Pillar Two of the OECD/G20’s Inclusive Framework on Base Erosion and Profit Shifting carries broad implications, spanning much more than businesses’ tax planning departments. This provision decrees that large multinational corporations need to pay a minimum level of tax and thus, modifies the dynamic between businesses and governments globally.
The onset of Pillar Two in 2024 requires businesses to gird for its effects and strategize accordingly. As these rules transform the relationship between businesses and governments in jurisdictions with lower tax rates that have traditionally used such taxes to woo investment, it will be intriguing to see how governments respond.
According to the European Commission, Pillar Two rules are relevant for member entities of multinational groups with an annual consolidated turnover of 750 million euros (about $815 million) or more. These groups will be required to ensure they pay the minimum level of tax regardless of where they operate. This includes the calculation of their effective tax rate for every jurisdiction where they function and submitting a top-up tax that equals the difference between their ETR and the 15% minimum tax.
Navigating these complex rules is a formidable task for multinationals. It’s challenging to keep track of which jurisdictions are incorporating the rules, and to discern when and how.
While the Organization for Economic Cooperation and Development (OECD) plans to create temporary safe harbor rules to reduce the compliance burden in the short term, businesses still need to examine the application of these rules and establish contingency plans if they don’t apply.
It is a common misconception that Pillar Two pertains solely to tax department issues. Businesses that fall under Pillar Two’s purview will need to provide over 100 different data points for each group entity. These data points necessitate input from various departments, such as human resources, finance, and legal; not just from the tax department. To meet Pillar Two requirements, businesses must have the requisite support, resources, and skills across these departments. Cross-departmental collaboration is thus pivotal.
Businesses must ensure they have the necessary data to anticipate and model Pillar Two’s impact and satisfy ongoing reporting and compliance obligations. It is unwise to presume that existing accounting and enterprise resource planning systems can readily supply the necessary data to comply.
With Pillar Two impacting both consolidated and local statutory accounts, the impact on financial reporting and disclosures must be well articulated. Additionally, different countries may enact these rules at various times, causing the rules’ enactment dates to differ amongst countries.
Addressing practical challenges, such as determining which entity must file and where the Pillar Two return must be filed if the parent company is based in a country that hasn’t yet adopted Pillar Two, is crucial. Incremental Pillar Two liabilities that businesses possess will affect earnings per share, underscoring the need for a clear communication strategy to explain these rules’ effects to investors and analysts.
As nations and corporations worldwide grapple with the repercussions of Pillar Two, large multinational businesses’ boards are under pressure to devise strategic approaches to tax. To assess, model, and comply with the rules, businesses need operational, technological, data, and personnel strategies that are clearly defined. Although meeting ongoing compliance and reporting requirements may strain resources, this is not just about compliance. As certain decisions may result in additional Pillar Two tax, tax matters are expected to prominently feature in business strategy.
This article was summarized from Bloomberg Tax, and the original article was penned by Emma Locken from Crowe UK.