Are you ready for the challenges of pillar two?

16 December 2023

More than 20% of businesses affected by pillar two, the rules introducing a global minimum tax rate, have yet to start to address what this means for them according to a recent RSM poll. This is despite the new rules, which come into force for accounting periods starting on or after 31 December 2023, increasing the global effective tax rate for some groups and increasing the reporting requirements for all businesses within their scope.

In the chancellor’s Autumn Statement, the UK government reaffirmed its introduction of the pillar two rules and made various amendments to the related UK legislation to keep pace with guidance from the OECD. Other territories, for example those in the EU, are also legislating to introduce the core of the pillar two rules so that they can come into force broadly from 2024. 

What is pillar two – a brief recap

Pillar two – the global minimum tax – forms one half of the response to the tax challenges posed by the globalisation and digitalisation of the economy proposed by the OECD/G20 Inclusive Framework of around 140 countries. It sits alongside pillar one, which looks at where income and profit fall within multinational enterprises. The two-pillar solution is a key part of the OECD’s longstanding project to address base erosion and profit shifting (BEPS).

At a high level, the rules will apply to businesses with global revenues of at least €750m – essentially those falling within existing country by country reporting (CbCR) requirements – and use data from the taxpaying group’s financial statements, subject to certain adjustments, to determine the effective tax rate in each territory. Where the effective tax rate is below 15%, top-up tax is charged either domestically or on the ultimate parent entity. As with CbCR, there will be a central global filing of a return (the ‘GloBE return’) at the ultimate parent entity level, or through a surrogate filing where the ultimate parent entity is not in a territory with pillar two rules in place. While there are some transitional safe harbours which can limit requirements in certain circumstances, a full filing is expected to require in excess of 150 data points and represent an onerous obligation.

Although the first GloBE return will not be required until 18 months after the end of the first qualifying period (reducing to 15 months thereafter), affected businesses should be engaging with pillar two now. This will allow action to be taken to ensure the information reported and top-up tax payment position is as robust as possible, and to support engagement with stakeholders where required. One of the first such requirements may be imminent now that legislation has been enacted, the impact of pillar two must be considered for financial reporting purposes.

Readiness for the new rules – best practice approach

In practice, significant amounts of top-up tax are unlikely to arise for most businesses. The challenge therefore becomes a data gathering and reporting exercise for qualifying businesses to fulfil the requirements of the GloBE return.

The most effective approach is to break what is otherwise a large and complex challenge into practical steps. We recommend the following actions.

  1. Initial assessment – reviewing the application of the pillar two rules to the business and considering whether complexities arise from the group’s structure.
  2. Impact modelling and stakeholder engagement – including high level modelling of the likely impact of top-up tax and the availability of transitional safe harbours, identifying reporting lines, and engaging with key stakeholders.
  3. Implementation – identifying and mapping data requirements, determining the most effective way to compile and upload this data, and putting in place appropriate governance and reporting processes.
  4. Reporting – selecting and implementing an appropriate reporting package for pillar two, co-ordinating filing requirements, and deciding on appropriate disclosures.
  5. Ongoing process enhancements – working towards full automation of the data gathering and reporting process, identifying process improvements and steps that could be taken to mitigate the impacts of pillar two.

Next steps – addressing the challenges of pillar two

Pillar two is something qualifying businesses should be engaging with now.

This is not just a consideration for head office teams. Subsidiaries not falling within the transitional safe harbours, or which have regional roles, are likely to play a part in data gathering and review. Where an ultimate parent entity is in a territory which is yet to adopt pillar two – in particular the United States – one or more subsidiaries will need to understand clearly who will be responsible for a surrogate filing and, potentially, be in a position to make that filing. With this in mind, early conversations with key stakeholders throughout the organisation are recommended.

RSM has a core team of pillar two specialists drawn from throughout our global network who would be happy to help qualifying businesses. More details on the key issues and best practice approaches can be found in our recent webinar.

For more information, please get in touch with Duncan Nott, or your usual RSM contact.