What is Pillar Two and why is it important?

The OECD’s Pillar Two framework aims to ensure multi-national enterprises (MNEs) with global revenues above €750 million pay a minimum tax rate on income within each jurisdiction in which they operate. Commonly referred to as BEPS 2.0, the framework imposes a Top-Up Tax on profits arising in jurisdictions where the effective tax rate (ETR) is below 15%.

Irrespective of whether any top-up tax ultimately arises, Pillar Two has created a significant compliance burden for affected organisations.
 

How are the rules being implemented? 

The core elements of Pillar Two are:

  • A Qualified Domestic Minimum Top-up Tax (QDMTT)
  • An Income Inclusion Rule (IIR), and
  • An Undertaxed Profits Rule (UTPR).
Implementation timelines vary by jurisdiction. Many countries have now introduced QDMTTs, IIRs and UTPRs, while others continue to enact legislation. As a result, multinational groups must monitor developments across all territories in which they operate. Over 60 countries have implemented at least one of the core elements of Pillar Two. 

The OECD continues to develop the Pillar Two framework through further Administrative Guidance and the Side-by-Side (SbS) package. In addition to facilitating the coexistence of Pillar Two and certain US international tax rules, the SbS package includes a range of simplification measures, including new safe harbours. These developments are intended to reduce compliance burdens and provide greater certainty for in-scope groups, although implementation will continue to vary by jurisdiction.

As jurisdictions consider adoption of these measures, multinational groups should assess the impact on their tax position, reporting obligations and compliance processes.

Who does Pillar Two apply to?
The rules apply to MNEs (and in a number of territories wholly domestic businesses) with annual consolidated revenues of at least €750 million in at least two out of the prior 4 accounting periods. Common structures likely to be impacted are those involving:
  • Tax havens, low-tax jurisdictions and jurisdictions with territorial regimes
  • Notional interest deduction regimes
  • IP boxes and other incentives regimes including tax holidays
  • Low-taxed financing, IP and global centralisation arrangements.
Every global organisation with global revenues of €750m or more will need to act to be compliant with Pillar Two. In addition, organisations that are close to the threshold will need to actively monitor whether they continue to fall outside of scope and, if on a growth trajectory, take action to prepare for Pillar Two compliance when they cross the revenue threshold.

It should be noted that a group may come immediately within scope if it exceeds the threshold as a result of M&A activity rather than organic growth due to specific rules on mergers.

Why BDO?
BDO has a dedicated global team made up of International Corporate Tax experts who can advise and assist with Pillar Two advisory and compliance services. With global support, we provide consistency and a joined-up approach to Pillar Two.

We deliver pragmatic advice which is relevant to your organisation. As BDO is not tied to one technology platform, we can work with you to find a solution that is tailored to you. Our flexible approach reflects the dynamic organisations we work with.

Areas where BDO can support
BDO are supporting “in scope” Groups throughout every step of the compliance process, from the initial impact assessment to strategy and planning, disclosure requirement support, identifying and addressing data gaps, assessing and implementing supporting technology, and compliance support including preparing and submitting Pillar Two returns.

Overall, our approach is multi-faceted and tailored around your needs as an organisation. It might typically entail:

Step 1: Impact Assessment
  • Undertake an impact assessment to determine high-risk areas and identify the potential impact of ETR and cash tax.
  • Assistance with Transitional CbCR Safe Harbour (TCSH) and Side-by-Side safe harbour review to define the scope of your ongoing compliance obligations.
  • Support with modelling ETR and cash tax impact, using our own model or helping to build your own.
  • Assistance with addressing specific accounting complexities.
Step 2: Strategy and planning
  • Identify the need for remedial action (if required) to avoid any potential risk of double taxation, including restructuring and simplification of the legal and operating structure.
  • Identification of legal and operational restructuring opportunities to address ETR impact
  • Implementation support for any identified strategies, including analysis of local and Pillar Two tax impact
  • Tracking of local implementation and interpretation of the Pillar Two rules, including developments in the OECD SbS package
  • Supporting you in assessing your data requirements, and identifying (and addressing) any data gaps
Step 3: Compliance Support
  • Assess the impact of compliance and design a roadmap to implement a plan for Pillar Two compliance.
  • Preparation and filing of a Global Information Return (GIR) QDMTT returns and other Pillar Two related returns and notifications in relevant jurisdictions.
  • Determination of governance, processes, controls and data gathering for Pillar Two readiness and compliance.
  • Compliance, reporting and implementation support.
  • Completed in house, alongside advisor or outsourced.
  • Technology solution assessment and implementation.
  • Ongoing governance and monitoring.
  • Determine financial statement disclosure requirements and define group policies. Preparation of quarterly safe harbour and Pillar Two computations based on full year forecasting for financial statement reporting and use in wider business planning.
  • Communication with the board of directors and stakeholders. Preparation of board presentations on the impact of Pillar Two, to keep your organisation informed.
  • Provision of education for your tax teams, accounting teams and other stakeholders.