Pillar Two

Key measures

While the detail on Pillar Two in Budget 2024 was light, Minister McGrath did affirm his commitment to publish legislation to implement Pillar Two in Ireland for accounting periods commencing on or after 31 December 2023. As expected, the detail around the new rules was outlined in today’s Finance Bill (Thursday, 19th October 2023).

On the day of Budget 2024, Minister McGrath also confirmed a welcome change to Ireland’s R&D Credit regime - it was announced that the R&D Tax Credit is being increased from 25% to 30%; thereby seeking to preserve the net value of the existing tax credit for businesses subject to the new Pillar Two rules. This was confirmed in today’s Finance Bill.

The Pillar Two rules referenced above will apply to multinational enterprises with annual consolidated revenues in excess of €750 million in at least two of the immediately preceding four years and seek to ensure that large multinational enterprises are subject to a minimum level of tax on the income / profits arising in each of the jurisdictions where they operate.

Who will be affected?

Multinational enterprises with annual consolidated revenues in excess of €750 million in at least two of the immediately preceding four years.

When? What to do now?

The new Pillar Two rules will apply for accounting periods commencing on or after 31 December 2023.

Impacted groups should be actively assessing the impact of the new rules, including the application of the safe harbour provisions previously published by the OECD and which are expected to be included in the Irish rules, to identify jurisdictions where top up tax is expected. This will in turn feed into relevant accounting disclosures that need to be included in the FY2023 financial statements in terms of qualitative and quantitative information pertaining to the future exposure to additional Pillar Two taxes.

The additional administrative burden associated with assessing and complying with the new rules is expected to be significant. As such, early consideration of possible technology / systems enhancements to alleviate the burden is highly recommended.

Our view

While the Finance Bill contains the detail of the new rules (from an Irish tax perspective), the introduction of these rules follows a lengthy process by the OECD in designing the new rules, an EU Directive on the implementation of the new rules in an EU context, several hundred pages of guidance from the OECD on the interpretation and application of the new rules and two separate public consultations over the last number of months by the Irish Department of Finance regarding the implementation of Pillar Two in Ireland.

One aspect not addressed in any of the aforementioned documents / public consultations is the updates contained in the Finance Bill regarding the inclusion of Pillar Two within Ireland’s General Anti-Avoidance Rules (‘GAAR’). This may result in inconsistency in how Pillar Two is implemented in various different countries. Notwithstanding that the first tax filing deadline in relation to Pillar Two is as late as June 2026, impacted groups will need to consider relevant accounting disclosures in relation to Pillar Two later this year – these will need to be included in respect of FY2023. In order to be able to complete such disclosures on an accurate basis, it is crucial that a sufficiently robust analysis has been undertaken to fully assess, on both a quantitative and qualitative basis, the anticipated impact of Pillar Two based on the current geographical profile of the group and the location/tax rates applicable to the relevant profits generated. This analysis should consider:

• Identification of jurisdictions that are expected to qualify for a safe harbour under the new Pillar Two rules, the benefit of which is potentially significant.
• Anticipated impact of the full Pillar Two rules for jurisdictions not expected to qualify for a safe harbour.

Where full calculations are applicable, this will likely require a large quantity of data to be assimilated to ensure compliance, and indeed to fully assess the impact. Depending on the current data landscape used by the group (e.g. different accounting software for each entity / jurisdiction) this may represent a significant challenge.

The level of change in the international tax environment represented by the introduction of Pillar Two across the globe is unprecedented and impacted groups need to ensure they stay ahead of the curve in meeting their compliance and disclosure requirements as they arise over the coming months. The data challenge under Pillar Two is real and should, in our view, be tackled head on to ensure no compliance obstacles emerge that might pose challenges in meeting the disclosure/compliance requirements of Pillar Two in due course.