The OECD inclusive framework’s Pillar Two model rules, applicable to large multinational groups with annual consolidated group revenue of at least EUR 750 million, will result in "top-up" tax amounts to bring the overall tax on profits in each jurisdiction where a group operates up to a 15% minimum effective tax rate. The key components are: qualified domestic minimum top-up taxes (QDMTT), which allow jurisdictions to charge any top-up taxes due in respect of local profits; the income inclusion rule (IIR) under which parent company jurisdictions apply the top-up tax rules on a top-down basis; and the undertaxed profits rule (UTPR), which will apply as a secondary (backstop) rule where the other rules have not been fully applied.

The guidance will be incorporated into the OECD’s commentary to the model rules at a future date. There are also a number of additional examples which will be included in the OECD’s published examples illustrating the application of the model rules.
The new guidance covers six distinct areas: recapture of deferred tax liabilities; divergences between Pillar Two basis and accounting carrying values; allocation of cross-border current taxes; allocation of cross-border deferred taxes; allocation of profits and taxes in groups including flow-through entities; and the treatment of securitization vehicles.

The model rules include a deferred tax liability recapture rule, which requires the benefit of some deferred tax liabilities (e.g. in relation to intangible fixed assets) that are taken into account in the Pillar Two calculations, to be tracked and then recaptured if they do not reverse within five years.
Some businesses raised questions about whether it would be necessary to track deferred tax liabilities on an item-by-item basis. The latest guidance sets out approaches on how to apply the deferred tax recapture rule in practice. For example, group entities will be permitted to track deferred tax liabilities on a "general ledger account" basis. Simplified tracking approaches can also be permitted on a less detailed "aggregate DTL category" basis (i.e., two or more general ledger accounts within the same balance sheet or sub-balance sheet account) where the composition of the category does not include assets that are likely to be liable to deferred tax liability recapture. Specific general ledger accounts cannot be aggregated with other accounts, including: non-amortizable intangible assets, including goodwill; intangibles with an accounting life of more than five years; related party receivables and payables; and "swinging accounts" where net asset and net liability positions can arise at different points of the life of the relevant assets/liabilities. General ledger accounts, which would always only generate deferred tax assets, are also generally excluded from an aggregate DTL category.
Deferred tax liabilities that would otherwise be covered by an exception to the recapture (e.g., deferred tax liabilities in respect of tangible fixed assets) will become subject to recapture if tracked as part of a general ledger or aggregate DTL category.
The default method for calculating the amount of the recapture of liabilities within an aggregate DTL category is last-in, first-out (LIFO). In some circumstances groups may choose to use the first-in, first-out (FIFO) method. Where an aggregate DTL category contains only short-term deferred tax liabilities that will reverse within five years, entities can benefit from a simplification to remove the need for tracking. Guidance is also provided on the methodology for determining whether any reversals are attributable to deferred tax liabilities that arose before the group came within the scope of Pillar Two.
The guidance also includes a clarification on the exceptions to the recapture rule: deferred tax liabilities associated with cost recovery allowances on leased property will be within the scope of the exception if the leased property is a tangible asset.

There are a number of areas in the model rules that require an entity to determine its Pillar Two income or loss by reference to values that may differ from the carrying values reflected in the financial accounts used in the preparation of the consolidated financial statements. Examples include: pension accruals; stock-based compensation; intra-group asset transfers accounted for at cost; elections to use the realization method in lieu of fair value accounting; and adjustments following acquisitions or disposals of entities. The guidance provides clarifications on how the total deferred tax adjustment amount should be calculated using Pillar Two (global anti-base erosion or "GloBE") carrying values in these areas. The guidance also clarifies the limited extent to which such divergences are taken into account for the purposes of applying the transition rules, and how Pillar Two deferred tax amounts are calculated following intragroup transfers accounted for at cost and subsequently amortized/impaired. The substance-based income exclusion continues to be calculated using accounting carrying values.

Under the model rules, covered tax amounts included within the financial accounts of a "main entity" but relating to the profits of its permanent establishment, are generally allocated to the permanent establishment jurisdiction for effective tax rate calculation purposes. Some jurisdictions allow for "cross-crediting," i.e., foreign taxes paid on one source of income can give rise to foreign tax credits that can be used against income arising in a different jurisdiction. The existing guidance on ‘cross-crediting’ is significantly expanded and sets out a formulaic mechanism for determining the allocations of covered tax amounts to each permanent establishment  where cross-crediting rules apply to the main entity. The mechanism uses a four-step process, together with allocation keys, to apportion amounts. Modifications apply where cross-crediting involves taxable distributions and/or is applied by reference to separate "baskets" of foreign income. The same principles also apply in respect of the cross-crediting of taxes on CFCs (other than taxes arising under a "blended CFC tax regime" such as US global intangible low-taxed income (GILTI), for which specific guidance issued in February 2023 remains applicable) and also hybrid and reverse hybrid entities.

The Pillar Two global minimum tax rules incorporate an agreed rule order, which prevents a jurisdiction from levying top-up tax in respect of low tax profits where those profits have already been subject to top-up tax under "qualified" rules in another jurisdiction. A separate questions and answers document published by the OECD inclusive framework describes agreed processes for common assessment of the "qualified" rules status of jurisdictions’ implementations of domestic minimum top-up tax rules, IIRs, and UTPRs; as well as assessing whether a jurisdiction's QDMTT satisfies the additional criteria for the QDMTT safe harbor to apply.
A simplified transitional qualification mechanism will apply initially based on self-certification by an implementing jurisdiction. An implementing jurisdiction will provide the OECD inclusive framework with information on the main features of their (draft or enacted) legislation. If the rules contain some minor inconsistencies, a jurisdiction can still make a self-certification where these are expected to be addressed within an agreed timeframe. If no questions are received from other OECD inclusive framework jurisdictions, or if any such questions are resolved, the rules will be recorded on the OECD website as having transitional qualified status. If questions cannot be resolved and a required level of opposition is reached (‘consensus minus one’ - i.e. all or all but one of the reviewing jurisdictions have agreed that the self-certification should be rejected) then the jurisdiction’s rules will not have transitional qualified status. If the rejection requirements are not reached, the jurisdiction’s rules will have transitional qualified status, but they will also be prioritized for early full legislative review under the peer review process. All implementing jurisdictions will be required to respect any transitional qualified status.
A full peer review process will be introduced, involving both a full legislative review of whether domestic legislation achieves outcomes consistent with the model rules, and ongoing monitoring to ensure that a jurisdiction's rules are in practice applied and administered consistently with the model rules. Any loss of transitional qualified status as a result of a peer review will not be retrospective but will only apply for accounting periods that begin on or after the date that the status changes.

Additional guidance has been issued on the treatment of groups with special purpose vehicles used for the purposes of securitization transactions. The guidance notes the importance for the sector that securitization entities remain "bankruptcy remote." Where a special purpose vehicle meets the guidance’s definition of a securitization entity (including having non-group investors), jurisdictions can exclude these entities from the scope of their QDMTTs. However, the "switch-off rule" would apply such that a group with an excluded securitization entity would not benefit from the QDMTT safe harbor for that jurisdiction. Alternatively, jurisdictions may choose to design their QDMTTs so that any QDMTT top-up tax liabilities in respect of securitization entities are imposed on other group entities located in the same jurisdiction, in which case the QDMTT safe harbor would remain available for that jurisdiction.
The OECD inclusive framework will consider issuing further administrative guidance to address issues associated with securitization entities, e.g., in respect of hedging arrangements.

The Pillar Two global minimum tax rules incorporate an agreed rule order, which prevents a jurisdiction from levying top-up tax in respect of low tax profits where those profits have already been subject to top-up tax under "qualified" rules in another jurisdiction. A separate questions and answers document published by the OECD inclusive framework describes agreed processes for common assessment of the "qualified" rules status of jurisdictions’ implementations of domestic minimum top-up tax rules, IIRs, and UTPRs; as well as assessing whether a jurisdiction's QDMTT satisfies the additional criteria for the QDMTT safe harbor to apply.
A simplified transitional qualification mechanism will apply initially based on self-certification by an implementing jurisdiction. An implementing jurisdiction will provide the OECD inclusive framework with information on the main features of their (draft or enacted) legislation. If the rules contain some minor inconsistencies, a jurisdiction can still make a self-certification where these are expected to be addressed within an agreed timeframe. If no questions are received from other OECD inclusive framework jurisdictions, or if any such questions are resolved, the rules will be recorded on the OECD website as having transitional qualified status. If questions cannot be resolved and a required level of opposition is reached (‘consensus minus one’ - i.e. all or all but one of the reviewing jurisdictions have agreed that the self-certification should be rejected) then the jurisdiction’s rules will not have transitional qualified status. If the rejection requirements are not reached, the jurisdiction’s rules will have transitional qualified status, but they will also be prioritized for early full legislative review under the peer review process. All implementing jurisdictions will be required to respect any transitional qualified status.
A full peer review process will be introduced, involving both a full legislative review of whether domestic legislation achieves outcomes consistent with the model rules, and ongoing monitoring to ensure that a jurisdiction's rules are in practice applied and administered consistently with the model rules. Any loss of transitional qualified status as a result of a peer review will not be retrospective but will only apply for accounting periods that begin on or after the date that the status changes.

The OECD inclusive framework will continue to release further agreed guidance on an ongoing basis. It is expected that future guidance will include the treatment of hybrid arbitrage arrangements in the main Pillar Two rules.