18 June, 2024

OECD Pillar Two – Global Minimum Tax

oecd pillar two

Pillar Two represents a pivotal development in international tax policy, aimed at addressing challenges arising from the digitalization of the global economy. It introduces a framework for establishing a global minimum Effective Tax Rate (ETR), targeting multinational enterprises (MNEs) operating across low-tax jurisdictions. This initiative requires careful consideration and proactive engagement from businesses to ensure compliance and alignment with evolving regulatory landscapes.

What is Pillar Two?

As part of the OECD Inclusive Framework, over 140 nations have agreed to implement a two-pillar strategy to tackle the tax issues emerging from the digitalization of the global economy. Pillar Two establishes a worldwide minimum Effective Tax Rate (ETR), stipulating that multinational corporations with consolidated revenues exceeding €750 million must adhere to a minimum ETR of 15% on income earned in jurisdictions with low tax rates. This approach aims to ensure a more equitable allocation of tax revenues, mitigate profit shifting, and address base erosion on a global scale.

When will Pillar Two be Implemented?

In numerous jurisdictions, the Pillar Two regulations, specifically the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-Up Tax (QDMTT), are already in effect as of 2024. The Undertaxed Profits Rule (UTPR) is slated to become effective in 2025. Additionally, several other jurisdictions are in the process of developing their domestic legislation to implement Pillar Two provisions beginning in 2024 and 2025.

Which Businesses are Covered by the OECD Pillar Two Rules?

The Pillar Two regulations target multinational enterprises (MNEs) with annual consolidated revenues of at least €750 million in at least two out of the four preceding accounting periods. Commonly affected structures include:

  • Tax havens, low-tax jurisdictions, and regions with territorial tax systems
  • Notional interest deduction regimes
  • Intellectual Property (IP) boxes and similar incentive programs, including tax holidays
  • Certain tax credit regimes
  • Low-taxed financing, IP, and centralized global arrangements

All global organizations with revenues meeting or exceeding €750 million must ensure compliance with Pillar Two. Organizations nearing this revenue threshold should closely monitor their financial status to confirm they remain outside the scope, and if on a growth path, prepare for compliance once they exceed the threshold.

Mergers and acquisitions (M&A) activity can influence whether a group or entity falls within the scope of these rules. Thus, it’s crucial to consider the impact on Pillar Two compliance during transactional documentation and due diligence processes.

What is the Multilateral Instrument Subject to Tax Rule (STTR MLI)?

Additionally, the OECD Framework recently adopted a multilateral instrument (the STTR MLI) to facilitate the implementation of the Subject to Tax Rule (STTR) under Pillar Two. This treaty-based rule permits source (or payor) jurisdictions to impose additional tax on certain categories of cross-border intragroup payments when these payments are subject to a nominal corporate income tax rate of less than 9% in the residence (or payee) state. The STTR is anticipated to be particularly advantageous for developing countries.

The MLI enables the inclusion of the STTR rule within existing bilateral agreements without requiring amendments to those treaties, provided both jurisdictions involved agree to the MLI. The instrument is currently open for signature, and it remains to be seen how many jurisdictions will adopt it.

Impact of Pillar Two on your Business?

The rollout of Pillar Two will significantly transform the operational landscape of corporate tax departments. Securing access to crucial data for interim forecasting and modeling is paramount, as is ensuring robust capabilities for ongoing reporting and compliance adherence. Beyond Tax, essential stakeholder groups within organizations like Controllership and Financial Planning & Analysis will also feel the cascading effects of these imminent adjustments.

A prevalent challenge many companies face is the resource gap in leading comprehensive BEPS 2.0 Readiness initiatives. The individual tasked with this pivotal role must adeptly navigate questions and challenges across four primary domains: People, Process, Data, and Technology.

Teams within the scope must comprehensively grasp, assess, and model the implications of Pillar Two throughout the organization. This encompasses evaluating additional data requirements and the impact on reporting and compliance, assessing the adequacy of existing technological infrastructures, establishing robust processes and controls, preparing and upskilling personnel, and effectively managing stakeholder expectations.

 

How RadiantBiz can help your company with Pillar Two?

RadiantBiz offers expertise to assist in evaluating and forecasting the potential financial and operational impacts stemming from Pillar Two.

Pillar Two significantly influences an organization’s financial operational structure, necessitating early engagement with stakeholders and substantial allocation of budget and resources to tackle numerous challenges. Companies must assess whether their existing data models, systems, technology, and operational processes are equipped to meet the demands introduced by this new international tax framework.

RadiantBiz professionals can help determine how to access the financial data needed to comply, identify gaps in the data needed for reporting, and reevaluate operations given the anticipated law changes in many countries.