Global Minimum Tax: How to Comply with BEPS Pillar Two Requirements?

The OECD’s new Pillar Two measures will see multinational enterprises (MNEs) with consolidated revenue of 750 million euro paying a global minimum tax (GMT) of 15%. Coming into effect as of January 2024, there is no more important priority than readying your organisation for the impact.

A recent webinar hosted by Thomson Reuters, EY and Orbitax provided practical strategies for organisations to adapt to the evolving measures and shed light on current levels of readiness in the industry.

Watch the full webinar on demand here or read on for the key insights.

The OECD’s Pillar Two framework: Four interlocking rules

The Pillar Two enforces an Effective Tax Rate (ETR) that must be calculated in each jurisdiction the MNE operates, in order to identify top-up tax due in each jurisdiction. However, as noted by Agnes Fok, Partner, Tax Technology and Transformation team at EY in Hong Kong, one of the webinar’s core speakers, the calculation process is more complex than a simple multiplication of pre-tax profits by 15%. Instead, it is governed by four interlocking rules outlined below:

1. Qualified Domestic Minimum Top-up Tax (QDMTT)

The QDMTT allows local jurisdictions to first collect a top-up tax from subsidiary companies operating in their region, ahead of any IIR or UTPR. It ensures that tax is paid at a local level by an MNE.

2. The Income Inclusion Rules (IIR)

The IIR ensures a parent company pays the 15% GMT in all the jurisdictions it operates in. Under the ruling, the parent company is required to pay a top-up tax for subsidiaries’ income that is taxed at ETR lower than 15%, according to the GLoBE rules.

3. The Under Tax Payment Rules (UTPR)

The UTPR comes into effect when an MNE parent company does not enforce the IIR, functioning as a backstop. In this case, in the scenario that a parent company is headquartered in a low tax jurisdiction, the UTPR will be collected by the group companies.

4. Subject to Tax Rule (STTR)

The STTR applies before the GloBE rules outlined above. It is a treaty-based rule designed to allow countries to impose limited additional taxation on certain cross-border payments, where the recipient is subject to nominal corporate income tax rate below 9%.

Global minimum tax developments and new Safe Harbours

Agnes (EY) highlighted that many countries are already moving towards implementing the GloBE framework at a domestic level in 2024, as well as 2025. The first wave of the countries that have enacted the Pillar Two rules in their local legislations include Japan, South Korea and the UK. Australia, Vietnam, Canada and many EU member states are on their way to implement these from 2024 as well. Certain jurisdictions like Singapore, Thailand, Hong Kong etc. are planning to implement the rules from 2025.

Recently, in July 2023, the OECD released second set of Administrative guidance on the Pillar Two GloBE Model Rules which includes Transitional UTPR Safe Harbours. To understand how these Safe Harbours could affect your organisation, read the guidance here.

Where are businesses at with Pillar Two preparations?

Polls were taken during the webinar, surveying the 700 finance and accounting experts in attendance. They provided valuable insight into current levels of preparation for GMT within the industry: which, according to the webinar’s experts, are lagging.

When asked about the status of BEPS Pillar Two efforts within their organisation: 32% were in the early stages of assessing their exposure and risk; 15% were planning and modelling (Safe Harbour/ETR); 14% were in the scoping, data collection and gap analysis stage; while 6% were evaluating solutions for operational readiness.

In light of the results, Agnes (EY) urged speed: “If you haven’t started an impact assessment, it is very urgent that you consider it right now. Even for those who think they won’t be affected until 2025, now is the time to begin the preparation process.” From now until January 2024, Agnes urged organisations to focus on refining their processes and modelling related to GloBE Rules.

To best prepare for Pillar Two compliance: Ready your data, says expert

Pillar Two introduces additional compliance requirements and involves the collection of 100+ data points. With regulatory authorities increasing their scrutiny, maintaining a robust audit trail is essential in order to achieve a transparent tax position. Caroline Wright, Associate Partner, Tax Technology and Transformation team at EY stressed the importance of using sophisticated data technology.

“The data collection process involves understanding the required data points, identifying where the data resides, and assessing its reliability. Consolidating this data into a well-structured, centralised data set, or a single source of truth, will be immensely valuable,” said Caroline.

In addition to spearheading data, Wright highlighted the importance of integrating Pillar Two processes seamlessly into existing compliance processes. Tax provision calculations will feed into Pillar Two calculations, and top-up tax numbers along with Effective Tax Rates (ETR) will feed back into tax provision calculations. Reviewing and optimising the current provision process and tools to align with the new requirements is therefore vital.

How does your data readiness compare?

Another poll conducted during the webinar shed light on the data readiness among those in attendance. In response to which data sources they intend to use for Pillar Two calculations: 38% of respondents said they intend to use spreadsheets and manual data collection, additionally, 41% of respondents said they’d use country-by-country reports, whilst only 18% said they would use tax packages and questionnaires. Nearly half of respondents at 48% planned to use Tax Provision Software and/or their ERP System.

In response to the results, Caroline (EY) noted, “Whilst running off spreadsheets is initially a good start…if you keep using spreadsheets, you’re going to be in a world of pain.”

Why automation is essential for your global minimum tax requirements

Organisations must streamline compliance efforts to stay prepared for the evolving GMT rules under OECD Pillar Two. During the webinar, Thomson Reuters’ Solutions Consultant, Manrong Zhang, stressed the importance of leveraging automation. In tune with Caroline (EY), Manrong strongly advised that MNEs adopt an end-to-end technological solution that can deliver on all aspects of global minimum tax compliance by providing extensive data and intricate calculations.

The webinar showcased the Orbitax Global Minimum Tax solution, which forms part of the web-based International Tax platform and has been tailor-made to deliver on GMT-specific compliance requirements.

The tool, for example, streamlines data collection processes by enabling flexible data retrieval from various sources like ERP systems or tax systems such as ONESOURCE Tax Provision via 90+ out of the box API connections, excel import functionality, mapping tool and data surveys for stakeholders’ responses. Meanwhile, country-specific calculation templates generate the relevant Safe Harbour, STTR, QDMTT, IIR and UTPR calculations across multiple jurisdictions concurrently and in the required sequence to generate jurisdiction wise top-up tax numbers. As an end-to-end solution it ensures transparency with a comprehensive audit trial, generates and auto-populates GLoBE Information Return and offers default and customisable reports for seamless information sharing with both stakeholders and tax authorities.

A demonstration of the tool can be viewed in the webinar.

Staying proactive as global minimum tax evolves

Given the January 2024 start date, and the varying complexity of implementing GMT processes, it is essential that organisations have preparations underway. The three, expert-recommended activities to ensure success are 1) starting early with impact assessment, modelling and understanding data requirements 2) implementing a robust data collection and compliance process, and 3) using purpose-built automated technology which is adaptable to the continuously evolving BEPS Pillar 2 rules. Being proactive in preparing for the new GMT rules will be the key to maintaining a competitive edge and ensuring transparent compliance with the evolving global minimum tax regulations.

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