The BEPS Pillar Two tax framework is the culmination of a yearslong initiative undertaken by the OECD and over 135 countries around the world to reform international tax rules applicable to multinational companies to help combat base erosion and profit-shifting strategies (BEPS) employed by large multinationals in their efforts to minimize effective tax rates on global profits.
To achieve this objective, Pillar Two introduced a new tax framework referred to as Global Anti-Base Erosion – or “GloBE” – a set of rules designed to ensure that multinational groups with over EUR 750 million in consolidated financial statement revenue are subjected to at least a 15% minimum tax rate on their global income in each jurisdiction the group operates. To ensure this minimum level is met, GloBE rules rely on a series of novel effective tax rate (“ETR”) calculations and, when applicable, require a top-up tax to be applied to income earned in low-tax jurisdictions where such income is not otherwise subject to an ETR of at least 15%.
The top-up tax may be assessed by the low-taxed entity itself, if that jurisdiction has implemented a Qualified Domestic Minimum Top-up Tax (QDMTT); at the ultimate parent entity (UPE) level, if the UPE jurisdiction has implemented an Income inclusion Rule (IIR); or by other entities in the group, in jurisdictions that have implemented an Under-Taxed Profits Rule UTPR) if neither a QDMTT nor an IIR otherwise applies.
GloBE rules require additional data gathering and preparation of new and complex book income-based ETR calculations by entity and jurisdiction to ultimately determine the nature and amount of any top-up taxes applicable to group income in low-tax jurisdictions. These rules also require detailed and complex GloBE-based tax and information return reporting for in-scope multinational groups and their constituent entities.
Pillar Two Tax Current Status
To implement this new global tax framework, participating countries are in the process of adopting, or have adopted already, local country tax legislation that incorporates the Pillar Two/GloBE principles and reporting requirements into their local country tax regimes. To date, significant progress has been made and many countries have implemented or are close to implementing these rules with effective dates for years beginning on or after January 1, 2024. Consequently, publicly traded U.S. and non-U.S. multinationals will likely begin dealing with the impact of these rules in connection with their first quarter 2024 income tax provision reporting.
While the U.S. has yet to implement Pillar Two legislation and appears unlikely to do so in the short-term, U.S. multinationals with constituent entities in jurisdictions that have implemented Pillar Two legislation will need to assess potential implications for income tax provision reporting and ultimately local country GloBE tax and information return reporting for the 2024 tax year.
GloBE Information Return reporting is extensive and is comprised of 28 pages and up to 480 data points for each jurisdiction. Non-U.S. multinationals with U.S. subsidiaries will also need to consider these rules as they assess the potential for Pillar Two top-up taxes in their UPE or constituent entity jurisdictions that have implemented Pillar Two rules. Even if no top-up tax liability applies, companies need to be prepared to provide satisfactory documentation supporting this conclusion to their external auditors in connection with their financial statement audit.
Recommended Action Steps for Pillar Two Implementation
Companies that have not developed processes and procedures to comply with Pillar Two financial accounting and tax reporting requirements are falling behind schedule and should consider taking steps to ensure they’re ready for these additional reporting requirements, including:
- Review your company’s legal entity structure to identify UPE and constituent entities (including permanent establishments) and relevant jurisdictions;
- Assess and monitor the status of Pillar Two legislation and applicable top-up taxes in jurisdictions relevant to group structure;
- Assess the applicability and document eligibility for available safe harbor rules (e.g., transitional country-by-country safe harbor);
- Assess the availability of necessary financial data on any entity by entity and/or jurisdictional level to be able to perform required
- GloBE calculations and identify data gaps for resolution;
- Prepare and organize workbooks with GloBE data to better allow the ability to perform GloBE ETR calculations;
- Develop or outsource a calculation model for the preparation of GloBE calculations;
- Evaluate and choose potential elections for the purpose of GloBE ETR calculations;
- Prepare GloBE ETR calculations by entity/jurisdiction;
- Assess potential Pillar Two financial statement disclosures; and
- Develop plans and procedures for preparation of GloBE-based local country tax return reporting and GloBE Information Return reporting.
Implementation of Pillar Two is a complex process requiring cooperation and coordination among various internal and/or external team members. The time is now if your organization has yet to develop a gameplan to address these new requirements.
About Schneider Downs Tax Advisors
With one of the largest regional tax practices in the country, Schneider Downs Tax Advisors’ personal focus on clients and in-depth understanding of current issues ensures that clients are complying with tax filing requirements and maximizing tax benefits. Our industry knowledge and focus ensures delivery of technical tax strategies which can be implemented as practical business initiatives. Learn more at our dedicated Tax services page.
