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 ends up payable, the compliance burden for affected organisations will be significant.
When will the new rules come into effect?
The core elements of Pillar Two are:
- An Income Inclusion Rule (IIR), and
- An Undertaxed Profits Rule (UTPR).
The timing of implementation for each element varies by territory. Most territories have opted to implement the IIR first – with the earliest movers having legislated for implementation from 1 January 2024 (accounting periods beginning on or after 31 December 2023). Implementation of the UTPR is expected to follow 12 months later – i.e. from 1 January 2025 at the earliest.
A country may also choose to implement a Qualified Domestic Minimum Top-up Tax (QDMTT), alongside the IIR. Several territories have now legislated for this, with commencement date generally aligned to the IIR.
It should be noted that whilst the rules are effective for accounting periods commencing after 31.12.23, “in scope” groups will be required to include disclosures of the expected pillar 2 impact within their financial statements for the year ended 31.12.23. BDO is currently supporting “in scope” Groups by undertaking an impact assessment which broadly involves a review of the safe harbours/de minimis limits and its application to the Group as an initial phase and determination of ETR and the resulting top up tax, as the next phase, if the safe harbours are not applicable. This should support the disclosure requirement and will also provide an assessment of future Pillar two tax exposures. Additionally, it will also help to identify and address data gaps that will be required to complete the calculations (should these be required). It would be helpful if we can have a call to chat through what work has been undertaken (if any) and we can also provide more detail on the impact assessments we are undertaking.
Who does Pillar Two apply to?
The rules apply to MNEs 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.
Do you have a plan in place to prepare?
Pillar Two will have short and long-term impacts. Large MNEs should expect a significant increase in compliance burden as the calculations are complex and many of the data points required may not currently be tracked, requiring updates to systems and changes to existing compliance processes.
BDO has a dedicated global team made up of International Corporate Tax experts who can advise and assist with planning for Pillar Two compliance. 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
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 safe harbour review to define the likely scope of your compliance obligation
- 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.
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) and the 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.