GloBE rules: one step at a time

In May 2023 the Government introduced draft legislation to adopt the OECD’s Global Anti-Base Erosion model rules (referred to as “the Applied GloBE rules”, being the OECD rules as introduced in New Zealand). The Applied GloBE rules are proposed to be adopted by reference to the OECD model rules, commentary and administrative guidance. The exact application date has not been set, instead, they are proposed to be triggered once a critical mass of countries have adopted them.

While there are still some uncertainties as to how the Applied GloBE rules will function in New Zealand, the proposed legislation outlines how the rules will be administered, and how they may interact with New Zealand’s existing tax laws.

What are the GloBE rules?

The GloBE rules were developed by the OECD to ensure large multinational groups (MNEs) pay a minimum effective tax rate of 15% on their global profits. The rules form Pillar Two of the “Two Pillar Solution” that aims to prevent MNEs from shifting profits to low or zero-tax jurisdictions.

The Applied GloBE rules that New Zealand has adopted will apply to MNEs with consolidated accounting revenue of more than EU€750 million in two of the four preceding income years. The rules do not apply to certain entities, such as government entities, international organisations, non-profit entities and certain pension, investment, and real estate funds. Inland Revenue expects between 20 and 25 New Zealand-headquartered MNEs to fall within the rules’ scope.

Taxing mechanisms

The Applied GloBE rules adopt an Income Inclusion Rule (IIR), an Under Taxed Profits Rule (UTPR), and a Domestic Income Inclusion Rule (DIIR).

The IIR is the primary mechanism that applies on a top-down basis, giving the ultimate parent entity country, or an intermediate parent entity country, the right to collect GloBE top-up tax for underlying foreign operations, unless the tax is collected in the foreign country under a Qualified Domestic Minimum Top-Up Tax.

The GloBE top-up tax is the difference between the 15% GloBE tax rate and the Effective Tax Rate (ETR) calculated for each country an MNE operates in. The ETR is calculated by dividing the “Adjusted Covered Taxes” of all entities in a jurisdiction by the GloBE Income. The calculation entails complex adjustments that combine both accounting and tax concepts.

The UTPR is a “back-stop” rule that applies when no parent is subject to the IIR. It allocates top-up tax to countries in proportion to the group’s payroll costs and tangible asset values in each country that adopts the GloBE rules. This ensures that if the country where an MNE has its headquarters does not implement GloBE rules, the MNE will still have to pay a top-up tax.

New Zealand is proposing to implement a DIIR that would apply to New Zealand-headquartered in-scope MNEs. A DIIR is intended to avoid New Zealand-headquartered MNEs having to pay any part of the GloBE top-up tax on undertaxed New Zealand income to other countries under the UTPR. There would also be no additional tax cost for these taxpayers, just a change in the country they paid the tax to.

When will the Applied GloBE rules come into force?

An exact application date has not been confirmed. Instead, an empowering provision allows the application date to be set by an Order in Council, on the recommendation of the Minister of Revenue.

The Bill commentary notes that this date will be “once the Government determines that a critical mass of countries has adopted the GloBE rules”. It will not be before 1 January 2024 for the IIR, and not before 1 January 2025 for the UTPR. The “critical mass” test will likely be met in the next few years, as the EU, Japan, Canada, Australia, and the UK have committed to adopting the OECD GloBE rules.

Interaction between the Applied GloBE rules and New Zealand’s domestic tax laws

There have been several amendments proposed to New Zealand’s domestic laws in the Taxation (Annual Rates for 2023/24, Multinational Tax, and Remedial Matters) Bill to incorporate the Applied GloBE rules. The legislation, as proposed, makes imputation credits unavailable for taxes paid under the IIR or UTPR. Imputation credits are generated for taxes paid under the DIIR. Foreign tax credits will not be available for taxes paid under the IIR or UTPR to another country but would be available for Qualified Domestic Top Up Tax paid in another country.

Notably, the Applied GloBE rules are proposed to override double tax treaties unless a treaty explicitly refers to them.

Safe harbour rules

The OECD has developed three transitional safe harbour tests which may provide that in-scope entities do not need to prepare full calculations for income years beginning on or before December 2026. The De Minimis Test, Simplified Test and Routine Profits Test aim to reduce the compliance burden for MNE Groups. If the transitional safe harbour regime is not applied in a jurisdiction in the first fiscal year, it cannot be applied for subsequent years. It is therefore critical that MNE Groups carefully consider the three applicable tests in the first fiscal year the rules apply.

Financial accounting disclosures: IAS 12 developments

In May 2023, the International Accounting Standards Board (IASB) issued amendments to IAS 12 Income Taxes to clarify the accounting treatment of deferred taxes following the implementation of the OECD GloBE rules.

The amendments introduce a mandatory temporary exception to the accounting for deferred taxes for jurisdictions implementing the OECD GloBE rules. This has not yet been incorporated into New Zealand accounting standards.

In addition, effective for annual periods beginning on or after 1 January 2023, in periods in which Pillar Two legislation is enacted or substantively enacted, but not yet in effect, an entity preparing IFRS accounts is required to disclose known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes.

Administration and compliance

All in-scope MNEs must register with Inland Revenue within six months of the end of the first income year they are in-scope of the Applied GloBE rules. If they cease to be in scope, they must also notify Inland Revenue within six months from the end of the income year the Applied GloBE rules cease to apply.

New Zealand in-scope MNEs must file a GloBE information return (GIR) with Inland Revenue electronically within 15 months of the end of the relevant income year (18 months for the first reporting year).

All in-scope MNEs must file a separate annual top-up tax return with Inland Revenue stating the amount of top-up tax payable. This return is due one month after the GIR is due (or would be due, if the MNE does not need to file a GIR). This is extended to two months after the GIR is due for the first reporting year. Top-up tax is due on the same date as this return.

New penalties of up to $100,000 have also been introduced for failing to: 

• register for GloBE tax,

• submit a GloBE information return on time, and

• submit a CbC report on time.

The CbC and GloBE regimes are closely linked because MNEs that are in scope of the GloBE rules will also fall under the CbC reporting requirements.

Concluding comments

The Applied GloBE rules are complex and there will be a significant compliance burden for in-scope MNEs. Despite many countries committing to the OECD GloBE rules, some uncertainty remains on how they will operate, as few countries have legislated them yet.

It is essential that tax teams of MNEs begin formulating a framework to effectively comply with the Applied GloBE rules. In the first few years, the transitional safe harbours may apply, and tax teams should currently be considering whether these apply.

From there, the next steps are firstly understanding the complex operation of the Applied GloBE rules and calculating any possible top-up taxes. Secondly, developing a solution within existing reporting systems that can incorporate the Applied GloBE rules, as they effectively represent an additional reporting obligation. Thirdly, implementing the solution effectively and monitoring any ongoing developments and possible improvements over time. Tax teams will need to engage with other areas of the business to get the right information and data.

All in-scope MNEs should be considering and communicating any material ramifications to their management team/executive, most notably any top-up taxes, the compliance burden and disclosure requirements. Connected to the disclosure requirements, statutory auditors will likely request information regarding this impact.

Submissions on the Taxation (Annual Rates for 2023/24, Multinational Tax, and Remedial Matters) Bill close on Friday 14 July 2023 and Inland Revenue is expected to release further guidance before the Applied GloBE rules are implemented in New Zealand.

While this article provides a high-level overview of some practical implications, we suggest getting in touch with your usual Deloitte advisor if these rules might affect you.

July 2023 - Tax Alerts