Getting ready for Pillar Two global tax rules
Establishing compliance: the foundation for company preparedness
Pillar Two is one of the most consequential international taxation frameworks in decades. It will have far-reaching consequences across affected companies. To prepare, cross-entity collaboration will be needed in the implementation of the Pillar Two tax rules (which are based on the GloBE Rules).
The new global tax framework, referred to as “Pillar Two,” has the potential to have a substantial impact on companies, specifically those with consolidated annual revenues of €750 million or more. Being prepared for Pillar Two is vital, as it involves various departments, including IT, in the process of determining Global Anti-Base Erosion (GloBE) income, which is the foundation of the Pillar Two computation. This preparation is significant as it not only maintains adherence to these new global tax regulations, but also assists in the strategic refinement of a company’s tax obligations.
What is Pillar Two?
Pillar Two is intended to establish a global minimum corporate tax rate of 15% in each of a company’s operating jurisdictions. The tax is determined in three ways:
- If the effective tax rate (ETR) in a given jurisdiction is below 15%, the jurisdiction may impose a qualified domestic minimum top-up tax (QDMTT).
- Absent the QDMTT, it may turn to the income inclusion rule (IIR) if an owner of a low-taxed entity is located in a Pillar Two jurisdiction.
- With no QDMTT and if none of the low-taxed entity’s owners are in Pillar Two jurisdictions, the undertaxed payments rule (UTPR) allows any group entity/entities in Pillar Two jurisdictions to apply the top-up tax.
Given the complexity of these rules, several temporary safe harbor and transitional harbor solutions have been created.
To date, more than 135 jurisdictions have pledged to implement Pillar Two. Early adopters include the United Kingdom, Switzerland, Japan, and South Korea while many other countries, across the world, are in the process of adoption. Some important dates:
- January 1, 2024: IIR became in effect for implementing jurisdictions; QDMTTs also became in effect in some countries. Transitional safe harbors may be available.
- January 1, 2025: UTPR will become in effect (subject to UTPR safe harbor, pertinent to US-owned multinationals).
- For in-scope calendar-year companies, the first information returns to report GloBE calculations are expected in June 2026.
Companywide coordination
Pillar Two involves multiple departments—tax, accounting, finance, legal, and IT—since determining GloBE income relies on data and other information from individual subsidiaries and business units in a manner that may not be present today. Although Tax may be the anticipated owner of Pillar Two compliance, coordination and collaboration across the organization is important.
Actions companies can consider now to prepare for Pillar Two
To ready themselves, companies should quickly determine the applicability of safe harbor and GloBE rules as well as the calculation under the Pillar Two rules in applicable jurisdictions. In addition, they need to review their corporate structures, and install controls to monitor relevant jurisdictions, so they can understand the implications of pertinent tax laws and legislation and ensure compliance. Especially important is determining how transfer pricing strategies may affect minimum tax requirements.
From a compliance standpoint, entities should enhance operations and data to align with the new global minimum tax requirements and work to anticipate the impact of possible increased tax liabilities. In terms of IT, it’s time to reassess technologies and systems related to tax planning, reporting, and tracking transactions at both entity and parent levels and other solutions to assist with the enhancement of the Pillar Two process. That way, companies can efficiently integrate GloBE income considerations and required data.
Skill sets needed
Pillar Two has wide implications. Consequently, companies either need to develop these necessary competencies internally or opt to acquire them externally. These include:
- Deep global accounting, auditing, and controls experience
- Comprehensive understanding of Pillar Two provisions, implementation, and implications
- Effective communication channels across departments
- Regulatory compliance experience
Reasons to consider a professional services adviser
Given the many complexities of Pillar Two, hiring a professional services adviser may make sense. Even if companies don’t operate in low-tax jurisdictions, Pillar Two could entail significant administrative and reporting burdens.
A professional services adviser can advise to create an effective plan to address Pillar Two’s impacts and advise with tax planning and compliance so liabilities can be handled efficiently and compliance and obligation risks reduced.
Marla Lewis
