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OECD Pillar Two - Global Minimum Tax

Taking action: managing your compliance obligations

The core principles of the international tax landscape are set to change from 2023. Almost all countries in the G20/OECD Inclusive Framework on BEPS (‘the Inclusive Framework’) have signed up to a joint political statement on the agreed components of their ‘two-pillar’ approach to global tax reform. Pillar Two sets out global minimum tax rules designed to ensure that large multinational businesses pay a minimum effective rate of tax of 15% on profits in all countries.

The OECD model rules outline the scope, mechanics, and administration of the Pillar Two approach. The unprecedented nature of this reform and the scope of activity required to comply with OECD Pillar Two will undoubtedly present significant challenges for the organisations that fall within the scope of the rules.

BEPS Pillar Two objectives and who will be impacted

From 2023, Pillar Two’s ‘income inclusion rule’ will apply to large multinational businesses with consolidated group revenues of at least EUR 750 million per year.

In-scope organisations will need to pay a minimum effective rate of tax of 15% in every country in which they operate. Groups with effective tax rates below the minimum in any particular jurisdiction will be required to pay top-up tax. From 2024, in cases where the income inclusion rule does not apply to a business, the ‘undertaxed payment rule’ will apply as a secondary (backstop).

The global minimum tax rate of 15% is estimated to generate around USD 150 billion in new tax revenues globally per year.

OECD/G20 Base Erosion and Profit Shifting Paper, October 2021

Considering the implications for your business

We recognize that many businesses will want to understand the likely impact of OECD Pillar Two approach on their organization. Our policy and technical tax specialists are advising many businesses, helping them to understand the implications of the new rules including additional tax costs, frictions in group structures and assessing potential approaches for businesses to prepare ahead of the Pillar Two rules taking effect.

In addition to our advisory services, our OECD Pillar One and Pillar Two modelling service combines the deep expertise of Deloitte tax specialists with the analytical power of our technology solution to help companies assess and evaluate the potential implications of Pillar Two on their tax profile.

Solution benefits:

  • Evaluate the impact of BEPS 2.0 Pillar proposals
  • Perform accurate compliance calculations post-enactment
  • Identify data limitations that may need to be considered for compliance
  • Customise to your fact pattern and data sources
  • The modelling service captures much of the analysis that we have undertaken around the impact of Pillar 2.
    For more information, visit the webpage.

What should my approach be to Pillar Two compliance?

Applying a global minimum 15% tax in itself may sound straightforward in principle, but there are a number of operational compliance complexities that companies need to be prepared for.

1. Scale up reporting and data analytics capabilities
Pillar Two will impose new calculation and reporting obligations that require businesses to have appropriate systems and processes to identify, gather and process the required data. These calculations will likely differ from existing reporting requirements and we expect that tax and accounting teams will need to work together closely to scale up reporting and data analytics capabilities
Additionally, these new calculations will need to be digitally and securely stored and carried forward on a traceable, trackable basis to be used for future year calculations and for potential tax authority audits.

We understand that complying with a new set of complex rules that spans multiple jurisdictions, undertaking significantly greater calculations and managing the associated filing requirements will place an enormous burden on already stretched tax teams.

- Sophie Blegent-Delapille, Managing Partner, Deloitte Taj, Societe d'Avocats, France

2. Plan for change
The Inclusive Framework is looking at an ambitious timetable for implementation, with application of the first elements of Pillar Two planned to start in 2023. From experience, we know that implementing significant calculation and filing changes within global organizations can be cumbersome, requiring advanced planning and change management to deliver successful results and avoid risk of non-compliance.

From speaking to a number of clients, we have identified potential data limitations within their current operations that may need to be considered for compliance purposes ahead of any calculations.

- Albert Fleming, Tax & Legal CTO, Deloitte North South Europe

What next?

We are evaluating compliance needs and solutions and would like to collaborate with clients to understand their issues and requirements. If you would like to discuss any of the above considerations and how they may affect your business, please get in contact with us. In the meantime, to stay on top of upcoming announcements relating to the Pillar 2 developments, please sign up to our Tax Alerts.

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