WHAT IS THE AIM OF PILLAR 2 RULES?
The aim of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework’s project is to ensure that multinational groups of companies pay a minimum level of tax on income arising in each jurisdiction in which they operate. This minimum level of tax is set at 15%.
IF MOST COUNTRIES HAVE CORPORATE TAX RATES OF MORE THAN 20%, WHY IS THE MINIMUM TAX SET AT 15%?
A large portion of corporate profit is subject to an effective tax rate (ETR) that is lower than 15%—despite the fact that the home jurisdiction of some multinational groups imposes a corporate tax at a much higher rate. Furthermore, the OECD Inclusive Framework includes jurisdictions that have corporate tax rates that are lower than 15%.
WHICH ARE THE IN-SCOPE ENTITIES?
Your group qualifies as an in-scope entity if:
- It has companies or permanent establishments (PE) in more than one jurisdiction, and
- It had an annual revenue of €750 million (or more) in the consolidated financial statements of at least two of the four fiscal years preceding the tested year.
With respect to the EU territory, please note that the European Commission just proposed a directive aimed at extending the scope of Pillar 2 rules to domestic groups (i.e., to groups that do not meet the first requirement listed above but meet the €750 million threshold).
IF MY GROUP IS IN-SCOPE, WHAT SHOULD I DO TO BE PREPARED FOR PILLAR 2?
- Calculate the ETR of your group on a jurisdictional basis
- Calculate the top-up tax (i.e., the amount due to reach an ETR of 15% in each jurisdiction)
- Identify the entity liable for the top-up tax. As a general rule, it should be the top parent company of the group, but in some cases a backstop rule applies and the subsidiaries are liable for the top-up tax.
Simplified modeling can be run to have a general idea of the impact and consider any restructurings accordingly.
MY GROUP IS BASED IN THE UNITED STATES AND IS SUBJECT TO GILTI RULES. DOES PILLAR 2 ALSO APPLY IN THIS CASE?
Yes, Pillar 2 also applies in this case. From a technical standpoint, the coexistence between Pillar 2 and global intangible low-taxed income (GILTI) rules has not been determined yet, although the OECD is willing to ensure a smooth coordination and a level playing field. As of today, GILTI rules might not be deemed fully in line with Pillar 2 rules as they do not provide an application of the GILTI regime on a country-by-country basis.
WHAT ARE THE NEXT STEPS?
In the first quarter of 2022, the OECD is expected to publish a commentary on Pillar 2 Model Rules, providing further details on the application of Pillar 2. As of today, the first application of Pillar 2 rules is set at year 2023. However, the implementation of the 15% minimum tax rules at the domestic level of each State is required and this may well cause a delay.