3 December 2024 CTF Roundtable Q. 11, 2024-1038241C6 - Global Minimum Tax Act – Interpretation and Application of OECD Agreed Administrative Guidance

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In the case of a reverse hybrid that is fiscally transparent in relation to an indirect owner (an FT-CE), will the CRA administer the application of the GMTA based on the June 2024 Administrative Guidance?

Position: Yes, the CRA will administer the provisions of the GMTA to achieve what the June 2024 Administrative Guidance clarifies as the appropriate outcome - the income staying in the FT-CE and any covered taxes paid by the upper tier entity (i.e., the indirect owner in your specific example) on that income being pushed down to the FT-CE.

Reasons: The CRA is committed to administering the GMTA in accordance with Canadian law as enacted by Parliament. This includes the application of subsection 3(1), which is described in the Department of Finance’s Explanatory notes as intending “to ensure that the Act is interpreted, applied and administered in a manner consistent with the outcomes provided under the Model Rules, Commentary and Administrative Guidance (referred to in this note, collectively, as the “Pillar Two Rules”), including any future revisions or additions to the Pillar Two Rules”.

2024 CTF Annual Tax Conference

CRA Roundtable

Question 11 - Global Minimum Tax Act – Interpretation and Application of OECD Agreed Administrative Guidance

We understand that CRA Rulings has formed a new Specialty Tax Division, in the Income Tax Rulings Directorate (the “ITRD”) of the Legislative Policy and Regulatory Affairs Branch, and that, amongst other items, this new division is responsible for interpreting the new Global Minimum Tax Act (the “GMTA”), implementing Pillar Two in Canada.

Subsection 3(1) of the GMTA requires Part 1, Part 2 and the relevant provisions of Part 5 of the GMTA to be, unless the context otherwise requires, interpreted consistently with the GloBE Model Rules, the GloBE Commentary and the administrative guidance in respect of the GloBE Model Rules (the “Administrative Guidance”). The Tax community has raised questions as to how the CRA will administer the application of the GMTA in circumstances where the enacted state of the GMTA does not reflect changes to the GloBE Model Rules, or to new GloBE Commentary or Administrative Guidance.

An example of this potential tension is the application of subsection 17(6) of the GMTA in situations where a particular constituent entity (a “CE”) is a reverse hybrid entity in relation to its direct owner, while at the same time being fiscally transparent in relation to an indirect owner that holds the particular CE through one or more intermediaries who are also fiscally transparent in relation to the indirect owner. In the version of the GMTA that was enacted on June 20, 2024, this scenario was addressed by allowing the income of the CE to be allocated to the indirect owner. However, the June 2024 Administrative Guidance took a different approach and addressed this scenario by allowing any tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. While both approaches are intended to address the same technical issue, they do not produce the same outcome in all cases. The proposed amendments to subsection 17(6) of the GMTA that were released in August 2024 (the “Summer Release”) no longer allow the income of the CE to be allocated to the indirect owner, and even though the Explanatory Notes indicate that the proposed amendments in the Summer Release are intended to give effect to the June 2024 Administrative Guidance, the proposed amendments do not include a mechanism that allows the tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. We understand that this is due to the short period of time between the release of the June 2024 Administrative Guidance and the Summer Release, which did not allow for all aspects of the June 2024 Administrative Guidance to be reflected in the Summer Release. We understand that there will be further amendments to the GMTA to align with the June 2024 Administrative Guidance, and such amendments will be effective from the inception of the GMTA.

In circumstances like this, will the CRA administer the application of the GMTA based on the enacted version of the GMTA, the proposed amendments to the GMTA, or the June 2024 Administrative Guidance (which is not yet reflected in the GMTA, neither enacted nor proposed)?

More generally, how will the CRA administer the application of the GMTA in circumstances where there have been changes to the GloBE Model Rules, GloBE Commentary or Administrative Guidance that have not yet been reflected in the GMTA, and to what extent can subsection 3(1) be relied upon in such cases?

CRA Response

New Section within the Income Tax Rulings Directorate

The DST and Global Tax Section (the “Section”) within the Speciality Tax Division of ITRD is responsible for interpreting the Global Minimum Tax Act as well as the Digital Services Tax Act. The Section has been preparing to respond to requests from the taxpayer community for technical interpretations regarding these two new tax statutes. The Section has also been supporting the systems set up work being carried out within the CRA as required to support the administration of these new taxes.

The DST and Global Tax Section can be reached through the same mailing and email addresses as their colleagues in ITRD, that being:

• Income Tax Rulings Directorate
  Canada Revenue Agency
  5th floor, Tower A, Place de Ville
  320 Queen Street
  Ottawa ON K1A 0L5
• itrd-ddi@cra-arc.gc.ca

Interpretation and Administration of Global Minimum Tax Act

As you note, subsection 3(1) of the GMTA is an interpretive rule that directs taxpayers and the Canada Revenue Agency (the “CRA”) to interpret the GMTA consistently with the GloBE Model Rules, the GloBE Commentary and the administrative guidance in respect of the GloBE Model Rules approved by the Inclusive Framework and published by the OECD from time to time. This interpretive rule instructs that the GMTA is to be applied in accordance with those sources “unless the context otherwise requires.”

The CRA is committed to administering the GMTA in accordance with Canadian law as enacted by Parliament. This includes the application of subsection 3(1), which is described in the Department of Finance’s Explanatory notes as intending “to ensure that the Act is interpreted, applied and administered in a manner consistent with the outcomes provided under the Model Rules, Commentary and Administrative Guidance (referred to in this note, collectively, as the “Pillar Two Rules”), including any future revisions or additions to the Pillar Two Rules”. It is important that the GMTA be administered as such to ensure its Part 2 tax is a Qualified IIR, its proposed Part 2.1 tax is a Qualified UTPR, and its Part 3 tax is a Qualified Domestic Minimum Top-up Tax (a “QDMTT”) that has QDMTT Safe Harbour status. Not achieving such qualification could result in Canadian businesses being subject to other jurisdictions’ Pillar Two Rules in addition to the GMTA.

In order to apply subsection 3(1) as intended, as new Administrative Guidance is approved by the Inclusive Framework and published by the OECD from time to time, the DST and Global Tax Section within ITRD will consult the Department of Finance on a case-by-case basis to determine how they intend to bring the Administrative Guidance into effect (e.g., through a proposed amendment to the GMTA or by the CRA applying the Administrative Guidance to interpret or clarify the existing GMTA provisions). Of note is that subsection 3(1) includes the instruction “unless the context otherwise requires” that, as noted in the Department of Finance’s Explanatory Notes, allows for there to be an intended substantive difference between the GMTA and a particular Administrative Guidance if such a difference were required to “produce outcomes that are understood to be better aligned with the policy intent of some aspect of the Pillar Two Rules.” The Explanatory Notes also explain that “In determining whether a substantive difference is intended, regard should be had to, among other things, whether the difference would produce outcomes that are consistent with the policy intent of the Pillar Two Rules, and whether the Inclusive Framework publication introducing the relevant aspect of the Pillar Two Rules occurred before or after the introduction of the relevant provisions to the Act. If the Inclusive Framework publication occurred after the relevant provisions were introduced to the Act, there is a strong inference that the difference is unintended (and may be rectified through future amendments to the Act).”

With respect to the specific example you raise involving a constituent entity (herein referred to as the “FT-CE”) that is a reverse hybrid entity (i.e., fiscally opaque in relation to its direct owner) while being fiscally transparent in relation to an indirect owner and covered tax paid by the indirect owner with respect to the income of the FT-CE, you have indicated that you have corresponded with the Department of Finance and that you anticipate amendments to the GMTA will be forthcoming. These future amendments would be over and above the draft proposed legislation released in August 2024. We have consulted with the Department of Finance and it is also our understanding that they are of the view that additional proposed amendments to section 24 of the GMTA may be in order to accommodate the matching of covered taxes with the FT-CE’s income in the circumstances of the specific example you raise. As such, the CRA will administer the provisions of the GMTA to achieve what the June Administrative Guidance clarifies as the appropriate outcome - the income staying in the FT-CE and any covered taxes paid by the upper tier entity (i.e., the indirect owner in your specific example) on that income being pushed down to the FT-CE.

Lori Doucet and James Atkinson
2024-103824
December 3, 2024