Episode Transcript
[00:00:06] Hello and welcome to our podcast series where we bring you insights into the latest developments in the global tax policy and controversy space.
[00:00:15] My name is Bruno Niceto da Silva and I'm a Senior advisor at the A and M Global Tax Policy and Controversy Group.
[00:00:23] In this episode I would like to briefly discuss with you five points.
[00:00:28] First, what is the background for the side by side system?
[00:00:32] Second, how does the interaction between the former guilty rules now Net CFC Tested Income or NCTI and the Globe currently works?
[00:00:44] Third, how the side by side system may work.
[00:00:48] Fourth, how the side by side system may be implemented and finally, some conclusions with our A and M takeaways.
[00:00:58] So let's look to the first topic. What is the background for the side by side system?
[00:01:04] You may recall that on 28 June the G7 published a statement agreeing on a side by side system as to fully exclude US Parenthood groups from the UTPR and the IIR in respect for both for their domestic and foreign profits.
[00:01:23] This statement allowed the removal of Section 899 from the One Big Beautiful Bill act, also known as the OB3 which would otherwise allow retaliation against unfair foreign taxes.
[00:01:37] The OBT made some key changes to the GILTI rules, one of them precisely and as I mentioned it's now called Net CFC Tested Income the NCTI and these changes gave rise now to a 14% effective tax rate on foreign profits.
[00:01:58] The G7 statement also included the commitment to ensure a level playing field and address any potential BEPS risks deriving from the side by side system.
[00:02:08] The statement also agreed on achieving material simplification of the overall pillar 2 administration and compliance, something that had been already requested for a While both by MNEs and tax administrations and to extend the favorable treatment which is given to the QRTCs, the qualified refundable tax credits to other substance based tax incentives.
[00:02:32] These Principles of the G7 statement were subsequently reaffirmed into the 20 July declaration acknowledging that any agreement on the side by side system will require the broad support of by the BEPS if members.
[00:02:48] So let's look quickly. How does the interaction between the former guilty rules, the current NCTI and the Global Rules currently works?
[00:02:58] So it works by treating the NCTI as blended CFC taxes.
[00:03:05] This means that inclusions made under the NCTI then are subject to a cross border tax allocation mechanism which allows for the so called cross push down of CFC taxes, meaning that any CFC taxes imposed on the foreign subsidiaries are pushed down are attributed to these foreign subsidiaries for the purposes of calculating their effective tax rate in the context of the application of the GLOBE rules.
[00:03:37] Therefore, any difference between the effective tax rate calculator after the push down and the 15% minimum rate under the GLOBE Rules may trigger the application of the income inclusion rules in certain scenarios, even in the case of US parented groups as regards the U.T.P.R, as we know there is a transitional safe harbor applicable for upes ultimate parent entities located in high tax jurisdictions, the ones which are subject to a nominal corporate income tax rate of at least 20%.
[00:04:08] Both the cross border tax allocation methodology is and the UTPR safe harbor will expire by the end of 2025.
[00:04:17] It's worth recalling that in case a jurisdiction has implemented a qualified domestic minimum top up tax, the CUDA mtt, this QDMTT will always apply primarily and before any other charging provisions, IIR or TPR and prior to any cross border allocation mechanism that I just described.
[00:04:41] Let's then move to the third topic.
[00:04:44] How the side by side system may work fundamentally and as reflected in the G statement is that neither the IIR or TPR will apply. In case of US Parented groups, there may be cases where the IIR may still apply.
[00:05:02] So if we have a US Intermediate parent company which is held by a foreign ultimate parent entity located in an implementing IIR jurisdiction, so the US Intermediate parent company can apply the NSTTI rules, there will be the cross border allocation mechanism for the purpose of determining the ETR of the foreign subsidiary and then potentially the IIR may apply at the level of the ultimate parent entity if there is any difference between the effective tax rate and the 15%.
[00:05:35] However, this will not be the case where the UPE is a US UPE where only the NCTI rules will apply in any case. And similar to the current framework the QDMTT has primacy jurisdictions are free to apply the 15% minimum tax to their local low tax profits and this applies prior to any other rules.
[00:06:00] Let's look to the fourth topic. So how may the side by side system may be implemented? Well here I would say that considering the prior experience with the UTPR transitional safe hardware, it is probably more likely that we can expect a permanent safe harbor that may allow to effectively implement the side by side system.
[00:06:23] So time for some conclusions of this podcast with some key takeaways. First, we should take into account existing global rules are still in place and M and ES should comply with the current framework.
[00:06:37] Second, the QDMTT remains and will remain applicable without any limitations in the context of the side by side system, so we may see more countries implementing this rule.
[00:06:47] Third, considering that the existing framework on interaction between the NCTI and the Globe Rules will expire by the end of 2025, it may be expected that new guidance will be release until the end of the year on the application of the side by side system subject. Of course if there is an agreement by all BEPS if members.
[00:07:08] Fourth, MNEs should start assessing how the side by side system may affect the existing structures, taking into account the impact on tax modeling in light of the expected simplified compliance framework and also in the context of M and A transactions.
[00:07:27] And that is all from me today. Thank you very much for joining us and stay with us as we continue this journey in our upcoming podcasts on this Pillar two topic. My colleagues Jay Thompson, Matt Andrew will soon bring you some thoughts on the QRTCS and the Safe Harbors.
[00:07:45] And please do not forget also to check our monthly newsletter which will bring you the latest key updates around selected editorial pieces from our global tax network.
