29 March 2023 - The international tax regime has made great strides in recent years to aim at addressing and resolving challenges arising in an increasingly globalized and digitalized economy. In October 2021, over 135 jurisdictions approved the Global Anti-Base Erosion Rules (GloBE). Amongst others, these rules provide for Pillar 2: a coordinated system of taxation that imposes a top-up tax on profits arising in a jurisdiction where the Effective Tax rate (ETR) is below the minimum rate of 15%.
The EU adopted the Directive governing Pillar 2 in December 2022 and Member States have until the 31st of December 2023 to transpose it into national legislation. The Directive will apply as of 2024, however the Undertaxed Payments Rule (UTPR) will become effective one year later.
Across the world, other countries outside of the EU including South Korea, the UK, Canada and Switzerland have adopted, or are in the process of adopting, Pillar 2 rules in their domestic legislation.
What is Pillar 2?
Pillar 2 introduces a minimum 15% ETR on corporate profit for large tax payers (any large multinational company with annual consolidated revenue exceeding EUR 750 million) in every country in which they operate. This means that tax payers that are subject to a lower ETR than 15% in a particular jurisdiction will be taxed additionally (top-up tax) to the agreed minimum rate.
Pillar 2 has important consequences for in-scope tax payers, namely:
- Recalculation of (i) profit and (ii) tax payable for determining the ETR under Pillar 2
- Several jurisdictions have announced they will implement a domestic minimum local tax (top-up tax) in case the ETR drops below 15%
- Top-up tax is generally payable by the ultimate parent of the undertaxed entity on the basis of the Income Inclusion Rule (IIR)
- In case the jurisdiction of the ultimate parent entity chooses not to implement the IIR, the top up tax may be collected in other jurisdictions on the basis of UTPR
- Preparation and filing of the GloBE Information Return with detailed information on all legal entities
Who does it apply to?
In principle, large multinational businesses with a consolidated annual revenue exceeding Euro 750 million are in scope, unless “excluded” (i.e. sovereign wealth funds, pension funds and certain Investment Funds). Additionally, Safe Harbors are available and may reduce the Pillar 2 burden on tax payers. The OECD will continue to issue consultation documents and new guidance to increase certainty and/or reduce the administrative burden with respect to Pillar 2 rules.