This article covers December 2022 Pillars One and Two developments and potential implications for multinational enterprises (MNEs). On January 26, 2023, Corptax international tax experts hosted a webinar looking at multiple aspects of Pillar Two in detail and sharing steps to prepare for a 2024 filing. View the recording here.

Background in Brief

In October 2021, 135+ member-jurisdictions of the OECD/G20’s Inclusive Framework, which comprise more than 90% of world GDP, reached an agreement on a two-pillar solution designed to reform the international tax system.

In a nutshell, Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs. Pillar 2 is a Global Minimum Tax (GMT) which requires MNEs with annual revenues above €750 million to pay a minimum effective tax rate of 15% on profits earned in each jurisdiction in which they operate.

In December 2022, the EU took the first major step and unanimously agreed to implement the GMT, requiring member countries to transcribe rules into local law by the end of 2023. South Korea has since followed suit, and Switzerland, Japan, Canada, Singapore, the UK, and other countries are moving toward adoption.

Plus, the OECD released three documents for Pillar Two and another for Pillar One, recapped below.

Pillar Two Implementation Framework Developments

1. GloBE Information Return (GIR) identifies data elements needed to support GMT calculations. It requires tax teams to capture and format potentially tens of thousands of data elements. Historically, most of this data hasn’t been collected at the level of detail necessary. Corporations will be pressed to have systems in place to gather, aggregate, and input information. Local staff will need to identify source data, implement new processes, and communicate data back to tax headquarters—all by a 2024 filing.

Further, income must be computed on a jurisdictional level. Consider MNEs operating across dozens of jurisdictions with hundreds of subsidiary entities. Numerous datapoints will be required for each entity, amounting to thousands of elements tax teams must track down.

2. Safe Harbor Rule
With that compliance burden in mind, the OECD laid out several safe harbor practices; however, the safe harbor operates on a jurisdiction-by-jurisdiction basis. The transitional safe harbor rules permit country-by-country net income to be used as a shortcut for GloBE income when applying safe harbor tests. This allows taxpayers to bypass a full computation.

A. de Minimis Rule—If you have less than €10M in revenue and less than €1M in profit in a country, you may be exempt from performing detailed calculations for that country.

B. ETR Test—If income taxes divided by CbC-reported income exceeds a specified percentage, the safe harbor applies for that country for that year. Percentages increase from 15% to 17% over a four-year transition period.

C. Substance-Based Income Exclusion—This reduces net GloBE income used to compute the top-up tax for a jurisdiction to determine the safe harbor ‘routine profits test’.

    • Substance-based Income Exclusion amount for a jurisdiction is the sum of the payroll carve-out and tangible asset carve-out for each constituent entity (other than investment entities) in that jurisdiction.
    • Payroll Carve-Out for a constituent entity located in a jurisdiction is equal to 5% of its eligible payroll costs. A higher percentage applies for the earliest years of adoption.
    • Tangible Asset Carve-Out for a constituent entity located in a jurisdiction is equal to 5% of the carrying value of eligible tangible assets located in said jurisdiction. Percentages are higher for initial years of enactment.

3. Tax Certainty
Because jurisdictions may interpret policies differently, the OECD set forth processes, including dispute prevention and resolution, for achieving tax certainty under GloBE rules. The intent is to minimize costs and risks for taxpayers and tax administrations.

Pillar One Developments—Rollback of Digital Services Tax

Pillar One is progressing more slowly, but December 2022 guidance reaffirms the OECD’s commitment to roll back Digital Services Taxes (DSTs). A number of jurisdictions have already implemented a gross receipts tax on digital services. A part of the two-pillar agreement is an acceptance that any DSTs will be repealed, and none will be enacted henceforth.

The Path Forward
Further administrative guidance is expected in early 2023 on the interpretation and administration of the GMT on a rolling basis. Because the GloBE Information Return and Tax Certainty documents released by the OECD were consultation documents, we anticipate the OECD will issue updates to these documents. Work is also proceeding on finalizing the Subject to Tax rule (STTR) and the related multilateral instrument to assist in its implementation as a component of Pillar One.

Corptax Solutions and Support
Our tax law analysts have monitored BEPS CbC and OECD developments since 2013 when the OECD released their initial action plan. We were first to market with solutions to help clients execute BEPS CbC reporting and plan for the GMT and US Alternative Minimum Tax (AMT). Explore your options to streamline preparation with the following solutions, tools, and consulting assistance.

If you would like to discuss the effect of new tax laws on your business—or how to get your ducks in a row— contact a Corptax international tax specialist.

About Larry Goldstein
A manager in the Tax Law Analyst Group, Larry works to ensure technical accuracy of the Corptax CbC international compliance products including all Pillars One and Two components.

About Ken Siegel
A director in the Tax Law Analyst Group, Ken helps determine the implications of new tax laws on Corptax clients doing business internationally.

On-demand Webinar: EU Adopts Pillar Two and Steps to Take Now.

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Larry Goldstein
CSC Corptax Manager
Ken Siegel
CSC Corptax Director

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