Pillar Two Impact Reaches Beyond Businesses’ Tax Departments

Pillar Two of the OECD/G20’s Inclusive Framework on Base Erosion and Profit Shifting requires large multinationals to pay a minimum level of tax. This complex reform establishes a new dynamic between governments and businesses across the world. For businesses, it also carries implications outside of tax planning matters.

With Pillar Two already commencing in 2024, businesses must prepare their strategies. It will be interesting to observe how governments respond to the rules, which alter the relationship between business and government in lower tax jurisdictions that may have traditionally used low taxes to attract investment.

Pillar Two rules apply to entities that are members of multinational groups with an annual consolidated turnover of at least 750 million euros (about $815 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 for each jurisdiction where they operate and pay a top-up tax for the difference between their ETR and the 15% minimum tax.

The complexity of these rules for multinational corporations is significant. Tracking which jurisdictions are implementing the rules—as well as when and how—is a challenge for businesses that operate in multiple countries.

While the Organization for Economic Cooperation and Development agreed to develop a set of temporary safe harbor rules to ease the compliance burden in the short term, businesses should still assess whether these rules apply and prepare backup plans if they don’t.

There is a common misunderstanding that Pillar Two is only a tax department issue. Businesses in the scope of Pillar Two must provide more than 100 separate data points for each entity in the group.

These data points contain information required from multiple departments—not just tax—such as human resources, finance, and legal. Businesses should consider whether they have the right support, resources, and skills from all departments to meet the Pillar Two requirements. If not, they should consider how to bridge that gap, as cross-team collaboration will be crucial.

Businesses should ensure they have data to forecast and model the impact of Pillar Two and meet ongoing reporting and compliance requirements. They shouldn’t assume existing accounting and enterprise resource planning systems can easily provide the data required to comply.

Some businesses have multiple information technology and finance systems resulting from acquisitions of companies with legacy systems, so getting access to the right data in the required format could be a challenge.

Because some of the data required may not serve any other function, existing systems may not be fit for this purpose, which will necessitate investment in new systems. Determining whether system modifications are needed is key to organizational preparedness and ongoing compliance.

Pillar Two will affect both consolidated and local statutory accounts. The financial reporting impact and disclosures in accounts must be clear. Also, each country may pass the rules into national legislation at differing times, meaning rules enactment dates will vary among countries.

This can present some practical challenges. For example, where the ultimate parent company is located in a country that has yet to adopt Pillar Two, the group should consider and understand which entity must file and where the Pillar Two return must be filed.

Any incremental Pillar Two liabilities businesses have will impact earnings per share. A clear communication strategy is a must to explain the effects of these rules to investors and analysts.

Many countries and companies are addressing the implications of Pillar Two, which means it is high up on the agenda of boards for large multinational businesses to adopt a strategic approach to tax. Business leaders must ensure they have a clear operational, technology, data, and people strategy to assess, model, and comply with the rules.

That isn’t a quick or cheap task, and many businesses may be under-resourced to manage ongoing compliance and reporting requirements. However, this isn’t just about compliance. Tax is likely to feature even more prominently in business strategy, particularly where certain decisions may result in additional Pillar Two tax.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Emma Locken is partner at Crowe UK, advising both domestic and multinational businesses in managing their tax affairs.

Write for Us: Author Guidelines