Pillar Two: What still needs to be done in 2024?

Half a year has already passed since the Minimum Taxation Act ("MinBestG") came into force on 31 December 2023, during which time MNE and large-scale domestic groups have had the opportunity to familiarise themselves with the new regulations. The provisions of the MinBestG are to be applied for the first time to (group) fiscal years starting after 31 December 2023, thus in particular for fiscal years starting on 1 January 2024 and corresponding to the calendar year. Up until now, besides the scoping and a possible applicability of the temporary CbCR safe harbour rules, in many cases the focus has been on collecting the relevant data points to determine the GloBE income/loss respectively the adjusted covered taxes to estimate a potential top-up tax.

In addition, the MinBestG provides for comprehensive compliance obligations that must be considered by Austrian constituent entities of groups in scope of the regulation. Although there is still time for some of these obligations, such as the submission of the GloBE Information Return (“GIR”, Sec 69 MinBestG) or the submission of a QDMTT return (Sec 77 MinBestG) (e.g. in case of the GIR in the transition year 18 months after the last day of the fiscal year), action is required for other compliance obligations that must be fulfilled by the end of the fiscal year in question. What actions therefore still need to be taken before the end of the current fiscal year? 

Procedural implementation of Pillar Two

If an MNE group with an ultimate parent entity or constituent entities resident in Austria has not yet addressed Pillar Two, now is the time to assess its impact on the group respectively the own constituent entity and take appropriate measures. This includes but is not limited to assessing whether the CbCR qualifies for the application of the safe harbour rules, which adjustments are relevant for determining the effective tax rate, in which form a top-up tax would be levied (QDMTT, IIR or UTPR) and which compliance obligations must be fulfilled. In addition, the effects on ongoing business processes should also be considered (e.g. establishment of new entities, M&A transactions).

Constituent entities for which only the QDMTT is to be taken into account in Austria (i.e. the UPE or an IPE or POPE must apply the IIR abroad) should in a first step consult within the group as soon as possible on how Pillar Two is handled within the group. In many cases, an initial assessment for the respective tax jurisdictions and thus possibly also for Austria will already have been made at group level as part of a centralized project organisation. In this case, possible tax-specific issues but especially local compliance obligations need to be examined and responsibilities defined.

Due to the considerable amount of data to be processed, it is also necessary to examine how existing infrastructure and processes (e.g. existing IT systems and reporting processes) can be utilised, adapted or expanded (e.g. amendments to existing reporting packages, implementation of specific Pillar Two tax tools).

Processes, responsibilities and controls relating to Pillar Two that have been set up as well as risks identified also need to be documented accordingly and should be included in the tax control system, in particular in the risk-control matrix, in process documentation and any work instructions, group manuals and -guidelines.

Assignment of one constituent entity as central taxpayer in case of several Austrian constituent entities

According to the MinBestG, only one Austrian constituent entity is assigned to be liable for any top-up-tax under the QDMTT, IIR and UTPR and thus as the central taxpayer for the entire group in Austria. A specific order of precedence is defined, which in a first step allows the ultimate (domestic or foreign) parent entity to select and assign a constituent entity resident in Austria as the constituent entity liable for any top-up-tax. If such an assignment is not made, the top domestic parent would be considered as taxpayer or, in the absence of a top domestic parent, the economically most important constituent entity resident in Austria. This specific order of precedence allows groups the greatest possible flexibility in determining the constituent entity liable to pay a possible top-up-tax, which, however, requires the assignment by the ultimate parent entity. 

Proof of this assignment must be submitted by the designated constituent entity to the Tax Office for Large Businesses before the end of the calendar year in which the fiscal year ends. For standard fiscal years, a corresponding assignment and notification to the tax office must therefore be made by 31 December 2024 for 2024. How the notification is to be made is currently still unclear.

Compensation for Pillar Two taxes

As only one Austrian constituent entity acts as central taxpayer under the MinBestG, in the case of two or more Austrian constituent entities it may be necessary to reach an agreement on the allocation of any top-up tax to be paid. By doing so, the constituent entity assigned as taxpayer of any top-up tax would not have to bear the entire economic burden of a top-up tax (which it may even not have caused) to be paid in Austria. The MinBestG provides for a corresponding compensation possibility "in accordance with the requirements of company law". It is therefore up to the group to decide whether and how a potential top-up tax is to be allocated, considering that the requirements of company law must be observed in order to avoid a prohibited repayment of equity in favour of the shareholder.

As not meeting the safe harbour criteria may result in a top-up tax and a potential allocation of such between several Austrian constituent entities already in 2024, we recommend concluding a corresponding Pillar Two tax compensation agreement still in the fiscal year 2024.

Pillar Two in the individual and consolidated financial statements 2024

Unless the Group has been or is subject to reporting obligations throughout the year, for the individual and consolidated financial statements as of 31 December 2024 at the latest, – similar to preliminary tax calculations for CIT purposes -  groups must be in a position to estimate any top-up tax for 2024 and make any necessary provisions. In addition, Pillar Two-specific disclosures must be included in the notes respectively it should be examined whether certain disclosures appear useful from a tax perspective (e.g. the disclosure of non recognized deferred taxes). 

In the course of this, we also recommend consulting with the auditor at an early stage in order to coordinate the procedure planned for 2024 in advance and to determine the analyses and documents required to carry out the necessary audit procedures.

Monitoring of compliance obligations outside of Austria

For MNE groups, Pillar Two obligations arise not only in Austria. Constituent entities are often also resident in countries that have implemented the Pillar Two regulations including a QDMTT. This also results in corresponding compliance obligations in the respective countries, which can range from registration and notification obligations to advance payments and additional declaration obligations. As the administrative rules are to be governed individually by the countries, there may also be different deadlines. 

In addition, it should be noted that the countries have certain leeway when implementing a QDMTT, meaning that there may be deviations in the calculation of the effective tax rate respectively any top-up tax compared to a calculation under the IIR (e.g. applicable accounting standard, different calculation of the substance based income exclusion). It is also necessary to check whether the temporary CbCR safe harbour regulations are also applicable for QDMTT purposes (and not only at the level of the UPE for IIR purposes).

Developments in the relevant countries should therefore be carefully monitored (Deloitte's Global Pillar Two Legislative Tracker) in order to make the necessary calculations correctly and to be able to fulfil the corresponding compliance obligations at short notice if necessary, but on time. 

Further Guidance relating to Pillar Two

Both abroad and in Austria, the regulations relating to Pillar Two are subject to constant change. For example, the OECD issued a new Agreed Administrative Guidance in June 2024. Further, the Austrian Ministry of Finance has published a first round of FAQs relating to the MinBestG. It is therefore also important to monitor such developments on an ongoing basis and take them into account when implementing Pillar Two in the group respectively at the level of the respecitve constituent entities.

Conclusion

Although there is still time for the first Pillar Two tax returns to be filed, affected groups and constituent entities still have numerous to-dos related to Pillar Two that need to be completed in the second half of 2024.

If you have any questions about the individual regulations in detail as well as further questions about the impact analysis and implementation in your company, your contacts at Deloitte will of course be happy to help.