I. Background

On 17 June 2024, the Organisation for Economic Co-operation and Development (“OECD”) released further Administrative Guidance on the Pillar Two Global Anti-Base Erosion (“GloBE”) Rules (the “Guidance”) to compliment the Model GloBE Rules and Consolidated Commentary issued to date.

As expected, the latest Guidance specifically considers securitisation vehicles (which we have referred to below as “SVs”).

II. Definitions

The Guidance provides a definition (see Appendix I) of an SV for Pillar Two purposes. This definition should include a broad range of securitisation transactions including, but not limited to, RMBS, CMBS and CLOs.

III. Jurisdictional options

The Guidance enables jurisdictions to choose between three options in relation to the local application of Qualified Domestic Minimum Top-up Tax (“QDMTT”) rules:

1. Take no action, in which case SVs would remain within the scope of QDMTT, where they are part of a Group for Pillar Two purposes
2. Include SVs within QDMTT rules but collect any top-up tax applicable from another Group member resident in the same jurisdiction, or
3. Carve out SVs so that such companies are not treated as Constituent Entities for the purposes of QDMTT.

Jurisdictions also have an option to exclude SVs from liability to top-up taxes under Undertaxed Profits Rule (“UTPR”), when those rules come into effect in 2025.

In relation to the QDMTT Safe Harbour, the Guidance confirms that where either Option 2 or 3 is adopted, the Consistency Standard will be met and the applicability of the QDMTT Safe Harbour should not be impacted.

However, where Option 3 above is adopted, the Switch-off Rule will apply with respect to the jurisdiction where such excluded SVs are resident. This means top-up taxes may be applicable to all entities resident in that jurisdiction, with a credit for QDMTT paid there. So, whilst the jurisdiction’s QDMTT would not, as a general matter, be excluded from the QDMTT Safe Harbour, it would be limited to circumstances not involving SVs subject to the carve-out. The impact may differ depending upon the facts and circumstances of the MNE Group.

Of note, this differs to the Switch-off Rule that will apply where a jurisdiction has legislated for a carve-out of Investment Entities. Per OECD Commentary, in such a case, the Switch-off Rule will apply with respect to the Investment Entities only, not all entities resident in that jurisdiction. EY is currently seeking clarification on the intended application of these rules.

IV. Future work

The OECD have stated that further work should be carried out in relation to SVs in order to ensure that top-up tax is not payable which is not commensurate with the economic profit of the SV (acknowledging that an SV is designed to make only negligible profit). This includes considering the following options:

1. An adjusted realisation basis election – further detail is required in order for taxpayers and their advisers to consider this option. At a high level, it seems to be suggesting ignoring fair value movements in the GloBE income calculation; and
2. Treating the SV as “deconsolidated” from the MNE Group. This appears to be the most sensible and practical approach and would remove the SV from the Pillar Two rules.

V. Application in Ireland

Ireland does not currently have a carve-out for SVs. The Irish Department of Finance has been awaiting the outcome of the OECD deliberations on the matter.

EY will be working with the relevant industry groups and engaging with the Irish authorities to understand which of the three options provided for in the Guidance will be taken, and, if applicable, when and how it will be transposed into Irish law.

While the current position of uncertainty is problematic, there are also disadvantages to adopting either of Option 2 or Option 3 above. In the case of Option 2, any top-up tax could be imposed on another Irish Group member which, for those with other entities in Ireland, may be undesirable. Option 3 risks exposing the SV and other Irish entities in the Group to top-up tax in another jurisdiction. The outcome may differ depending on the particular factual position of the MNE Group.

VI. Application in the UK

The UK Domestic Minimum Tax legislation, enacted in 2023 was amended by Finance Act 2024 to include a carve-out for securitisation companies, defined by reference to the Taxation of Securitisation Companies Regulations 2006.

This followed advocacy from the industry in the UK to HM Treasury given the impact being observed in the securitisation market arising from the question whether SVs could be subject to top-up tax. The UK government implemented the change in recognition that there would be a need in parallel to advocate for change at the OECD Inclusive Framework level so as not to potentially invalidate the UK Domestic Minimum Tax from qualification for the QDMTT Safe Harbour.

The release of the Guidance would indicate that the UK government’s position is likely to be that they have effectively implemented Option 3. It can be expected that HM Treasury will remain actively involved in the future work in the context of other jurisdictions’ IIR and UTPR treatment of UK SVs.

VII. Conclusion

The OECD approach is intended to allow jurisdictions the ability to prevent QDMTT from impacting SVs for 2024, while clearly stating that further work is required. EY will be monitoring developments and working with the relevant authorities in relation to the ongoing work required.

The article was co-authored by Richard Milnes, Partner, EMEIA Financial Services, Tax.