Pillar Two Compliance Automation

Where do the two Pillars come from?

As part of the OECD's global tax reform efforts, Pillar Two aims to ensure a minimum effective tax rate of 15% in each jurisdiction where a MNE operates. The scope of Pillar Two covers MNEs with a global turnover of 750 million annually. With its implementation planned for 2024, Pillar two is designed to address tax competition and the "race to the bottom" phenomenon.

Understanding Pillar Two

The OECD has published model rules outlining the implementation of Pillar two. Certain steps need to be taken to determine whether the effective tax rate criteria is met which involves calculating the so-called GLoBE (Global Anti Base Erosion) income and Covered Taxes per jurisdiction. Dividing the Covered taxes by the GLoBE income gives insight in the GLoBE effective tax rate. For a comprehensive understanding of these calculations we encourage you to read more here.

Transitional Safe Harbours

To ease the transition to the Pillar Two, OECD issued specific Safe Harbours. It consists of three tests:

1. The de minimis test: Revenue and income below a certain threshold
2. The simplified ETR test: A simplified calculated effective tax rate that equals or exceeds an agreed rate.
3. The routine profits test: No excess profits after excluding routine profits.

If a jurisdiction passes one of these tests no further detailed calculations are required. The safe harbours apply to fiscal years beginning on or before December 31, 2026 but not after June 30, 2028.

Typical challenges MNE's are facing

Compliance with Pillar Two rules will require companies to start with the Financial Accounting data based on Group GAAP per entity and modify it as per the rules. There are over 160 data points which need consideration and which typically are spread out over multiple data sources.

This is a list of the challenges MNE's often face when assessing and implementing Pillar Two rules:

Managing the data wrangling challenges of Pillar Two

Pillar Two compliance could be achieved with lots of manual effort and spreadsheets. The amount of work however means that MNEs would be dedicating a significant number of people to attain that goal. That is the right moment to streamline your tax accounting, Country by Country Reporting and Pillar Two process using one solution that captures it all!