The second Pillar Two compliance cycle gives businesses less time to prepare, with the key deadline shortening from 18 months to 15 months.

After completing the first compliance cycle it might be tempting to take a breather. However, now is the time to reflect on year one and start thinking about how to navigate year two.

An Organisation for Economic Cooperation and Development (OECD) paper published earlier this year may provide some clues about the future of Pillar Two. This is one of the first empirical assessments looking at the impact of the Pillar Two rules in practice.

Its key conclusion is that in-scope businesses experienced higher effective tax rates after implementation. However, the data used for the study is derived from country-by-country reporting (CbCR) disclosures, not Pillar Two returns. Although it is still too early to determine whether Pillar Two has achieved the outcomes policymakers envisaged, it seems here to stay.

What lessons can be learned from the first Pillar Two compliance cycle

For many businesses, successfully completing the first Pillar Two compliance cycle will come as a relief. It has required businesses to grapple with new legislation, software and reporting obligations, as well as evolving local compliance requirements. We have identified some key takeaways to help make year two easier:

Identify changes to the business structure

Changes to the group structure can influence how the Pillar Two rules apply to individual entities. They can also affect whether a multinational group as a whole is within scope, and for which accounting periods.

These rules are not always straightforward to apply and can have a significant impact on a group’s Pillar Two position. Identifying changes early is therefore critical to a smooth compliance process. This includes the structural impact of mergers or demergers, new joint venture arrangements, and relocation or expansion of business activities.

Consider the impact of tax provisions

For most businesses, Pillar Two is the first tax regime for which the tax provision recognised in the consolidated or local financial statements can impact the amount of tax due.

Previously, some businesses may not have accounted for deferred tax for certain group members within the consolidated financial statements as these amounts would be immaterial. With Pillar Two here to stay, it is increasingly important for tax provisions to be as accurate as possible, even where amounts are immaterial.

In particular, the recognition of deferred tax assets can, in some cases, have a significant impact on the availability of Pillar Two safe harbours.

Maintain access to the transitional safe harbour

The transitional CbCR safe harbour is a temporary simplification and is more straightforward than applying the detailed global anti-base erosion (GloBE) rules. The GloBE rules apply where the conditions for the CbCR safe harbour are not met.

One of the key conditions is that the CbCR is qualifying for Pillar Two purposes, ie the CbCR disclosures for each jurisdiction can be reconciled to the relevant financial statements.

Many businesses will have reviewed their CbCR preparation methodology during the first Pillar Two compliance cycle. It is important that the outcomes from this review continue to be implemented in year two. Any business changes that impact the relevant financial statements should also be reflected appropriately in the CbCR. This can help businesses continue to access the CbCR safe harbour.

Keep track of local Pillar Two requirements

While the core Pillar Two rules have been agreed in principle internationally by the OECD Inclusive Framework, the practical implementation varies between jurisdictions. Requirements can differ, including return format and deadlines. There can also be differences in how the core rules for calculating top-up tax are implemented into local law.

Adding further complexity, many jurisdictions made last minute changes to reporting deadlines during the first Pillar Two cycle. Businesses should keep track of local reporting requirements and any deviations from the core internationally agreed rules in each jurisdiction where they have a presence. A key step is identifying jurisdictions where Pillar Two took effect in 2025 rather than 2024.

Preparing for changes to Pillar Two

Businesses will also have to contend with a new set of rules for the second Pillar Two cycle. The undertaxed profits rule (UTPR) will take effect for accounting periods beginning on or after 1 January 2025. The UTPR is a backstop that ensures that any low-taxed profits in a group that are not within scope of the other Pillar Two rules are still subject to top-up tax.

This will impact groups where the ultimate parent is located in a jurisdiction that has not implemented Pillar Two, such as the US. The side-by-side package announced by the OECD earlier this year will exempt US parented businesses from the scope of the UTPR rule. However, this will only apply for accounting periods beginning on or after 1 January 2026. Applying the UTPR may add further complexity to the second Pillar Two compliance cycle. It is important that businesses consider its impact as early as possible.

How to optimise your Pillar Two compliance cycle

The end of the first Pillar Two compliance cycle is the perfect time to consider how to optimise your process going forward. These are the areas we think you should focus on:

• Moving from reactive to proactive: often, the Pillar Two consequences of a transaction or business change are only considered when preparing Pillar Two returns. Instead, Pillar Two impacts should be considered up front, alongside the other tax effects of the transaction or change.
• Make Pillar Two ‘business as usual’: consider how Pillar Two will fit into your regular compliance cycle. For many businesses, the 15-month deadline falls right in the middle of one of the busiest times for finance teams. Bringing forward preparation of the CbCR and Pillar Two returns can help manage competing deadlines.
• Use technology to manage deadlines: for many businesses, managing different reporting obligations and deadlines across multiple jurisdictions is the most complex part of the Pillar Two compliance cycle. The right tool can make it much easier to manage reporting, drafting and lodgement, track deadlines and reduce the risk of missing key requirements.

If you need further help in managing your Pillar Two compliance, please contact Sarah Hall, Kaila Engelsman or your usual RSM contact.

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