BEPS Pillar Two: Top 10 Complexities & Variables
The OECD’s Base Erosion and Profit Shifting (BEPS) Pillar Two initiative is now live, introducing a complex, global minimum tax framework that creates reporting and compliance challenges for multinational businesses with annual revenue of 750 million euros or more. As local adoption of these international tax rules unfolds, the complexities and variables of Pillar Two are becoming increasingly apparent.
Drawing on his experience in global tax compliance programmes, Mick Edmondson shares his insights into the main complexities and variables that multinational enterprises (MNEs) need to navigate as they integrate Pillar Two into their tax reporting and compliance obligations.
1. Complex & Evolving Global Model Rules
The OECD’s Pillar Two Model Rules, released in December 2021, have already seen several updates, with guidance issued in February, July, and December 2023, as well as June 2024. These rules require over 200 data inputs for every constituent entity, sourced from multiple departments across an organisation. Particularly challenging is the need for data related to Deferred Taxes, which may require additional accounting books to meet compliance obligations. Staying updated with the latest changes is critical, as these complex rules will continue to evolve over time. For full details on the OECD’s rules and guidance, you can access the OECD’s official documentation here.
2. Transitional Safe Harbours
Transitional Safe Harbours provide temporary relief by delaying full compliance for up to three years for jurisdictions with an effective tax rate over the minimum tax rate of 15%. While this is beneficial, it adds a layer of uncertainty around which countries might need full compliance before the end of the three years. Additionally, Safe Harbours require different data inputs, including a ‘qualifying’ Country-by-Country Report, the specifics of which are still awaiting further guidance. Ultimately, whether a Country-by-Country Report qualifies will depend on the interpretation the relevant jurisdiction's tax authorities.
3. Country Enactment Variables
Each country must enact the OECD’s Model Rules into their own legal framework and official languages, leading to both necessary and opportunistic variations. The timing of enactment also varies significantly, with nearly 40 countries expected to enact the rules in 2024, around 50 in 2025, and about 60 yet to commit to a date. These variables create a complex landscape for MNEs, who must track the enactment status and specific requirements for each country they operate in. For detailed tracking, you can refer to PwC’s superb Pillar Two Country Tracker or similar from their peers.
4. Qualifying Domestic Minimum Top-Up Taxes (QDMTTs)
Countries will increasingly introduce Qualified Domestic Minimum Top-Up Taxes (QDMTTs) as they take precedence over Global Rules imposed from the country of the MNE’s ultimate parent entity (UPE). QDMTTs can differ materially from the Global Rules including for example being based on local statutory accounts rather than group accounts. The relationship between QDMTTs and the Global Rules is not yet fully clear but provisionally, a QDMTT will have to pass a TBC peer review process to be the only Pillar Two compliance required for a country. Prior to this, an MNE may have to do returns for the QDMTT and the Global Rules (paying any top-up-tax firstly on the QDMTT then on any incremental difference for the Global Rules)
5. Changes to Related Laws
As countries enact Pillar Two legislation, including QDMTTs, they are also likely to adjust their tax incentive regimes to mitigate the potential impact on inbound investment. Early movers like Thailand, Singapore, Switzerland, and Barbados have already started making such adjustments. But that might be the ‘tip of the iceberg’. One example: U.S. R&D credits are non-refundable. The U.S. wants Pillar Two rules to change so that they would be ‘good credits’ for Pillar Two. That could impact on how Pillar Two applies to regimes elsewhere. The alternative would be the U.S. making changes to its R&D regime!
6. Joint Ventures
All the complexities and variables of Pillar Two here also apply to Joint Ventures. But the picture for Joint Ventures is further complicated by the question of which party is responsible for Pillar Two reporting, compliance and any payments
This will depend on normal considerations of ownership %, control and existing accounting arrangements. But for Pillar Two there’s the added complication that Pillar Two only applies to MNEs with annual income of 750m Euros or more leading to differing scenarios dependent on the turnover of the joint venture and each owner.
Also, Pillar Two requires JVs to be separated into their own ‘tested jurisdictions’ (including for Country-by-Country Reporting for Transitional Safe Harbours)
7. Undertaxed Profits Rule (UTPR)
The Undertaxed Profits Rule (UTPR) is one of the most radical aspects of Pillar Two enabling a country that’s enacted Pillar Two to collect top-up tax from a country that hasn’t based on an MNE having entities in both countries - regardless of whether those entities have any connection beyond being in the same MNE group
This sits at odds with existing international tax treaty norms and there’s already been a challenge from a U.S. Corporation to Belgium’s enactment of UTPR
8. Changing Legal Entity Footprint
Maintaining accurate master data for all legal entities is crucial for understanding the scope and potential impact of Pillar Two. This includes data for the start and end of the relevant financial statements and any changes in between. The specific data requirements will vary depending on whether a jurisdiction is under Transitional Safe Harbour or subject to Global Rules and/or QDMTT. At the point jurisdictions exit Transitional Safe Harbour, data will also be needed as far back as to 1st December 2021. Having an accurate, detailed view of acquisitions will be particularly important for understanding any impacts to ETR or the processes being followed to ensure the CbCR is qualifying for Transitional Safe Harbour purposes
9. Evolving Technology
Pillar Two compliance demands new technology solutions to source, standardise, and calculate diverse data inputs. Various technology solutions are evolving to meet these needs, with some focusing on financial reporting or Global Rules compliance, and others also addressing QDMTTs. MNEs may need multiple solutions to meet both near-term reporting requirements and long-term compliance needs (whilst integrating with wider Reporting, Accounting & Tax Compliance technologies that may also be changing)
10. Stakeholders Beyond Tax
Pillar Two requires over 200 data inputs for each legal entity, much of which is currently held across various parts of Finance and Shared Services within Group and Statutory Accounting ERP systems. Precisely what’s needed will continue to evolve as each country enacts Pillar Two, with potential variations particularly for QDMTTs. Early engagement with stakeholders beyond tax will help ensure efficient data management and standardisation of processes, particularly for complex inputs like Deferred Taxes and qualifying Country-by-Country Reports.
Conclusion
BEPS Pillar Two is live and complex. But full requirements will take years to finalise. Understanding the complexities and variables will help MNEs to cost-effectively build Pillar Two into Tax Reporting & Compliance.
Is your organisation ready for BEPS Pillar Two?
At Complete Projects, we have the experience and expertise to build Pillar Two implementation programmes that ensure all stakeholders are ready for the full scope of Pillar Two reporting and compliance whilst also being able to adjust as requirements and timings become clearer with each country’s enactment.
Get in touch now to explore what we can do for your Pillar Two Programme.
ABOUT THE AUTHOR
Mick is the PPPM Lead at Complete Projects which he founded in 2008; he is a proven leader with over 35 years of experience in Operations and PPPM, spanning social care, legal services, government, energy, manufactured goods and digital education. Mick also brings broader HR, IT, L&D people and team leadership from having senior management responsibility in diverse environments.