More than 140 jurisdictions have now signed up in principle to the global minimum tax framework, representing a ground-breaking plan to update key elements of the international tax system, which is no longer fit for purpose in a global and digitalised economy.
The Pillar 2 Global Anti-Base Erosion (GloBE) rules have been developed by the Organisation for Economic Co-operation and Development (OECD) to provide a common system of taxation that ensures multinational enterprises (MNEs) pay a global minimum tax (GMT) of 15% in each jurisdiction where they operate and generate income.
On 14 March 2022, the OECD published a comprehensive commentary and illustrative examples of what the implementation of the GloBE rules could look like. However, with the rules still evolving keeping track of progress is essential.
Which groups will be impacted by the rules?
Content The Pillar 2 GloBE initiative seeks to ensure that MNEs and large groups with consolidated accounting revenue globally of €750m in two of the four previous tax years pay a minimum tax of 15% in each jurisdiction they operate. More broadly, Pillar 2 GloBE will apply to those groups which already have to report under the country-by-country reporting (CbCR) rules and any entities in that group, with some exceptions.
What tax system will be put in place and how will it work?
The rules involve a system of top-up taxes paid at the parent company level if profits elsewhere within the group have been taxed below the minimum rate of 15% set. Any top-up tax not collected under an income inclusion rule (IIR) will be charged to other group entities under an undertaxed payments rule (UTPR).
In addition, a subject-to-tax rule (STTR) will allow countries to charge a top-up withholding tax on certain types of outbound payments. The rules also enable governments to introduce a qualified domestic minimum top-up tax (QDMTT) to ensure that any top-up tax due on profits is collected in the country where it is generated. In terms of calculating tax due, groups may qualify for proposed safe harbour rules whereby simplified calculations will be acceptable in the initial reporting period.
When do groups need to comply?
While the first set of Pillar 2 GloBE reporting is expected in June 2026, groups must conduct an initial reporting obligation assessment based on 2023 year-end calculations. For International Accounting Standards (IAS) reporting groups, the IAS Board proposes disclosures relating to Pillar 2 GloBE that could be required for the 2023 financial statements. The disclosures require ETR to be calculated and disclosed for each jurisdiction on both a Pillar 2 GloBE and a basic financial statements basis.
In terms of individual jurisdiction timetables and approach, EU Member States are obliged to transpose the directive into their national law by 31 December 2023 and are expected to follow the OECD’s implementation and reporting timeframes. The UK has announced a similar implementation and reporting timeframe. However, some countries have yet to announce implementation dates or their exact approach.
Does Pillar 2 GloBE offer any benefits?
Despite the initial complexity and increased compliance burden, the Pillar 2 GloBE rules are designed to ensure that all countries benefit from a fair share of tax, which is closely linked to the need for MNEs to improve the sustainability of business models. The ability to show more transparency on tax paid per jurisdiction is a key corporate sustainability reporting (CSR) benefit. Equally, any resulting organisational or operational decisions that encourage a local presence benefit communities and give economic security.
From an internal perspective, Pillar 2 GloBE can also catalyse CFOs to encourage boards to invest in upscaling and enhancing current systems to automate and streamline tax collection and compliance across the group.
What are the main challenges?
As jurisdictions begin to implement the rules, understanding the compliance and fiscal impact on current arrangements is challenging, as are implementation timescales. As more clarification emerges from the OECD and more jurisdictions implement local laws, Heads of Tax will be under pressure to assess the impact of the new rules. With financial reporting based on 2023 year-end information, timeframes are tight, giving MNEs little time to agree on new disclosures, conduct calculations and review appropriately. In addition:
While safe harbour transitional rules offer a simplified approach for the first three years, full GloBE calculations are very complex and require data which is not readily available. Inaccurate or incomplete data is a further challenge for both simplified and full data requirements.
Groups need to assess where full calculations are required or whether simplified calculations for 2024-2026 will be acceptable.
GloBE rules impact many other parts of the organisation, including any necessary organisational restructuring, transfer pricing methodologies and increased compliance pressure on the audit function.
First, assess whether you are within scope of the rules. For those groups that breach the €750m threshold, a high-level impact assessment should be undertaken to determine where top-up tax is due and whether you are eligible for the safe harbour transitional rules. Next:
Identify data sources and collection mechanisms and procedures;
Determine whether computations will be carried out at the local or group level, taking into account how different jurisdictions implement the rules;
Identify whether there are benefits to applying for any of the GloBE elections;
Review transfer pricing methodology and adjustments;
Consider whether excess tax is being suffered and restructure if appropriate.
A process that includes identifying risks and benefits to existing functions will be key to future-proofing business operations.
Why an international approach is essential
Dealing with GloBE requires an international approach that joins the dots between how parent entities and subsidiaries are impacted based on revenue and location. As an internationally integrated partnership operating in over 90 countries and territories around the world, the ability to draw on the expertise of more than 44,000 professionals enables us to collaborate closely with impacted clients.
Having been involved in the development of GloBE rules at the OECD level and with extensive CbC reporting knowledge, Mazars can:
assist in calculating the potential top-up tax due under existing arrangements,
review your CbC reporting processes and controls,
assess Pillar 2 readiness and identify gaps,
assess safe harbour eligibility,
highlight key risk areas and potential Pillar 2 impact and summarise proposals and prioritisation,
design roadmap and implementation plans for Pillar 2 compliance and optimisation if appropriate.
Mazars is already supporting clients on their Pillar 2 GloBE journey with our Pillar 2 tool to support data point calculations and help track Pillar 2 GloBE country-by-country progress.
Questioning the anti-avoidance measures usefulness
Pillar 2, which is the Global Anti-Base Erosion Rules (GloBE) minimum tax project, and the BEFIT initiatives are considered likely to reduce some tax planning opportunities respectively at worldwide and EU levels, and thus reduce the need to address them through anti-avoidance rules. Therefore, it may be reasonable to consider whether all these anti-avoidance rules need to remain should the BEFIT and DEBRA initiatives be implemented.
As of 13 July, 132 of 139 jurisdictions (including Bermuda, Cayman Islands, BVI, Switzerland, and the Bahamas) agreed to the OECD Pillar 1 and 2 proposals as refined by the US initiative. The seven that did not were: Ireland, Estonia, Hungary, Barbados, Kenya, Nigeria, Sri Lanka. This follows the earlier G7 (of which the US is a member) communique indicating agreement on the broad outline. There are still details to be finalised, but the OECD aims to finalise the remaining issues and implementation by October 2021.
Tax matters and ESG ratings & Pillar 2 disclosures
Over the last decade, the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) have made significant developments regarding tax transparency regimes and the exchange of information between tax authorities. However, these developments are being taken further in the drive for increased transparency and public availability of such information, particularly in relation to environmental, social and governance (ESG) reporting.
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