BEPS 2.0: Global minimum tax

The Pillar Two rules are applied on a country-by-country basis, meaning that an MNE that is determined to be in-scope must calculate its ETR in every jurisdiction in which it operates, based on a detailed and complex set of rules. For example, higher taxes in one jurisdiction cannot offset lower taxes in another. If the jurisdictional ETR falls below 15 per cent (which can happen even for jurisdictions with high headline tax rates or accounting ETRs above 15 percent), the company is generally required to pay a “top-up tax”.

If top-up tax impacts are expected, consider a review of existing global structures, value chains, the location of activities, and the effectiveness of existing tax concession claims.

The Income Inclusion Rule (IIR) acts as the primary taxing rule for Pillar Two application. Generally, the jurisdiction in which the MNE is headquartered imposes a tax to collect any shortfall between the global minimum tax rate and the jurisdictional ETR in the various countries in which the MNE group operates.

However, jurisdictions can also choose to apply a Qualified Domestic Minimum Top-Up Tax (QDMTT), which takes priority over the IIR and allows them to address the shortfall and collect tax themselves. A third possibility is the case where an MNE’s headquarter country (or an intermediate country) fails to impose the global minimum tax (through the IIR), and an amount equivalent to the global minimum tax rate is not collected under one or more QDMTTs is the collective application of a UTPR (Undertaxed Profits Rule).

Recent changes to accounting standards include new pre-regime disclosures in relation to operations with indicators of a potential exposure to top-up tax. A closer look at standalone financial statements will also be essential to ensure the requirements of transitional safe harbors and/or the Pillar Two complex computations and adjustments are met. To ease transition to the new regime, new safe harbor rules apply for the first three years of the new regime. If an MNE passes one of three tests for a jurisdiction (a de minimis test, a simplified ETR test and a routine profit test) it will not be required to perform detailed Pillar Two calculations and will not be subject to a top-up tax in that jurisdiction.

The calculations of the jurisdictional ETR under these rules (which can often differ from the accounting computation of ETR) is complex with potentially hundreds of data points required across multiple countries. MNEs should work to identify and resolve data gaps early in the process with the necessary solutioning and automation. Transition and ongoing compliance costs can be significant even if no top-up tax ultimately arises. Planning and budgets should factor in multi-stakeholder complexities and resourcing needs to manage potential system changes over a multi-year period.