Important consultations on OECDG20 pillar two proposals

20 May 2022

Pillar two of the international tax reforms to address the tax challenges arising from the globalisation and digitalisation of the economy contains the new global anti-base erosion (GloBE) rules, which provide for a global minimum tax rate of 15 per cent on the profits earned in each jurisdiction in which in-scope multi-national enterprises (MNEs) operate. These reforms are being driven by the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) and broadly affect MNEs with global revenues of €750m or more.

The rules in outline

The model rules were published by the OECD in December 2021 and include two main charging provisions: an income inclusion rule (IIR) and an under-taxed profits rule (UTPR). The rules are complex and affected taxpayers are expected to face significant practical challenges in gathering the required information and calculating the additional ‘top-up tax’ due, if any, under the IIR or UTPR for each relevant jurisdiction and, where appropriate, determining which tax authority it should be paid to.

Timetable for implementation

The pillar two implementation timetable remains ambitious and requires participating jurisdictions to implement measures by 2023, with the UK government intending to enact the necessary legislation for the IIR to take effect from 1 April 2023 and the UTPR to follow from 1 April 2024.


Against this background, a UK government consultation on issues concerning the implementation of pillar two in the UK closed in April 2022, with an OECD written consultation on the wider international implementation framework closing, and a public consultation meeting to discuss and clarify the written responses taking place, shortly thereafter.

Published responses to the consultations have focused on the following themes.

Global alignment

To ensure that the pillar two regime operates as intended, it is essential that all 141 members of the Inclusive Framework implement the rules consistently and at the same time. Responses to the consultations have questioned how realistic this goal is, given the complexity of the rules and the inevitable challenges that will arise as each jurisdiction seeks to integrate these provisions into their existing and no doubt complex domestic tax regimes.

By way of example, this can be seen in the amendments proposed to the existing US global intangible low tax income (GILTI) rules that have a similar purpose but work differently to the GloBE rules, to make good on the Biden administration’s commitment to implement pillar two. Agreeing and enacting the necessary changes represents a significant challenge given the domestic US political situation.

If these administrative challenges and the resulting legislation are not carefully thought through, the outcome may be inconsistent implementation which, in turn, is likely to create additional complexity and uncertainty for in-scope taxpayers.

Timing of implementation

As with much draft legislation, there is significant uncertainty about how the model rules will apply in practice. The commentary and examples provided by the OECD, at more than one hundred pages, offer some helpful but nonetheless incomplete clarification, with the uncertainty exacerbated by the fact that the GloBE rules have yet to be finalised.

A significant example of this is that the model rules refer to elective safe harbours aimed at minimising taxpayer compliance costs, but these are being developed as part of the implementation framework and hence, neither the model rules nor the OECD commentary include any further detail.

A strong theme of the consultation responses is, therefore, a request to defer implementation to allow for the model rules to be finalised, to give jurisdictions additional time to interpret and understand them in the context of their existing national legislative frameworks. It is hoped that this will help to ensure domestic pillar two rules, when implemented, are globally coordinated and aligned, and, in turn, allow time for affected taxpayers to understand and plan to apply them.

The UK government has historically taken the lead with the implementation of OECD BEPS derived legislation, such as the hybrid mismatch rules. However, respondents to the UK consultation highlighted that early adoption of pillar two in the UK could place UK-headquartered businesses at a competitive disadvantage.

Managing taxpayer compliance

Another concern expressed by consultation respondents was that if the rules are implemented in 2023, in-scope taxpayers may have to deal with multiple permutations of the same rules, as well as well as a mix of jurisdictions that have adopted the rules alongside those that have not, which will inevitably increase the costs of compliance. Practical examples of administrative easements that may help in-scope taxpayers include alignment of the notification requirements for the GloBE return, and ensuring the payment date for any top-up tax liabilities falls after GloBE returns are finalised.

End to end examples

The pillar two commentary issued by the OECD includes examples that seek to illustrate details of the application of the model rules, often in complex or challenging scenarios. Whilst these examples are helpful, many consider that it would have been more helpful to also include end-to-end calculation examples, using common fact patterns, to help taxpayers better understand how the OECD expects the rules to operate in practice.

What can taxpayers do now?

Even though the pillar two model rules remain some way from finalisation, groups should now, and during the remainder of 2022, look to take steps to:

  • identify whether they are within the scope of the rules; and
  • model and estimate the potential impact on cash taxes, deferred taxes, and their pillar two effective tax rate.

A dialogue with stakeholders on the anticipated effect of pillar two on their position should also be initiated.

In-scope MNEs will need to ensure that management and those responsible for the necessary calculations and analysis have access to all the necessary data to enable them to determine whether any top-up tax is due and, if so, where. This data may come from multiple sources in multiple jurisdictions, so new procedures and systems are likely to be needed to ensure it can be gathered and interpreted efficiently. Taking initial steps now to develop the structures needed, including identifying investment requirements for additional technology and process solutions, should ensure that businesses are well-placed to manage the compliance obligations. Giving early consideration to possible actions to optimise group structures may also be appropriate.

For more information, please get in touch with Suze McDonald or your usual RSM contact.