OECD Pillar 2 GloBE: Preparing for a different tax future

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  rules and any entities in that group, with some exceptions.

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.In addition, a subject-to-tax rule 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 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.

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 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.

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.

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.