Is your business ready for new international tax obligations?

The Pillar Two rules are live, European Union (EU) public Country-by-Country Reporting (CbCR) is fast approaching, and other changes, including reforms to the transfer pricing of distribution activities under the Pillar One ‘Amount B’ rules, are on the horizon. Businesses with international operations should ensure they are prepared for the new global tax landscape.  

Pillar Two rules

The Pillar Two rules, developed by the OECD Inclusive Framework (IF) and already implemented into UK law, broadly require groups with consolidated annual revenue of more than €750m to pay a minimum 15% effective rate of tax on their profits in each jurisdiction they operate in for accounting periods beginning on or after 31 December 2023.  

For businesses caught by Pillar Two, work should be well underway to:

• Determine whether transitional safe harbour rules will apply.
• Develop a clear approach for collating the necessary data points.
• Implement robust governance processes.
• Assess potential top-up tax risks and ensure appropriate disclosures are made in statutory accounts.
• Plan for the first year of tax provisioning work for which Pillar Two must be considered.
• Ensure adequate evidence is provided to auditors of the tax provisioning process.
• Make sure registration and filing obligations are met.  

The UK Pillar Two rules require in-scope groups to register with HMRC within six months of the end date of the first accounting period to which the rules apply. For a 31 December 2024 year end, the registration will be due by 30 June 2025. The registration must be completed by the ‘filing member’ of the group, which will generally, by default, be the ultimate parent entity (UPE). A UPE can, however, nominate another group entity to be the filing member, which could be beneficial, in particular, if a group’s UPE is based in a territory that has not adopted the Pillar Two rules (eg the United States).

The UPE (or nominated group entity) must prepare and lodge the worldwide group’s Pillar Two global anti-base erosion (GloBE) return within 18 months of the end of the first accounting period to which the rules apply (the time limit reduces to 15 months for subsequent periods). For groups with a 31 December 2024 year end, the first GloBE return will be due on or before 30 June 2026. Groups will also need to ensure that they comply with local Pillar Two filing requirements in each relevant jurisdiction - typically there might be a requirement to file a local “slice” of the GloBE return by the deadline for the main GloBE return.

European Union public Country-by-Country Reporting rules

In addition to Pillar Two, for financial years starting on or after 22 June 2024, some businesses will also have to publish certain information online, similar to that required for the purposes of CbCR. This requirement will apply, broadly, to those with consolidated revenue of more than €750m and that are headquartered or have a qualifying entity operating in the EU (qualifying entities include, for example, those with total assets exceeding €5m and revenue greater than €10m). The information should generally be published within one year of the end of the financial year; ie by 31 December 2026 for those with a 31 December 2025 financial year end. However, this requirement could apply sooner for entities located in a territory that has chosen to adopt the rules early (eg Romania, Croatia or Sweden) or apply an earlier publication deadline (eg Spain or Hungary).  

Pillar One - Amount B 

Amount B of Pillar One of the IF’s international tax reforms is a new approach to transfer pricing for ‘baseline’ marketing and distribution activities. Amount B represents an amendment to the OECD’s transfer pricing guidelines, which jurisdictions can bring into effect on or after 1 January 2025 and could affect businesses of any size. The changes are intended to simplify the application of transfer pricing rules for in-scope businesses, but this significant change from the current position may be regarded by many as just another set of new and complex rules to navigate.

Further transfer pricing and reporting developments

The UK government is aware that the international tax environment presents increasing complexity for taxpayers and has committed to simplifying the rules in coming years. In the most recent budget, the potential removal of UK-UK transfer pricing rules was once again raised. However, HMRC has also announced a potential requirement for multinational groups to report information on certain cross-border related party transactions to HMRC. When coupled with a potential lowering of the size threshold for application of the UK transfer pricing rules to include medium-sized businesses, this means that there will undoubtedly be an increase in UK transfer pricing compliance requirements for many businesses. There are a considerable number of additional reporting requirements to navigate, so those affected will need to ensure they are well prepared.  

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