Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:05] Speaker B: Welcome to our podcast on the September Pillar 2 package and what it means specifically for US multinational companies.
I'm Corey Terry, a managing director in Alvarez and Marcel's Corporate Transaction Tax and Advisory practice in New York.
[00:00:18] Speaker A: And I'm Michael Maute, Senior Director in the CTTA practice in New York.
And this podcast is part of our A and M Text Talks podcast series where we discuss items of interest to tax practition.
We also invite listeners to check out our latest podcast which focused on the Pillar 2 guidance related to explicitly conditional taxes.
[00:00:41] Speaker B: That's right, Ben. Today we're talking about what US multinational companies should know about OECD's September Pillar 2 package and Maika. We've been waiting for Pillar 2 guidance for a while now and it's finally here. So what were your initial thoughts on this package?
[00:00:59] Speaker A: Well, I must admit that my initial thought was this is not really the guidance that we were hoping to get.
What about the Integrity rules and the other permanent safe harbors?
But it seems we'll be getting more on those other topics later this year. So for now let's focus on the September package. And that package was basically comprised of three separate documents.
The first one is the revised Globe Information Return or GIR guidance, which has been updated for the side by side safe harbor rules which were released in January this year.
Next, there is new administrative guidance covering explicitly conditional taxes as well as QDMTT accounting period mismatches.
And last but not least, there is now a framework for the full legislative review of Pillar 2 regimes. And this is really the so called peer review process that the inclusive Framework framework will use to confirm or potentially withdraw a jurisdiction's qualified status as it relates to local pillar 2 rules.
[00:02:07] Speaker B: So those are some high stakes.
[00:02:10] Speaker A: Yeah, high stakes indeed. So three releases. And while they're all covering somewhat separate topics, what it does seem is that they're all moving in the direction of firming up documentation and enforcement of Pillar two rules.
[00:02:25] Speaker B: Yeah, I agree with that. And I think the through line here seems to be enforcement. You know, the first phase of the Pillar 2 project was about getting legislation enacted, navigating the framework. This package emphasizes documentation and the ongoing legislative procedures.
So that means proving that the regimes qualify, that the safe harbors hold, and that the QDMT's actually deliver the outcomes that the rules intended.
[00:02:49] Speaker A: Right. And since we're focusing on US Parented groups, the first thing to probably mention is that the guidance and documents issued this September don't immediately change the Pillar two landscape for US multinationals.
And that's really? Because after the side by side agreement was reached, US Parenthood groups are now primarily focused on local QDMT's, the application of safe harbors and overall compliance. That being said, because the guidance deals with each of those items, US Parented groups do have a lot to take away from the package.
So let's dive into a bit more detail on each of the documents and how they are relevant to US Parenthood groups. So if we start with the gir, I think that's what most US Parented groups have been most curious about.
And the real question is how the GIR obligations have been amended as a result of the side by side safe harbor and the new guidance that was issued.
And you may recall that when the side by side package was negotiated and released earlier this year, a lot of US Multinationals were hoping that this would basically be the end of GIR obligations for US Parenthood groups. And that turned out to be wrong.
That being said, the GIR simplification for US Parented groups relying on the side by side safe harbor is mostly real.
Corey, do you want to go into a bit more detail on that?
[00:04:17] Speaker B: Sure. Right. And I agree with the mostly real part.
But certainly there are those of us that remember the June 2025 G7 agreement.
And we may quibble with the simplification elements here because as you may recall, in that agreement the government effectively traded omitting Section 899 from the OB3 legislation in exchange for this so called side by side agreement and safe harbor.
But embedded in that agreement was a promise, and I quote, to work to deliver a side by side system that would be undertaken alongside material simplifications delivered to the overall Pillar 2 Administration and Compliance framework. And so Micah, as you alluded to, the US Government and taxpayers at that time were cautiously optimistic that this would mean there would be no GIR requirement for US Multinationals at all. And that would be great because this GIR is not just a compliance burden. But let's face it, companies don't want to share this information broadly. So that didn't work out. And we do actually have us MNCs having to file GIRs as we know.
So maybe we just go back and say what this, what the rules were prior to this, to this guidance. So prior to this package, which by the way applies for GIR reporting for fiscal year starting on or after December 31, 2025. So the old rules still apply for US multinationals and everyone else in this new package, US parented groups. Sorry, before this package, US parented groups still had to file a GIR for the whole group, including all of Section 1 and all corporate structural information. In addition, Section 2 and Section 3 had to be completed for each market where the US parented group had constituent entities. So there's a lot of information.
But under this new September guidance, what is no longer required in section 1 includes certain corporate structural information items that are found in section 1.3 and the group summary in section 1.4, which was intended to function as like a jurisdiction by jurisdiction dashboard reporting the ETR range exceptions that were relied on and the QDMTT ranges.
So this section was intended to give markets sufficient information to determine whether they could have a taxation right over other jurisdictions. In addition, Section 2 or Section 3 solely have to be completed for jurisdictions with the QDMTT and no IRR or UTPR calculations have to be included.
So that was a lot. But the shift is one of focus on specific markets, not necessarily overall relief of compliance obligations. So for us headed groups selecting side by side, the QDMT jurisdictions effectively become your pillar to compliance. But as with everything, it's not so straightforward.
[00:07:09] Speaker A: Yeah, and one last item that I'll highlight which just wasn't completely clear to me is whether the side by side safe harbor application and the new guidance actually impacts the dissemination approach.
Because as folks may remember, before the guidance and before the side by side safe harbor, the dissemination approach approach worked as follows. UPE jurisdictions would receive the entire gir. I don't think there would be any changes there. And then jurisdictions with taxing rights under the rule order, and that would include IAR markets or QDMTT markets, or for the jurisdiction itself would receive the etr, the top of tax and allocation data for jurisdictions where they would have a taxing rights.
And then finally, every jurisdiction in which the group has a constituent entity would basically receive the general information. So basically Section one, it's not clear to me whether the guidance now amends this dissemination approach. In my mind it might actually make sense because the top up tax under the IIR and UTPR is deemed to be zero for, you know, previous IIR markets no longer to have access to that additional information. But that is not clearly stated in the updated guidance. So perhaps more to come on that, let's turn to the administrative guidance which covers both the definition of explicitly conditional taxes as well as QDMTT accounting period mismatches.
Corey, can you explain to the folks listening in what explicitly conditional taxes are?
[00:08:59] Speaker B: Sure, and I think I'll start by saying, you know, I don't think we Want to spend too, too much time on this because you know, cutting to the chase, I think a lot of the rules on these explicitly conditional taxes just aren't applied to USMC MNCs that are eligible for the safe harbor. But just so everyone's aware of it, a tax is an explicitly conditional tax and therefore that tax does not count as a covered tax for pillar 2 purposes if it is assessed based on whether a group is subject to a qualified IRR or UTPR elsewhere and is not eligible for the side by side. So what does that mean? For example, if a country imposes a tax only when the income would not otherwise be subject to an IRR or a UTR, this would clearly fall within the rule because effectively the jurisdiction is trying to soak up the other tax that would be assessed by some other jurisdiction clearly in the rule. But the inverse is also true. So if a, if a country assesses a tax and then only turns it off if the income is not subject to an IRR utpr, that would also be in scope of the rule. So the consequence is that the explicitly conditional taxes are not covered taxes.
But as I said, importantly, if the taxpayer is eligible for the side by side safe harbor, these rules don't generally apply.
[00:10:16] Speaker A: Yeah. So for multinationals overall, the question is really do they have any entities operating in a group where that jurisdiction has some type of exemption or special regime which is dependent on the group's overall globe profile. But again Corey, as you mentioned, for US multinationals or US parented groups, this is going to be less relevant where the side by side safe harbor applies.
[00:10:44] Speaker B: Yeah.
But where it does apply, the effect actually is quite real. And this is maybe the one area why we bring it up where it could impact US multinationals. And that's because not only does the conditional these conditional taxes drop the amount adjusted of adjusted covered taxes, I should say, which means ETRs generally go down and a taxpayer is going to be more likely to be subject to a top up tax. But also, and this is key, the guidance says that adjurance tax that enacts a conditional domestic minimum top up tax won't qualify as a qualified domestic minimum top up tax and get all the benefits that come with that. So there are actually knock on effects that can apply to us MNCs that go beyond just the jurisdiction that enacted and whether or not there's a reduction in ETR under these rules.
[00:11:35] Speaker A: Yep. So this is a life diligence item going forward, especially I think around new legislation in markets, albeit that the question is with this new guidance Will jurisdictions even go down this path of implementing this type of legislation? Which probably the answer is no.
[00:11:56] Speaker B: Yeah.
So if we move on to qdmtts, like what struck me most about, you know, across all the three releases is how often these qdmtts are coming up. So in the gir, in the accounting guidance, in the review framework.
So for US multinationals that elected side by side, you know, the world of qdmtts are still very important and certainly a pillar to reality.
[00:12:21] Speaker A: Exactly. And the second piece of the guidance from the administrative guidance specifically covers qdmtts as well. And it really solves a practical QDMT headache, which is what happens when an entity's financial year doesn't line up with the group's financial year and what accounting standard should be used for the calculation of the local QDMT charge. Corey, do you want to go into a little bit more detail on that one?
[00:12:49] Speaker B: Yeah, this one is interesting because you know, the core clarification involves the so called local financial accounting standard rules, the LFAS rules. And at a very high level, these rules allow a taxpayer to use their local statutory gap instead of the UPE gap for their local QDMT computations when certain conditions are met. And there's a number of reasons a US multinational might want to prefer the local statutory accounting standard over the UPE GAAP or vice versa. For instance, sometimes under statutory GAAP there's amortization of intangibles that reduces your globe income, whereas maybe that amortization is not there under UPE gaap. And so you might get a better answer using statutory financial standard local financial standards over UPE, which is effectively US GAAP for US MNCs. So just quickly on this, under the old rule, if an entity's local financial fiscal year covers a different period from the fiscal year of the consolidated financial statements, the QDMTT cannot use the LFAS rules. And the QDMT has to be done in, in the UP gaap, which is US gaap. So that, you know, there was always just this mismatch. If there was, you know, September 30th, year end, local year end, and the US consolidated group used 1231, full stop, you couldn't use the LFAST rules and use local gaap. But what this guidance says is that if the entity's fiscal, local fiscal period for its financial accounts matches the period that are used for the consolidated financial statements, that entity can still continue to use the local financial accounting standard. So even if the period doesn't line up with the group's own financial year.
It's an opportunity to continue to use the LFAS rules, You know, and without getting into too much detail, the guidance also adds a few other practical refinements to these rules. You know, now a country can require entities to calculate the QDMTT on a set required QDMTC fiscal period of its own, which may or may not match the group's year. And then interestingly, for those that want to stay on the local financial accounting standard, there were always M and A considerations where either liquidating or disposing of an entity or acquiring an entity mid year might technically run afoul of the LFAS requirements to have the same year end for all of the constituent entities. And in that case, there is some liberalization on those rules that provide those standards, but it's really more of a grace period for the year that the transaction happens, or I think also the preceding year. So you kind of have to get back on the right track pretty quickly after that. It only really stops you from blowing the rule for the transaction itself.
[00:15:40] Speaker A: Yep, perfect.
Let's move on to the last document that was issued in September and briefly talk about what what we call the legislative Review.
And this third document is not necessarily going to change any Pillar 2 filings today or tomorrow or even likely anytime soon. But strategically, it may be one of the more important documents.
And this is really the OECD moving from the transitional self certification for the so called qualified status of a dmtt, IIR or UTPR to a full legislative review, basically a peer review of each jurisdiction's Pillar 2 legislation.
Listeners will know that the qualified rule status gives effect to the global pillar 2 rule order by modifying the application of rules in one jurisdiction where there is an applicable qualified rule in another jurisdiction. And so the qualified status of Pillar 2 rules is an important element in deciphering which rules apply.
Corey, do you want to go into a little bit more detail on what this means for jurisdictions and how companies need to monitor this?
Sure.
[00:16:56] Speaker B: So I think the short answer is that the qualified status of certain domestic pillar 2 rules is no longer something that a taxpayer can just assume. So under the peer review, a jurisdiction's legislation can be scrutinized, recommendations to amend the domestic law can be issued, and qualified status can ultimately be withdrawn.
So it's worth understanding how the peer review works because the process has some substance to it. And Mike, as you alluded to, the purpose of the peer review process is to achieve consistency and coordination in the application of the rules across different jurisdictions.
The full Legislative review is designed to determine if the legislation of a jurisdiction achieves the outcomes that are consistent with the globe rules. So the jurisdiction itself first has to kick it off. It hands to the OECD D Secretariat its legislation. It also includes a table mapping its rules against the model rules, a self assessment and a translation. If the language is different from there, it becomes an actual peer review. So other jurisdictions now get to weigh in on where they think that legislation falls short or maybe qualifies. And notably so do taxpayers. Every implementing jurisdiction legislation will get reviewed through this process and and the results land in the central record for everyone to see.
[00:18:15] Speaker A: Yeah, and the other item that I'll add is that the good news is that any loss of status applies prospectively from fiscal years beginning on or after the decision date, and so there's no retroactive surprises for companies to take into account.
On top of that, a jurisdiction that fixes an inconsistency with retrospective effect can even have its status restored retrospectively.
The one topic to watch out for is what this document refers to as so called related benefits.
And the concern is really that a jurisdiction that imposes top up tax then hands that value back to a taxpayer through a benefit which is tied to the rules and guidance on how related benefits will be identified and treated as still being developed and could ultimately impact a jurisdiction's qualified status.
So more to come on that?
[00:19:12] Speaker B: Yeah. And for all the groups monitoring the central record, which is where all these decisions will be published, will become an annual governance process rather than just a year end check.
[00:19:23] Speaker A: Yeah.
So just to close off this podcast, the question arises what US parented groups and US multinationals and their tax departments should do right now. What's on the list? What are the priorities?
Corey, what are the recommendations that you can give to our listeners?
[00:19:43] Speaker B: Sure, yeah. I mean a few things are just sort of common sense. So focus on a few things. So first, I think all US MNC should be revisiting their safe harbor strategy for fiscal 2026 jurisdiction by jurisdiction. You know, this is not necessarily new coming out of this guidance, but it's very relevant to the go forward.
Also, taxpayers that have not eligible for the side by side safe harbor should screen regimes for conditional tax features. And certainly to the extent that some of those conditional tax features end up creating a QDMT problem in the in the jurisdiction that will become relevant to all taxpayers. USMNC should be getting ready for the new GIR reporting requirements for fiscal years beginning on or after December 31, 2025. It's a little Tricky because there's a separate process for the prior years. This is a go forward process. So compliance burdens, although simplified, there is change and change always means getting ahead of things.
Taxpayers need to map their QDMTT exposure. This for USMNCs, continues to be the main driver of Pillar 2 after the side by side. And also just check to make sure that you're using the right financial accounting standards. Maybe this guidance gives you an opportunity to switch from UPE GAAP to, you know, statutory financial accounting standards, which may give you a benefit depending on your facts. So analyze that and that may be a good, a good answer for some folks. And then finally, as this peer review process gets kicked off, you know, getting ready to, you know, monitor their central record, making sure you understand where the countries that you're operating in stand on the, the peer review process. So just a few things that, you know, we wanted to talk about also, you know, maybe before we go, we do expect some more guidance, as Micah alluded to, before year end. So I wouldn't review this package as sort of pillar two winding down. The inclusive framework has committed to further guidance on discriminatory taxes benefits by the end of 2026, which are intended to apply prospectively. And the related benefits guidance is still in development, among other things. So in addition, we're also expecting guidance on the permanent safe harbors and the integrity measures. Those are supposed to be published by the end of the year, but we shall see. But the groups that come through this phase, the best will be the ones that are, you know, prepared for the documentation and governance as they go through this process with their respective colleagues.
[00:22:17] Speaker A: And on that note, thanks everybody for joining us and for listening in.
[00:22:22] Speaker B: Yeah, thank you very much everyone. Thanks for listening. Have a good day.
