What is Pillar Two?
A global minimum effective tax rate for multinational enterprises has been implemented for accounting periods starting on or after Dec. 31, 2023. The Organisation for Economic Co-operation and Development has prepared model rules to be adopted into national tax law by more than 135 countries around the world. These rules apply to businesses with consolidated revenue of at least 750 million euros.
Pillar Two identifies relevant income and profit from group entities in a jurisdiction along with related covered taxes.
The effective rate for a group’s aggregate results in each territory is then compared to the global minimum rate of 15%. Any shortfall gives rise to “top-up tax” payable by either the ultimate parent entity or an intermediate parent in the group structure. Some territories collect any top-up tax locally through a domestic minimum tax.
Most top-up tax is expected to be collected through either a qualifying domestic minimum tax or the income inclusion rule. Any excess will be picked up by an undertaxed profits rule.
The computation of amounts due is filed by the group’s ultimate parent entity in a specific Global Anti-Base Erosion (GloBE) return due 15 months after the year-end (or 18 months for the first period). Local entities need to notify their tax authority of the filing jurisdiction and confirm if there are any additional local filing requirements.
Businesses falling within the Pillar Two rules should take steps to understand their potential exposure to “top-up tax” and to put in place a robust reporting process.
What information is needed for Pillar Two compliance?
The calculation uses information from a group’s consolidated financial statements. The accounting standards of the ultimate parent are the starting point, although local accounting standards may be used without adjustment when differences fall within set thresholds.
There is no exclusion for materiality just because there is no requirement to include an entity in consolidated accounts.
Adjustments are required to align results in the accounts more closely with local computations. Some entities, such as investment companies or flow-through entities, have specific additional rules.
Determining the amount of covered taxes paid relies on current tax reported in the financial statements. Addressing the impact of losses or tax credits depends on the deferred tax balance. It is important for groups to have confidence in the composition and strength of both balances at an entity level.
Various elections are possible under the rules. There are also de minimis limits with reference to the scale of activities in each jurisdiction.
How can RSM help you?
We can support your business at every step in robust Pillar Two reporting. Our services include:
- Examining the Pillar Two and GloBE rules in the context of your business to identify potential complexity and help map your pathway to global minimum tax compliance
- Identifying appropriate process steps and controls to build your GloBE governance, including advising on stakeholder engagement throughout the setup process
- Modeling potential GloBE minimum tax liabilities to support discussions around financial statements and the tax compliance process
- Providing advice, support and tools—including automation—for your ongoing GloBE minimum tax reporting process
