OECD Pillar Two rules enacted in New Zealand - navigating the 15% minimum tax for multinationals

By Annamaria Maclean & Young Jin Kim

The New Zealand Government enacted legislation in March to formally implement the OECD Global Anti-Base Erosion (GloBE) Pillar Two rules. The purpose of these new Pillar Two rules is to ensure that multinational enterprise groups (MNE groups) with global turnover above EUR 750m in two of the four preceding income years, pay at least a 15% tax on their income in each country where that income is reported for financial reporting purposes.

In addition to the 20 to 25 New Zealand-headquartered groups on Inland Revenue’s radar, the Pillar Two rules will apply to inbound groups operating in New Zealand (e.g., via a subsidiary, branch or permanent establishment) that meet the global financial threshold of EUR 750m.

The new GloBE rules, as enacted in New Zealand, include:

• The Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR) which are the primary mechanisms of the Pillar Two rules. These rules will apply in New Zealand to both New Zealand-headquartered groups and inbound groups for the income years beginning on or after 1 January 2025.
• The Domestic Income Inclusion Rule (DIIR) which applies to New Zealand-headquartered companies allowing the New Zealand Government to collect top-up tax on undertaxed New Zealand profits that would ordinarily be paid offshore under the UTPR (subject to the level of overseas assets and employees). We note the application of the DIIR has been deferred to the income year beginning on or after 1 January 2026.
• The Qualified Domestic Minimum Top-up Tax (QDMTT) has not been enacted in New Zealand.

For more details about the operation of the rules themselves, our July 2023 article provides a starting point to better understand the operation of the rules.

Next steps

• Centralised response is likely – we expect most MNE groups will adopt a centralised approach due to the top-down approach of the Pillar Two rules, meaning any calculations and modelling will likely be performed by the ultimate parent entity or regional head offices for larger MNE groups.
  
  Taxpayers contemplating the Pillar Two rules in New Zealand (i.e., New Zealand-headquartered MNE groups) should remain vigilant about timelines and compliance obligations for any offshore investments and be ready to respond in a timely manner in certain circumstances. For instance, Belgium has already prescribed a registration deadline for in-scope constituent entities that can be due as early as 13 July 2024 although an extension to this deadline has been announced which is expected to apply to most taxpayers - please refer to our global tax@hand articles for more information about the registration requirements in Belgium and extension to the initial deadline.
  
  At the minimum, in-scope constituent entities located in New Zealand should understand their domestic compliance obligations and communicate any material ramifications to their management team and/or head office.

• New Zealand Registrations, GloBE information return (GIR) and multinational top-up tax return - there are various registration and compliance requirements that may apply in New Zealand. The exact format of the registrations and top-up tax returns has not yet been finalised and further guidance will be provided by Inland Revenue closer to the due date. Based on our domestic legislation, all in-scope MNEs much register with Inland Revenue and file an annual top-up tax return. In addition, in-scope New Zealand-headquartered MNE groups are required to submit the GIR in New Zealand in the prescribed electronic format. We note that penalties of up to NZD 100,000 could be imposed for non-compliance.

• Financial reporting disclosures – taxpayers that prepare IFRS financial statements in New Zealand will also need to consider whether any disclosures of Pillar Two information will be required in the local financial statements. Even if no top-up taxes are expected to arise under the Pillar Two rules, certain disclosures may be required for Pillar Two purposes and auditors may expect documentation or workpapers to be provided to support any disclosures made.

• Safe Harbour calculations – as a starting point, most in-scope constituent entities will be best placed to consider whether they meet any of three transitional safe harbour tests, which aim to reduce the compliance burden for MNE groups. Taxpayers that meet one of the transitional safe harbour tests will not be required to prepare full GloBE calculations (which are expected to be complex and time-consuming) for income years beginning on or before December 2026.
  
  However, if the transitional safe harbour regime is not applied in a jurisdiction in the first fiscal year the rules apply, it cannot be applied for subsequent years. It is therefore critical that MNE groups carefully consider the three applicable tests in the first fiscal year the rules apply.

• CBCR reporting – additional guidance released by the OECD has confirmed that the transitional safe harbour calculations operate through the use of simplified jurisdictional revenue and income information contained in an MNE group’s “Qualified CbC Report” and tax information contained in “Qualified Financial Statements”. Taxpayers should consider reviewing and solidifying their CbC Reports to ensure they meet the OECD requirements to be “qualified” and are eligible to be used the safe harbour calculations. There is expected to be deeper scrutiny of CbC Reports by tax authorities as they become the source data for safe harbour calculations.

Other global developments

While most of the world's focus on international tax reform has been on the OECD Two-Pillar Solution for the last few years, it may have been easy to miss that a parallel international tax reform initiative is being driven by the United Nations (UN).

Recent developments include the UN issuing a draft Terms of Reference for a UN Framework Convention on International Tax Cooperation. This work appears to cross over with the work the OECD have been driving on BEPS and we are watching with interest given the UN Framework Convention seeks to include priority areas such as the taxation of the digitalised and globalised economy (which the OECD Two-Pillar solution is also looking to address). More information can be found on this in our global tax@hand article.

Final comments

Given the complexity of the new GloBE Pillar Two rules and the significant compliance burden for certain in-scope MNE groups, it is essential that affected taxpayers begin assessing the implications of the new rules and develop a framework to comply with the new rules/financial reporting obligations.

Deloitte has a number of tools and technology solutions that can be used to support our clients with modelling, scenario planning as well as detailed compliance calculations and filing.

Please contact your usual Deloitte advisor if you would like to understand your obligations under the Pillar Two rules further.