This article covers the latest Pillar One and Pillar Two progress and implications for multinational enterprises (MNEs).
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.
- Corptax Global Minimum Tax Tool—scenario modeling, risk analysis, and planning tool for GMT and AMT using Corptax data.
- Global Minimum Tax Readiness Assessment—Sourcing, organizing, and sharing data to plan for GMT and AMT.
- Corptax BEPS CbC Solution—Use existing system data and collect, organize, and report on new data to generate the full CbC report.
- BEPS CbC Consulting Services—BEPS CbC solution setup and readiness assessment to ensure a fully optimized process to support the public CbC report.
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.