Pillar 2 is one of the most significant changes to the international tax landscape in decades. In the UK the first accounting period is likely to be December 2024 year-end. Yvonne Chappell and Casper Kaars Sijpesteijn explain how you can prepare for it.
The Pillar 2 international rules will bring a new global minimum tax of 15% across 130+ jurisdictions. Effectively, groups with consolidated revenue over EUR 750 million and in scope will need to calculate and report an effective tax rate in all the jurisdictions in which they operate. If the effective tax rate is under 15% (regardless of local headline tax rates and reliefs), a top-up tax may need to be paid. This will be a fundamental shift in the way businesses are taxed with complicated and additional global compliance and reporting obligations.
Why you need to plan for Pillar 2 now
In the UK legislation to implement the new rules was announced in the Spring Finance Bill 2023 for accounting periods commencing on or after 31 December 2023.
While the end of the calendar year may feel like a long way away, in scope companies with year-ends falling after substantial enactment of the UK legislation (probably summer 2023) are likely to require additional disclosures in their financial statements. The disclosures will need to comment on the impact the new rules could have on them. They'll also need to forecast any 'top-up' tax liabilities from the date the rules come into force, ie, throughout 2024.
While ultimately it's anticipated that the exercise will be undertaken at the parent company level for all large groups, to the extent that the parent company jurisdiction hasn't yet adopted the rules, the obligation goes down the chain. Given that the UK is one of the first countries to introduce these rules (including a domestic minimum tax), this means that multinational groups with a UK parent-company or intermediate holding companies, or even UK domestic groups are all likely to have to take action this year to prepare.
A roadmap for approaching Pillar 2
You need to understand your objectives for the forthcoming quarters. This will let you hold yourselves to account for progress. What's in your roadmap and the level of quality in what you do is likely to be shaped by your desired ESG reputation, corporate tax strategy, the expectations of your wider stakeholders, and if listed - regulators. To be effective, your roadmap will include balancing moving parts in three areas:
1 Scope clarity, with the application of exemptions and safe harbours. Your considerations may include:
- Strategy – do you expect growth or decline to change your revenue through the EUR 750 million threshold or impact exemptions and safe harbours?
- Structure – how will your corporate structure evolve and how will this impact the potential filing entity
- Adoption – what impact with the timing of other jurisdictions enacting Pillar 2 have on filings
2 Impact assessment
- Are you able to benefit from any of the safe harbour or industry-specific exemptions?
- Where will top-up taxes be paid and how much will this be?
- Which jurisdictions are at risk of having to pay top-up taxes?
- What actions are acceptable that could mitigate tax losses?
3 How2 design
- What are your global data requirements – what data exists, where is it, what are the limitations, and what new data is needed? How relevant is your Chart of Accounts?
- Blue-print and document your global process and controls to turn data into management information for decision-making, as well as reporting for filing
- Assess and enact any system changes or workarounds required to create reporting
- Collaborate with your global finance teams to manage the change
Pillar 2 builds out on country-by-country reporting and creates a new and more detailed reporting obligation, with an evolving scope to contend with. Given how hard it can be to manage change in finance and design efficient and effective management information and reporting, your tax team will really benefit from the time and resources to set you up for success: putting you on the front foot for conversations with your audit committee, auditors, and to show how you fulfil director obligations.