Pillar 2: Everything You Need to Know About Global Minimum Tax

The international taxation landscape evolves continuously, introducing us to new groundbreaking transformations now and then. Pillar 2, a dynamic and visionary component of the OECD/G20 Inclusive Framework's master plan for reforming global taxation, has been getting a lot of attention lately. Find out what exactly is Pillar 2, and why it’s capturing the attention of governments, multinational enterprises (MNEs), and tax professionals around the world.

 

Definition and Meaning of Pillar 2

Pillar 2 is one of two pillars of the OECD/G20 Inclusive Framework's plan to reform international taxation. With 139 member countries, Pillar 2 is designed to establish a global minimum tax (GMT) of 15% on the income of MNEs with a global turnover of at least €750 million. The GMT consists of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).

• The IIR requires MNEs to pay a top-up tax for jurisdiction where the effective tax rate is below the agreed-upon minimum rate.
• The UTPR is a secondary mechanism to collect top-up tax in certain cases where the IIR would not result in a top-up tax.

Pillar 2 is expected to come into effect in 2024, but the exact date will vary from country to country. For instance, the European Union (EU directive) has said that it will implement Pillar 2 from 2024, while the United States has not yet announced a date. However, some countries, such as Germany and Indonesia, have already started to implement Pillar 2 rules.

 

Difference Between Pillar 1 and Pillar 2

In general, Pillar 1 primarily deals with the reallocation of income to market jurisdictions, while Pillar 2 focuses on establishing a global minimum taxation framework and preventing tax avoidance. Here’s a detailed overview:

 

Pillar 1: Profit Allocation and Nexus

Pillar 1 focuses on the reallocation of taxable income to market jurisdictions for large multinationals and affects effective tax rates, cash tax obligations, and transfer pricing arrangements. Intended to include an increasing number of entities over time, Pillar 1’s timeline for introduction depends on acceptance by a critical mass of jurisdictions.

Pillar 1 repeals digital services taxes and similar measures, with unclear identification and timetable, while covering various industries, moving away from the initial focus on digitalized business models.

 

Pillar 2: Global Minimum Taxation

Pillar 2 aims to ensure income is taxed at an appropriate rate and establish a GMT of 15% for multinationals with €750 million+ turnover. Model Global Anti-Base Erosion (GloBE) rules are released under Pillar 2, and it’s expected to be implemented by the European Union and other jurisdictions from 2024–2025.

Pillar 2 introduces a radical shift in the tax landscape and involves various mechanisms, including the Undertaxed Payments Rule (UTPR) and Subject to Tax Rule (STTR).

 

Main Goals and Benefits of Pillar 2

The main goal of Pillar 2 is to prevent MNEs from shifting profits to low-tax jurisdictions in order to reduce their tax liability. Pillar 2 will generate billions of dollars in additional tax revenue for governments around the world and is intended to create a more level playing field for businesses, offer a more competitive business environment and establish a fairer tax system.

Best Practices and Tips on How to Implement Pillar 2

The implementation of Pillar 2 is a complex process that will require the cooperation of governments, businesses, and other stakeholders. It’s important to start planning early to give everyone involved enough time to prepare.

Other crucial parts are building consensus on the implementation of Pillar 2 and using technology, such as automating the calculation of effective tax rates and tracking the flow of profits between jurisdictions.

The implementation of Pillar 2 isn’t easy, and there’s no one-size-fits-all solution—be flexible and be willing to adapt the implementation plan as needed. Here’re some additional tips for implementing Pillar 2:

• Get buy-in from senior management to ensure that it’s implemented effectively.
• Train your staff on its requirements and rules.
• Use a qualified tax advisor, especially if you’re unsure about how to implement it.
• Stay up-to-date on the latest developments since the rules for Pillar 2 are still evolving.

 

Challenges and Possible Solutions in the Implementation of Pillar 2

During the implementation of Pillar 2, you (as a business) may face several challenges, such as:

• Difficulty in making changes to your accounting and tax reporting systems.
• High compliance costs for collecting and reporting data on your global profits and activities.
• Political opposition to Pillar 2, especially from countries that have low tax rates.

 

Not to mention that administrative burden could be significant for governments and businesses alike. The best solution to these problems is simplifying the Pillar 2 rules so businesses can easily understand them.  

Another effective solution is to embrace technology and software solutions like GlobalTaxCenter Suite that help businesses comply with the complex tax rules of the digital economy. GlobalTaxCenter Suite includes modules for country-by-country reporting (CbCR), the OECD's GloBE rules, and the EU's DAC 6 reporting requirements.

The Suite helps you comply with the rules in a timely and accurate manner with a lot of features that simplify collecting and reporting data, including:

• A centralized data repository that stores all of the data needed for compliance.
• Automated workflows that help to streamline the compliance process.
• A user-friendly interface that makes it easy to navigate the software.

 

Outlook for the Future of Pillar 2

The future of Pillar 2 looks positive, affecting a wide range of stakeholders, including MNEs, governments, and developing countries. The OECD/G20 Inclusive Framework has reached a broad consensus on the implementation of Pillar 2, and many countries have already committed to implementing the rules. There are some challenges that will need to be addressed in the implementation of Pillar 2, such as the complexity of the rules and the compliance costs for businesses.

 

Sources:

• OECD: The Pillar Two Rules in a Nutshell (PDF)
• OECD: OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax
• PwC: Pillar Two Readiness – Are you #PillarTwoReady?
• PwC: Pillar Two – Assess. Report. Comply
• KPMG: E-News from the EU Tax Centre (E-News 179)