OECD Pillar 2 GloBE: The big tax shake-up is on the way

Leaders from 139 countries have agreed on a minimum tax rate for global corporations to pay, wherever they operate, in an effort to discourage tax avoidance. This change, OECD Pillar 2 GloBE (Pillar 2), represents one of the biggest changes in international tax for over 200 years.

“It’s a fundamental change in the tax landscape,” says Lucy Redding, Tax Partner.

Here is everything you need to know about Pillar 2.

What is Pillar 2?

The initiative, which is being driven by member countries of the Organisation for Economic Cooperation and Development (OECD), sets a global minimum tax rate of 15% in every jurisdiction in which the multinational operates.  It can also affect large businesses that operate purely domestically in some jurisdictions.

It is the next step in the evolution of the OECD’s longstanding Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which was developed to address tax avoidance and ensure the coherence of international tax rules.

Pillar 2 would generally not force countries to raise their tax rates but would compel companies to pay their fair share of tax in countries in which they operate, as opposed to funnel profits to low-tax jurisdictions.

Such is the force of political will surrounding Pillar 2, even those countries with zero or low tax rates, and whose economy depends upon the business of those multinationals to varying degrees, were compelled to sign up for the initiative.

“The momentum around Pillar 2 is such that now there are a sufficient number of countries that are adopting it, most other countries will have to join in,” explains Neil Rolfe, Head of Insurance Tax, FS Partner. “One of the clever things is that in the first year, an adopting country gets to collect tax in relation to subsidiaries in other countries. But in the second year, an adopting country anywhere will collect taxes in relation to low-tax countries anywhere in the worldwide group.

So, the UK could collect taxes in respect of the US or China and it’s that provision that means that everybody has to join in. It’s better to be in control of your own destiny than to let somebody else set the rules.”

Will your business be affected?

Pillar 2 applies to organisations with a consolidated group revenue of more than 750 million euros in two of the previous four years.

How will your business be impacted?

If your business meets the criteria, you can expect two layers of cost relating to Pillar 2.

The first is a tax cost.

“If you meet the size criteria, you may find you’ve got additional tax to pay as a group if you’re not currently paying the minimum 15% tax in certain jurisdictions,” says Redding.

The second is a compliance burden.

“There’s a compliance burden, and with that comes a compliance cost. So, at best businesses are going to have a compliance cost, and at worst they’re going to have a compliance cost and additional tax to pay.”

What do you need to do, and when?

Effectively Pillar 2 applies in the UK from January 1, 2024, meaning that for groups preparing accounts to 31 December 2024 - their first accounting period for which a Pillar 2 return is required will be December 31, 2024. Taxes will need to be paid and the return submitted by 30 June 2026 and then 15 months after the end of subsequent accounting periods.

However, there is a reporting requirement for businesses in relation to the impact of Pillar 2 in their 2023 accounts. This means businesses will need to disclose the expected Pillar 2 impact on the business in its financial statements.

“You have to include disclosure in your end-of-year financial statements for 2023 as to what you expect the impact of Pillar 2 to be in 2024. So, finance teams will need to work out what they’re going to include in their 2023 accounts where they have operations in the UK, the EU, and other early adopting countries” says Rolfe.

What are your next steps?

“We start by assessing country-by-country reporting (CbCR) data. Many companies affected by Pillar 2 will have already been filing CbCR,” says Donay Viljoen, Financial Services Tax Manager.

The CbCR is a group-level return that’s submitted to the tax authority that states all of the locations in which the group has a taxable presence and some basic data about each of the branches or entities – profits, tax paid, etc. Data from this return is used to show whether one of the Pillar 2 temporary Safe Harbour Rules applies. If they apply, that allows the business to submit an abbreviated return to say that it has no Pillar 2 tax in the relevant country.

If Pillar 2 Safe Harbour Rules do not apply to that country, things get a bit trickier.

“Then you would have to do full Pillar 2 calculations. Those are very complicated and tend to require a lot of datasets that won’t necessarily automatically be available from accounting system reports. So, depending on the impact and how far advanced on Pillar 2 matters the business is, the next phase may be to have a look at accounting systems to see how you would collate the information needed,” says Viljoen.

“Over the next year, we expect that groups requiring full Pillar 2 calculations will need quite a lot of help to assess the top-up taxes payable and to prepare their first Pillar 2 tax return in 2026.”

First and foremost, for any CFO or tax director though, is to prepare for their 2023 accounts. This will involve working out what resources are required – including people and budget – and ensuring they have those in hand to effectively undertake the process.

Says Rolfe: “Everybody realises that dealing with Pillar 2 is going to require a huge amount of work and that it’s very complicated. And so, the OECD instruction to jurisdictions is that people should be doing it on a ‘best endeavours’ basis in the first three years. But it’s important to be as accurate as possible from the beginning to avoid negatively impacting the company and avoiding any fallout down the line.”

Updated February 2024