OECD offers new UTPR safe harbor, favorable credit rules

The Organisation for Economic Co-operation and Development (OECD) has released a series of guidance on Pillar 2 that includes favorable rules for U.S. energy tax credits and a transitional safe harbor for the undertaxed profits rule (UTPR) that will benefit U.S. multinationals.

The OECD has been racing to provide guidance under the Pillar 2 global minimum tax so implementation can begin as early as 2024 on certain aspects of the initiative. The latest material was released for the meeting between the G20 Finance Ministers and Central Bank Governors in India on July 17-18 and includes: 

• Administrative Guidance on the Global Anti-Base Erosion (GloBE) Model Rules
• GloBE Information Return
• OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors
• G20/OECD Roadmap on Developing Countries and International Taxation Update 2023
• Public consultation documents on Amount B
• A report called Tax Challenges Arising from the Digistalisation of the Economy - Subject to Tax Rule

Covering a variety of topics, the guidance provides clarification on currency conversion rules for GloBE calculations, the application of substance-based income exclusion, qualified domestic minimum top-up tax, and safe harbors. More importantly for U.S. companies, the administrative guidance includes a transitional UTPR safe harbor and favorable rules for transferable energy credits.

The OECD designed the safe harbor to provide transitional relief to parent entities in jurisdictions with a corporate income tax rate of at least 20%, which includes the United States. For ultimate parent entities in these jurisdictions, the UTPR will be deemed zero for fiscal years which run no longer than 12 months and that begin on or before Dec. 31, 2025, and end before Dec. 31, 2026.

The safe harbor will not apply to top-up tax from the income inclusion rule (IIR), but the OECD previously released a separate transitional safe harbor that can provide some relief. The transitional safe harbor for the country-by-country report (CbCR) identifies low-risk jurisdictions and exempts qualifying multinationals from top-up taxes under the IIR, UTPR, and qualified domestic minimum top-up tax (QDMTT). Companies can qualify for the CbCR safe harbor by meeting a de minimis income test, satisfying a minimum effective tax rate under a simplified test, or falling under a routine profits threshold.

A multinational enterprise (MNE) group that qualifies for more than one transitional safe harbor may choose which safe harbor to apply for that jurisdiction. When an MNE qualifies for both a transitional CbCR and a UTPR safe harbor in a jurisdiction in a fiscal year, the MNE may elect to apply the transitional CbCR safe harbor rather than the UTPR safe harbor in order to avoid losing the benefit of the transitional CbCR safe harbor in a subsequent fiscal year under the “once out, always out” approach.

The favorable tax credit rules will apply to the energy credits that were recently made transferable under the Inflation Reduction Act. The GLoBE rules generally treat certain refundable tax credits equivalent to payments or grants, so that they do not reduce effective tax rates. Earlier guidance provided similar treatment for U.S. credits that are monetized through tax equity structures, but it was unclear how credits that were directly transferable would be treated.

The new guidance provides that the seller of the credit generally includes the proceeds in income and does not have a reduction in tax that would lower the effective tax rate for purposes of the GLoBE gules. An originator of a transferable credit that does not sell it can include the entire face value of the credit in income without any reduction in tax expense. A credit buyer, however, will reduce its tax expense, but only by the amount paid for the credit, not by the actual credit amount.

Implementation of Pillar 2 continues to be contentious topic in Congress. Republicans on the Ways and Means Committee criticized Treasury for the agreement in a recent hearing and introduced new legislation that would impose reciprocal taxes on entities in countries with a UTPR. It would also tighten the base erosion and anti-abuse tax (BEAT). It follow previous legislation that would impose retaliatory taxes on counties implementing Pillar 2.