02 November 2023
A global minimum effective tax rate for multinational enterprises is being introduced for accounting periods commencing on or after 31 December 2023.
This will apply to businesses with a turnover of at least €750m. These rules are being introduced under Pillar 2 of the OECD’s reform of the international tax system. The OECD has prepared model rules which have been or are expected to be adopted into national law by the UK, EU Member States and others.
Businesses falling within the Pillar 2 rules should be taking steps now to understand their potential exposure to ‘top-up tax’ and to put in place a robust reporting process. Large multinational business in the mining and metals sector can expect the new compliance requirements to present a technical and operational challenge given the globalised, capital-intensive nature of their operations and exposure to differing tax treatment across the territories in which they operate.
How will the Pillar 2 rules work?
Pillar 2 identifies relevant income and profit from group entities in a jurisdiction together with related covered taxes.
The effective rate for a group’s aggregate results in each territory is then compared to the global minimum rate of 15%. Any shortfall will give rise to ‘top-up tax’ payable either by the ultimate parent entity or an intermediate parent in the group structure. Some territories, including the UK, will collect any top-up tax locally through a domestic minimum tax. The computation of amounts due will be filed by the group’s ultimate parent entity in a specific ‘GloBE return’ due 15 months after the year end (or 18 months for the first period). Local entities will need to notify their tax authority of the filing jurisdiction.
There are also transitional rules that allow businesses to apply less complex reporting requirements in the initial three years of the Pillar 2 regime. Businesses may be able to apply these transitional rules depending on their country-by-country reporting data and their financial profile in different territories.
What information is needed?
The calculation will use information from a group’s financial statements, as the OECD’s aim is to rely on existing data. The accounting standards of the ultimate parent will be the starting point, although local accounting standards may be used without adjustment where differences fall within set thresholds.
Adjustments are required to align results in the accounts more closely with local tax computations. Some entities such as investment companies or flow through entities have specific additional rules.
Determining the amount of covered taxes paid will rely on current tax reported in the financial statements. Addressing the impact of losses or tax credits will rely on the deferred tax balance. It will be important for groups to have confidence in the composition and robustness of both of these balances at an entity level.
It is possible to make various elections under the rules. There are also de minimis limits with reference to the scale of activities in each jurisdiction.
Specific considerations for mining and metals companies
In aligning the group’s financial statements with the local tax computations, businesses will make a number of adjustments to the headline financial accounting net income / (loss) in each entity and territory.
Particularly relevant to mining and metals businesses will be adjustments related to:
- Deferred tax assets and liabilities – considering the deferred tax impact of specific local tax regimes concerning fixed asset depreciation / capital allowances, resource rent and royalty regimes, etc.
- Research and development incentives – determining how research and development incentive regimes are treated under the Pillar 2 rules (i.e. qualified vs. non-qualified)
- Aligning their transfer pricing model to the arm’s length principle – ensuring that any transfer pricing arrangements are correctly priced and documented, or that any variance between an arm’s length transfer pricing model and the business’ actual model has been quantified for disclosure in the GloBE return. Of specific interest may be higher risk transfer pricing models including marketing, trading and distribution hubs, as well as the attribution of value to blending, logistics management and risk management activities.
Supporting your business at each stage
Large multinational mining and metals businesses will need to be comfortable that they understand how the principles of Pillar 2 apply to their facts and circumstances, and that they put in place a robust reporting process. These considerations need to take place at a group level, but also territory-by-territory depending on the rate that each jurisdiction adopts the Pillar 2 rules.
Some will be further along their journey than others, but the following actions should be kept at front of mind at all stages:
- have a plan and a timetable for your steps to address Pillar 2;
- engage with stakeholders, including teams who will be relied on to provide data, along with senior management and auditors;
- be clear where responsibilities sit for Pillar 2 reporting and the data it uses;
- build a governance environment which is fully joined up with your tax and reporting governance;
- ensure you have effective channels to provide information regarding changes that may arise from local enactment of the rules; and
- don’t be afraid to consult – this is a wholly new area.
How RSM can help
To discuss these issues for your business in more detail, please contact our specialists Paul Minness, Sarah Hall or Kaila Engelsman.