The interaction between Safe Harbour and Qualified Domestic Minimum Top-Up Tax increase the need for solutions outside of your accounting and tax accounting systems
Assumably, many countries will implement a local Qualified Domestic Minimum Top-up Tax (QDMTT) which will decrease the number of entities in a group where a full data collection process is needed. However, on the other hand, you must collect data for the QDMTT calculation.
According to OECD regulations and the draft EU Directive, a jurisdiction can opt for implementing QDMTT regulations. Any top-up tax paid under these latter regulations will reduce any top-up tax calculated under Pillar 2.
Under the OECD regulations, a Qualified Domestic Minimum Top-up Tax means a minimum tax that is included in the domestic law of a jurisdiction and that:
(a) determines the Excess Profits of the Constituent Entities located in the jurisdiction (domestic Excess Profits) in a manner that is equivalent to the GloBE Rules;
(b) operates to increase domestic tax liability with respect to domestic Excess Profits to the Minimum Rate for the jurisdiction and Constituent Entities for a Fiscal Year; and
(c) is implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and the Commentary, provided that such jurisdiction does not provide any benefits that are related to such rules.
Challenges related to QDMTT
The above implies that a multinational group must keep track of whether a jurisdiction will introduce QDMTT regulations and have a process that supports the following.
- Have a process to calculate the QDMTT for each jurisdiction.
- Be able to fulfill any local compliance regarding QDMTT in each jurisdiction.
- Secure that QDMTT tax paid in each jurisdiction is treated correctly in the Pillar 2 calculations.
The Impact of Safe Harbour
The work of the Inclusive Framework in developing safe harbours has also included work on a QDMTT safe harbour that would provide compliance simplifications for MNEs operating in jurisdictions that have adopted a QDMTT. A QDMTT Safe Harbour would eliminate the need for an MNE to perform an additional GloBE calculation in addition to the QDMTT calculation required under local law. The Inclusive Framework will consider such a Safe Harbour as part of the Administrative Guidance on the QDMTT.
Assuming that the OECD introduces a Safe Harbour related to QDMTT, this will significantly impact the Pillar 2 compliance process. This is because the entities in a jurisdiction that introduce a QDMTT will be comprised by the Pillar 2 Safe Harbour and thus will be excluded from a full Pillar 2 calculation. At first glance, this seems to be a real simplification for many multinational groups. However, remember that a local QDMTT calculation must be done in the QDMTT jurisdictions and that these calculations will probably be similar to the full Pillar 2 calculations. The value of being able to use the “QDMTT Safe Harbour” for Pillar 2 purposes from a simplification point of view can therefore be questioned.
Another interesting question is how the Transitional Safe Harbour rules (Country-by-Country safe harbour) will affect the relationship between Pillar 2 and QDMTT.
Here we can conclude that entities in a jurisdiction that are comprised by the Pillar 2 Safe Harbour regulations do not automatically become out of the scope of a full QDMTT calculation in a jurisdiction. To become out of scope, each jurisdiction implementing QDMTT also needs to introduce QDMTT safe harbour rules similar to the Pillar 2 Safe Harbour rules to qualify as a safe harbour.
The above underlines the importance that any Pillar 2 Safe Harbour regulations must be mirrored in any QDMTT regulations in each jurisdiction.
The impact of Safe Harbour on the data collection process
The main benefit of having a jurisdiction under Pillar 2 and QDMTT Safe Harbour is that entities in such a jurisdiction are not in scope for a full Pillar 2 calculation of top-up tax. Thus, the introduction of the transitional Safe Harbour rules will simplify the data collection process since data collection of figures for calculating Globe income, and ETR only applies to entities in a jurisdiction that is not excluded by Safe Harbour rules. I.e., a jurisdiction that qualify under the transitional Safe Harbour rules is out-of-scope for both Pillar 2 and local top-up tax calculation.
Considering the above, many groups could have a limited number of entities where a full data collection process is needed. Thus, the need to do expensive automation of the data collection process and/or to make changes to the accounting or tax reporting system must be assessed in each group when you have reviewed the impact of the Safe Harbour regulations. In practice, the data collection process could be more or less manual for many groups, which is why such a process should be able to manage central input (both automatic and manual) and input from local reporters. Adding a hundred or more new accounts to a tax accounting system to collect data for only a handful of entities that may vary from year to year might not be optimal. If your accounting system does not allow you to limit which entities that can see a new account, it makes it even less attractive to use the accounting system. Instead, the interaction between Safe Harbour and Qualified Domestic Minimum Top-Up Tax increase the need for solutions outside of your accounting and tax accounting systems
How can you start a structured process to understand the effects of the safe harbour rules and be Pillar 2 ready
Blika is developing a solution to help you put a process in place to calculate which jurisdictions qualify under the safe harbour rules. You can quickly be up and running with our solution that facilitates the complexity of making the Pillar 2 safe harbour calculations. The Blika Pillar 2 solution is an end-to-end solution where you can automatically make the GloBE calculation and control the whole Pillar 2 process. Blika is currently developing all parts of the Pillar 2 process and will add support, e.g., for rollover figures and filing. However, you can soon use the solution to assess the effects of the safe harbour calculations and ensure that you are implementing a structured process. With Blika, you have a solution that can support you through the whole Pillar 2 implementation journey step by step. Due to the complexity of the Pillar 2 rules, you may want to start an implementation journey as early as possible.
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