Pillar 2 – where are we?

Emma Locken, Partner, Corporate Tax

Just before Christmas we saw significant progress with the BEPS Pillar 2 rules. A year after the OECD released the Pillar 2 model rules, it released a number of guidance and consultation documents.

A reminder of Pillar 2

The Pillar 2 rules apply to entities that are members of multinational groups with annual consolidated turnover of at least EUR 750 million, and seek to ensure they pay the minimum level of tax wherever they operate. Groups that fall within the rules will need to calculate their effective tax rate (ETR) for each jurisdiction in which they operate, and pay a top up tax for the difference between their ETR and the 15% minimum tax.

What has happened so far?

OCED released draft model rules in December 2021, and commentary in March 2022, with the rules introducing two key measures being the Income Inclusion Rule (IIR) and underpayment of tax rules (UTPR).

Broadly, the IIR operates such that where an entity’s effective tax rate is below 15% the ultimate parent entity is liable for the top up tax even the low tax jurisdictions may introduce their own form of minimum tax to ensure they benefit from the top up taxes which would otherwise be collected by the jurisdiction of the parent company. The UTPR can apply by way of a denial of a tax deduction for payments where low tax members of a group are not subject to the IIR.

The UK opened a consultation into the implementation of Pillar 2 in January 2022, shortly after the release of the OCED model rules, which concluded in July 2022. The UK government published draft legislation on 20 July 2022, to implement Pillar 2 into the UK legislation which will apply for accounting periods beginning on or after 31 December 2023. The draft legislation was subject to technical consultation which closed on 14 September 2022.

Although there are areas the UK is seeking clarity on at an international level, the UK has expressed its intention to legislate in Finance Bill 2022-2023 and it was clear from the November Autumn Statement that the government remains committed to implementing Pillar 2.

In December 2022, the OECD issued guidance on the implementation of Pillar 2 as follows:

guidance on safe harbours and penalty relief
a public consultation document on the Global Anti-Base Erosion or GloBE Information Return
a public consultation document on Tax Certainty for the GloBE Rules.

The guidance on Safe Harbours and Penalty Relief includes the agreed terms of a Transitional Country-by-Country Reporting Safe Harbour. This effectively removes the obligation of calculating the GloBE effective tax rate for a group’s operations in lower-risk jurisdictions in the initial years; thereby providing relief to multinationals in respect of their GloBE compliance obligations as they implement the rules.

The document also includes the framework for the development of Permanent Safe Harbours which would allow a multinational to either reduce the number of computations and adjustments required under the GloBE rules, or perform alternative simplified calculations.

A Transitional Penalty Relief regime, where no penalties or sanctions apply during the transitional period, where the business has taken reasonable measures to ensure the correct application of the GloBE Rules.

There are two consultations that closed on 3 February 2023. One is the public consultation document on the GloBE Information Return, which seeks input on the amount and type of information that groups should be expected to report for the application of the GloBE Rules. The other public consultation document on Tax Certainty for the GloBE Rules outlines various mechanisms for achieving tax certainty under the GloBE rules.

In February, the Inclusive Framework received public comments in respect of compliance and tax certainty aspects of global minimum tax. The public consultation meeting will be held virtually on 16 March 2023.

You can find these consultations on the OCED website.

Recent developments

On 2 February 2023, the OECD released technical guidance for implementation of the global minimum tax. The guidance seeks to ensure co-ordinated outcomes and greater certainty for businesses as they move to apply the global minimum corporate tax rules from the beginning of 2024.

The document includes guidance on the scope, operation and transitional aspects of the GloBE rules as well as the collection of top up tax in a jurisdiction in a period where the jurisdiction has no GloBE income, and the treatment of debt releases and certain tax credit equity structures.

The guidance will be incorporated into a revised version of the commentary that will be released later this year, replacing the original version that had been released in March 2022.

What next

Going forward, the Inclusive Framework expects to finalise the model provision for the Subject to Tax Rule and the related multilateral instrument to assist in its implementation.

What should businesses be doing?

Given the Pillar 2 rules have recently been agreed by EU member states and we expect to see the rules adopted in other countries early this year, it is important that groups assess not only the impact of these rules but the practical implications of applying these rules. Businesses will need to understand how they will collect all the data required to meet the requirements, and whether they have the appropriate resource to be able to meet the ongoing compliance obligations. It will also be important for businesses to understand the impact on the financial statements and disclosures, clearly with internal and external stakeholder communication and management being key.

For more information on how Crowe can help, please contact Emma Locken or your usual Crowe contact.