On Feb. 2, 2023, the Organization for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting, still commonly known as the OECD, released technical guidance on “pillar two” of the global tax deal.

This pillar covers the implementation of the proposed 15% global minimum tax on large multinational enterprises, including clarification on the application of a U.S. tax on intangible income. Although your operation may not be large enough to be directly impacted by these provisions, you can count on most countries eventually adopting the rules for everyone. The guidance drew a mixed reaction from U.S. officials.

Topics Covered

Arriving in the form of a document spanning over 100 pages, the guidance covers several aspects of the 15% global minimum tax. Among the topics addressed are:

• The scope of the tax
• Applicable definitions
• Taxable income calculations and treatment
• Global anti-base erosion rules for insurance companies
• Qualified domestic minimum top-up taxes

The guidance was unanimously agreed upon by all 142 countries and jurisdictions that have signed on to the two-pillar global tax deal. It will be incorporated into and supplant official OECD commentary originally released in March 2022.

“While this brings an end to the work we had set for ourselves in October 2021, we will continue, over the coming months, to work hard to ensure that the rules are implemented in a coordinated and administrable manner,” said Grace Perez-Navarro, director of the OECD Center for Tax Policy and Administration, in a same-day press release. “This will include listening to stakeholders on how the operation of the rules can be further refined to reduce compliance costs and achieve better tax certainty for business, and how we can optimize the information to be reported in the GloBE Information Return, while also developing a robust and transparent peer review process and expanding our capacity building efforts,” she added.

GILTI Also Addressed

In addition to discussing the topics noted above, the guidance notably sheds light on how the Global Intangible Low-Tax Income (GILTI) Regime enacted under the Tax Cuts and Jobs Act of 2017 fits in with the 15% global minimum tax’s design. According to the document, GILTI is now considered a Controlled Foreign Corporation (CFC) Tax Regime under the GloBE Rules, which include the income inclusion rule — the primary mechanism of the 15% global minimum tax.

“However, given the status of GILTI as a Blended CFC Tax Regime, and the urgent need for guidance on the allocation of GILTI taxes under Article 4.3.2(c), the Inclusive Framework has agreed [on] a simplified allocation that can be applied to Blended CFC Tax Regimes, including GILTI, for a limited time period,” explains the guidance.

More On the Blended Regime

A Blended CFC Tax Regime aggregates income, losses and creditable taxes of all the CFCs for the purposes of calculating the shareholder’s tax liability under the regime if the applicable rate is less than 15%. Applicable rate “means the threshold for low taxation under the Blended CFC Tax Regime (i.e., the minimum rate at which foreign taxes on CFC income generally fully offsets the CFC tax),” according to the guidance. The GILTI applicable rate is 13.125%, and the OECD will assess whether to allow a special allocation methodology for Blended CFC Tax Regimes after the unspecified limited time period.

The blended CFC tax allocated to an entity is calculated by dividing the blended CFC “allocation key” by the sum of all blended CFC allocation keys, multiplied by the allocable blended CFC tax. The blended CFC allocation fee is found by subtracting the GloBE jurisdictional effective tax rate from the applicable rate, multiplied by the attributable income of the entity.

For GILTI purposes, the Allocable Blended CFC tax is determined based on the U.S. shareholder’s domestic federal income tax return. If there is not a “domestic loss,” it’s equal to the amount of GILTI, multiplied by 21%, less the foreign tax credit.

Obviously, the effective rate of the GILTI tax is impacted by the present 50% deduction allowed is calculating the US tax (and amount of foreign taxes allowed as an offset). This is changing for calendar year taxpayers in 2026 when the deduction will be reduced to 37.5%.

Yeas and Nays

The U.S. Department of the Treasury publicly expressed support for the guidance in a February 2023 press release. “The continued progress in implementing the global minimum tax represents another step in leveling the playing field for U.S. businesses, while also protecting U.S. workers and middle-class families by ending the race to the bottom in corporate tax rates,” said Assistant Secretary of the Treasury for Tax Policy, Lily Batchelder. “We welcome this agreed guidance on key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes, and provide additional clarity that stakeholders have asked for.”

However, as mentioned, not everyone is pleased with the guidance and subsequent direction of the global tax deal. In a Feb. 10, 2023, letter to OECD Secretary-General Mathias Cormann, House Ways and Means Committee Chair Jason Smith (R-MO) expressed his displeasure regarding how the U.S. GILTI regime currently fits in with the OECD’s 15% global minimum tax framework under its GloBE rules. He alleged the OECD has been conducting backroom deals to “attack the United States,” and the president’s delegates have “not stopped them.”

“We recognize the sovereign right of countries to adopt tax rules for their own companies and for activities within their own borders,” Smith wrote in the letter. “We welcome countries’ efforts to enact their own GILTI-type global minimum taxes. Regrettably, other countries are considering a GILTI-type global minimum tax only if they can also impose a new Under Taxed Profits Rule (UTPR) surtax on American companies.” He added that the UTPR surtax is “fundamentally flawed” and will “target important U.S. tax incentives” as well as American companies operating abroad.

In a press release accompanying Smith’s letter, House Republicans on the Ways and Means Committee lent support to his position. They perceive the GloBE rules — particularly the interaction of the UTPR with GILTI — as the product of “collusion” with the Biden administration that will impair the economic competitiveness of the United States.

“Despite numerous reformulations, the OECD global tax deal fails to deliver on its most important objectives: eliminating discriminatory digital services taxes, strengthening the principles of cross-border taxation for a digitalizing economy, and ensuring fair treatment across countries,” says the press release.

The Saga Continues

As reaction to the OECD guidance shows, perspectives of U.S. government officials on the global tax deal tend to fall clearly along the wide partisan divide that currently exists. Moore Doeren Mayhew will continue to monitor this issue and how it might impact your specific tax situation. Contact us today to learn how the global minimum tax might impact you.