Navigating the Global Minimum Tax era is already a reality for Multinational Enterprise Groups (MNE Groups) with a total consolidated turnover exceeding €750 million per annum. But how does this impact Cyprus companies within these MNE Groups? This article delves into the Pillar Two rules and highlights key considerations for the in scope groups, presenting an analysis of their unique challenges and opportunities.

Pillar Two represents a monumental shift in global tax regulations and brings forward many challenges for large international businesses that are impacted by increased data requirements, calculation and reporting demands.

Recognising the complexities associated with the application and design of the new regulations, Deloitte’s technology specialists have developed innovative solutions to assist organisations in navigating Pillar Two compliance.

Our solutions are specifically designed to facilitate the needs of your global organisation. They enable teams across the world to access, update, and review data in real time to deliver the support your organisation needs – from initial assessment stages, all the way through to filing.

Overview of Pillar Two

The Pillar Two framework is part of the OECD’s anti-Base Erosion and Profit Shifting (BEPS) framework and seeks to ensure a universal minimum level of taxation on all large multinational enterprises (MNEs), thereby preventing the shifting of profit to low-tax jurisdictions.

Pillar Two Model Rules/Directive seek to achieve a 15% global minimum effective tax rate (ETR) for MNEs exceeding €750 million in consolidated group revenue. The mechanism to enforce the collection of additional tax where the ETR in a jurisdiction is less than 15% is underpinned by two interconnected rules:

        1. Income Inclusion Rule (IIR): the first rule requires the ultimate parent entity (UPE) to pay a top-up tax on its proportionate share of the income of any low-taxed constituent entity in which the UPE has a       direct or indirect ownership interest. This rule is to be effective from 1 January 2024. If the IIR is not applied at the level of the UPE jurisdiction (i.e. the jurisdiction of the UPE does not apply an IIR), the obligation to pay the top-up tax can flow down the ownership chain to the Intermediate Parent Entity (IPE). The IPE, which is a constituent entity that isn't a UPE and that owns an ownership interest in another constituent entity in the multinational enterprise group, would then be required to apply the IIR.

        2. Undertaxed Payments Rule (UTPR): the second rule serves as a backstop rule to the IIR and is aimed at ensuring that other group entities pay their fair share of taxes on profits generated across jurisdictions when the IIR does not result in the payment of the global minimum tax. This rule is expected to come into effect from 1 January 2025.

Under the Directive, Member States have the option to elect and apply a Qualified Domestic Top-Up Tax (QDMTT) for companies that are based in their own jurisdiction. This will allow such jurisdictions to collect the top-up tax in their own jurisdiction instead of allowing a foreign jurisdiction to charge top-up taxes elsewhere.

Cyprus is due to transpose the EU Directive, which harmonises the application of Pillar Two throughout Member States, into its domestic legislation. In line with the Directive, the IIR will have a retrospective effect from 1 January 2024 and the UTPR will be effective from 1 January 2025. Cyprus is expected to introduce a QDMTT which will be effective as of 1 January 2025.

Safe harbour rules

The Transitional Safe Harbor (TSH) rules are short-term measures that stipulate specific circumstances in which taxpayers would be exempt from preparing full Pillar Two calculations to alleviate the risk of administrative burden. TSH apply for years beginning on or before December 31, 2026, i.e. three years for most groups.

Under the TSH, no top-up tax will become due for that jurisdiction and the information return will not be required to be completed in full, provided that at least one of the following tests is met:

      1. De minimis test: the business reports total revenues of less than €10 million and profit before income tax of less than €1 million on its CBC report for a jurisdiction.

      2. Effective tax rate test: the business has an ETR in a jurisdiction that is equal to or greater than 15%.

      3. Routine profits test: the business’s profit before income tax in a jurisdiction is equal to or less than the “substance-based income exclusion amount” as calculated under the OECD Model Rules.
The TSH is available only if the taxpayer prepares a “Qualified CbC Report.” A Qualified CbC Report is one prepared using Qualified Financial Statements. A “once out, always out” rule applies meaning if a jurisdiction does not qualify for the TSH in a fiscal year, such jurisdiction cannot qualify in subsequent years.

Challenges for MNEs

The complexity of the new rules presents significant compliance challenges and can impose a significant administrative burden on companies within scope.

Pillar Two calculations are complex and will require a significant amount of data to be collected from different sources, across several entities and jurisdictions. Companies will need to analyse the information, review exposure, model financial impacts, and use the results to inform operational decisions.

To provide the support you need throughout the entire process – from the gathering and analysis of data to competing the required paperwork – our Deloitte compliance specialists have developed the below outlined technology tools that can help you fulfil your Pillar Two compliance responsibilities accurately and timely.

1. Deloitte Pillar Two Diagnostic Tool
Data is at the core of Pillar Two compliance. Precise and comprehensive data collection is instrumental to accurately determine your organisation’s effective tax rate, detect gaps or risk areas, and implement necessary measures to ensure compliance.

Our Pillar Two Data Diagnostic Tool is designed precisely for these purposes. It serves as a pathway to understand your existing data framework and to identify any issues that may hinder Pillar Two compliance.

Its intent is to provide a clear snapshot of your data ecosystem, pinpointing challenges within the group, setting the scene for both short-term and long-term strategic decisions, while also identifying data sources and gaps and communicating operational challenges to the wider business.

Some of the more specific functions of the tool include:

      • Data assessment: The tool scans and assesses your current data structure and identifies gaps, inconsistencies, or areas of potential risk that need addressing. This could involve data accessibility, accuracy, or completeness problems that may impact Pillar Two compliance.

      • Standardised data schema: By providing a uniform data schema, it aids in streamlining data collection across diverse areas of an organisation, ensuring data consistency.

      • Gap analysis: It leverages intelligent algorithms to provide a gap analysis indicating where your organisation’s data structure might not fully align with Pillar Two requirements and proposing practical solutions for these gaps.

      • Data validation: The tool validates the quality and accessibility of the tax-relevant data and analyses possible data inconsistencies across different parts of your business.

2. Deloitte Pillar Two Agent
The Deloitte Pillar Two Agent is a sophisticated software which incorporates and interprets Pillar Two rules according to your organisation’s unique structure to deliver the support and guidance you need.

It provides transparency and efficiency through a single, cloud-based technology platform, supported throughout by Deloitte’s dedicated tax team as part of co-sourcing and outsourcing engagements.
Functions of the tool include:

      • Pillar Two calculations: the tool takes into account the rule interactions across different jurisdictions and conducts detailed calculations based on the data you provide.

      • Submission of returns: it can file Pillar Two returns and perform local country filings directly from the system.

      • Keeping up to date: it can keep the system up to date by incorporating country rules and OECD updates as soon as they are released.

      • Safe harbour rules: the tool has been programmed to understand and apply accurately the safe harbour rules, providing relief and easing the initial administrative burden during the first years of the rules application, by excluding certain entities or incomes from the scope of Pillar Two.

Actions that we can assist you in taking

• Examine if and how the company can benefit from safe harbours: Clean-up and solidify CbC reporting: To be eligible to utilise the Transitional CbCR safe harbor, your CbC report must meet a number of requirements. Manage the risk that a CbC Report is not qualified by updating your CbC reporting processes now.

Assess the safe harbour impact: The simplified ETR and de minimis tests use information that should be readily available in the CbCR itself and in a company’s tax provision workpapers. The routine profits test can be estimated as well. You can quickly size up where your Pillar Two top-up taxes will likely land and where to focus resources.

Assess the cost vs. benefit of safe harbour benefits and future planning: Assess future transactions that may be impacted and accordingly decide whether or not to elect safe harbour for relevant jurisdiction.

      • Estimate the impact of Pillar Two on the company’s financial reporting:
For countries that don’t meet the TSH, start gathering the information to do a GloBE calculation including estimating the impact of the full Pillar Two calculation and evaluating planning considerations that impact top-up tax for relevant jurisdictions.

      • Decide which compliance strategy and model the company should adopt:
We can schedule a free demo of the Deloitte technology (Data Diagnostic Tool and Pillar Two Agent) for you to consider. Our Deloitte technology solutions can support your organisation with Pillar Two adherence and Pillar Two compliance.

Our team looks forward to providing you with the detailed insights and guidance you need.