September guidance does is to convert the principle into a technical rule so explicitly conditional taxes are not treated as covered taxes and in a moment I will explain you the consequences.
[00:07:15] It also confirms that the domestic minimum top up tax or@DMTT that is explicitly conditional cannot qualify as a qualified domestic minimum top up tax, subject also to a narrow time limited derogation for the year of 2024 which I will also explain briefly in a second so as a recap we know what explicit conditional taxes are Second, we know why they are relevant or why they raise the concern that justify the issues of this guidance. Third question is how can the guidance impact M&ES? Or in other words what is the impact if an M and E benefits from an explicitly conditional tax?
[00:07:58] So the most immediate impact is computational regarding calculations. So an explicitly conditional tax must be removed from adjusted cover taxes or in other words a conditional tax is not a covered tax. It is also not included in the net tax expense adjustment and is not added back to the financial account net income or loss. The final when calculating globe income. So the result is since I do not take this amount into account as a covered tax, the immediate consequence or the first consequence is lower jurisdictional effective tax rate. So my numerator decreases with while my denominator remains the same.
[00:08:39] So potentially we may have higher IIR or GTPR top up tax than the group might expect it if the local payment would have been treated as a covered tax and potentially credible under the GLOBE rules mechanics.
[00:08:55] Second consequence so the first one is removal from the numerator, lower effective tax rate, potential top up tax or higher top up tax exposure. Second consequence is a related consequence. So while the local tax can still be legally payable under domestic law, yet it can provide no corresponding cover tax benefit under the global calculation. In other words, we are paying this tax locally, but this tax will not be treated as a cover tax. So it means that I'm going to have top up tax exposure as this tax was never paid. So the question is it's not merely for the groups that benefit from the conditionality, it also affect all the other groups which operate in a jurisdiction which applies conditional taxes.
[00:09:40] So those groups that operate under jurisdiction, they pay conditional taxes if they pay a tax which is explicitly conditional. Under this guidance, this tax is removed from covered taxes and is going to be taxed elsewhere.
[00:09:54] Third consequence, the guidance affects QDMTT reliance.
[00:09:58] So if a domestic minimum tax is treated as explicitly conditional, it will also not qualify as a qualified domestic minimum top up tax. It will not be a qdmtt. So fundamentally and specifically if we have a QDMTT which is QDMTT safe harbor, it means that this may leave residual top up tax to be computed under the IR otpr. So the QDMTT safe harbor basically means that I get an exemption of top up tax in another jurisdiction. This is switched off, so potentially I may have to pay additional top up tax elsewhere. Fourth is also that groups need to analyze the legal design, not only the tax labels. So what is important, and I will comment about this in the end is that we need to revise the charging provision, exemption eligibility conditions linked to the foreign IIR or ETPR exposure links to the side by side safe harbor and whether a conditional surcharge is generally separate. I'm going to put it in different terms. It will be up to each M and A group actually to evaluate if this is a conditional tax or not unless there is any specific assessment in the context of the OECD inclusive framework why it's up to each M and E group because the consequence will be for each M and E group. So if, and again if this tax is conditional, it's not treated as a covert tax reduces the numerator consequence top up tax exposure. So we know the impact. I will tell you in a moment what to do, but we know the impact. The last point I want to mention about Question 3 is about the narrow transitional rule. So an explicitly conditional tax may still be treated as a covered tax for a fiscal year beginning before 1st of January 2025 when where the relevant conditional element was enacted before 30th of November 2024 and the tax is no longer conditional for fiscal years beginning on or after 1st of January 2025.
[00:11:56] A similar time limited derogation can preserve QDMTT status so qualified status of the minimum top up tax provided that was enacted before 30-11-2424 Henry included the Sunset clause remove the conditional element and turn it into a conditional as from the 1st of January 2025. So I'm going to simplify this. It means that if we had a conditional tax that only applies for the fiscal year 2024, that's fine. If we have a fiscal conditional tax that applies beyond the fiscal year of 2024, so 25 and beyond, then we have an issue because this tax will lead to the consequences that I just explained.
[00:12:38] Just as a matter of to complete my analysis, you can see that the OECD central record of legislation that is publicly available in the OECD website includes as regards Bahamas and Barbados a reference that these two jurisdictions applied a conditional domestic minimum top up tax for the year of 2024. So this is only for the year of 2024. So they will apply it unconditionally from 2025.
[00:13:09] That's the reason why despite the conditionality element, they still are in OECD central record legislation as qualified domestic minimum top up tax because they had this sunset clause which mean meant that the rule was only applicable for 2024. Now the last question. So we went from explaining what the conditional taxes are which is the distinctive criteria of being a global non globe taxpayer. We explained why this guidance is relevant. Then we dealt with impact for MNEs and the key message is removing from covered taxes potentially top up tax exposure. And if you are in jurisdiction that implements conditional taxes you can pay that tax locally but is not being recognized for the purposes of ETR computation. So now the question four is what to expect next.
[00:13:59] So the guidance is deliberately limited. It only covers explicitly conditional taxes.
[00:14:06] So it does not cover other types of discriminatory taxation or other type of conditional taxes which are not explicitly covered taxes.
[00:14:17] So the OECD and the inclusive framework stated clearly that there will be further guidance to be issued until the end of this year which is intended to apply prospectively and it will assess what are other types of discriminatory taxation or conditional taxes which may be caught under identical treatment which means not being treated as covered tax. My final message for M&ES and I told you I will tell what should be done. The final message is practical is the need to monitor both OECD developments and domestic implementation. So this administrative guidance will be or should be incorporated into the globe commentary. But the way and timing in which operates domestically may depend on the relevant jurisdictions law groups and this is my important, most important message should maintain an inventory of unusual levies, surcharges, exemptions, benefits and identify provisions linked directly or indirectly to the pillar 2 status and be ready to reassess their covered tax positions considering this guidance and in particular when the next guidance will be released. So this is all from my side. I hope you enjoy it. I want to thank you very much for joining us today.
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