Pillar Two Readiness

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Global Minimum Tax Public Consultation

The UAE MoF launches a public consultation on Global Minimum Tax

See Pillar Two developments by country

OECD Pillar Two country tracker

Access PwC's Data Input Catalogue

Pillar Two Data Input Catalogue

Pillar Two Engine

A New Global Tax System: Are you #PillarTwoReady?

What is Pillar Two?

In 2021, the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework (IF) issued a ‘Statement’ focused on addressing the remaining key challenges of base erosion and profit shifting (BEPS) arising from the digitalisation of the global economy.

The Statement proposed a Two-Pillar Solution, comprised of (i) Pillar One which aims to ensure a fairer distribution of taxing rights is established with respect to the profits of large multinational enterprises (MNEs), and (ii) Pillar Two which implements a new global minimum Effective Tax Rate (ETR) of 15% for certain MNEs.

Pillar Two aims to ensure an appropriate level of tax is paid by MNEs through a series of measures aimed at modernising the international tax system for modern businesses. The Subject to Tax Rule (STTR) and the Global Anti-Base Erosion (GloBE) are the two components of Pillar Two.

Pillar Two came into force on 1 January 2024 and over 35 countries have implemented the rules to date, with others in the process of doing so.

Within the Middle East, Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates are all members of the IF and expected to adopt the Pillar Two rules in line with the consensus on the Two-Pillar Statement. Libya, Lebanon, Iraq and Palestine are not members of the IF and hence their position on Pillar Two is yet to be known.

Further developments are being monitored, with live updates available on our PwC Pillar Two Country Tracker.

The implementation of Pillar Two (a global minimum ETR of 15 %) has the potential to notably raise the effective tax rate for businesses in the Middle East, particularly for MNEs operating in countries which have historically provided no or low statutory tax rates and those presently enjoying preferential taxation due to local Gulf Cooperation Council (GCC) ownership.

Due to the design of its charging provisions, Pillar Two may still impact the operations of Middle East based MNEs from 1 January 2024, even prior to the implementation of the rules in the region, for example where the group has operations in one of the implementing jurisdictions outside the Middle East.

As such, irrespective of the decision made by Middle East countries to incorporate Pillar Two into their domestic legislation, Middle East MNEs could incur additional taxes from 1 January 2024.

The Pillar Two rules came into effect on 1 January 2024, and over 35 countries have introduced tax rules that put into force a 15% effective tax rate on in-scope entities, as well as over 100 being expected to also introduce rules that will come into effect in 2024 or 2025.

The GloBE Rules

The GloBE Rules contemplate three different mechanisms for assessing tax on a MNE’s income, and MNEs will have to comply with the filing requirements for each applicable rule. The first opportunity to collect the Top up Tax is the so-called Domestic Minimum Top-up Tax (DMTT) which gives the choice for the low tax jurisdiction itself to collect the tax (relating to this country). Second in line is the so-called Income Inclusion Rule (IIR), which generally imposes tax on the parent entities within the MNE group to the extent their foreign subsidiaries are taxed at a rate less than 15% (after the application of the DMTT in their respective countries, if any).

These two mechanisms are accompanied by a ‘backstop’ rule, known as the Undertaxed Profits Rule (UTPR) which permits the collection of any remaining Top-up Tax (after DMTT and IIR are applied) globally by any country where the MNE is active, meaning where there are people and/or tangible assets on the ground. Under certain conditions, the DMTT could be elevated to a safe harbour that switches off the IIR and UTPR in other jurisdictions.

STTR Rules

The STTR is a treaty based rule applicable to intra-group payments from source countries that are subject to low nominal tax rates in the country of the payee. The STTR focuses on where a source country has given up taxing rights on certain outbound intra-group payments under a double tax treaty, and it should be able to recover some of those rights where the income in question is taxed in the state of the payee at a nominal rate below 9%. The STTR applies to interest, royalties and a defined set of other payments made between ‘connected persons’, including services.

The OECD IF members have committed to adopt the STTR when requested by other IF members that are developing countries. In October 2023, the OECD IF issued a multilateral instrument (“MLI”) that brings into effect the STTR by allowing for multiple bilateral tax treaties to be amended at the same time. Signature of the MLI is underway and applicability of the STTR is expected to commence in the near future.

The impact of Pillar Two on the end-to-end operations of the tax department is monumental. Companies will need to ensure they have the data needed to forecast and model in the interim, as well as the data to maintain reporting and compliance requirements upon enactment. In addition to tax, there are several key stakeholder groups within the organisation, including controllership and financial planning & analysis, that will be impacted by the impending changes. One of the common challenges many companies will face is a gap in resources to lead such a broad Pillar Two readiness initiative. Amongst others, the person in this lead role must be able to address the questions and challenges across four broad categories: People, Process, Data and Technology.

Groups within scope will need to understand, evaluate, and model the impacts of Pillar Two across the organisation. This includes, but is not limited to, assessing the additional data and reporting/compliance requirements, evaluating the existing technology ecosystem and capabilities, establishing processes and controls, preparing and training resources and managing stakeholder expectations.

How PwC can help your company with Pillar Two

PwC experts can help you assess and model the likely financial and operational consequences of Pillar Two.

Operational Readiness
Data Strategy
Quantitative analysis: PwC’s Pillar Two Engine
PwC’s Data Input Catalogue

Operational Readiness

Pillar Two will have a pervasive impact on an organisation’s financial operating model requiring early stakeholder engagement and substantial budget and resource allocation to address the multitude of challenges. Organisations must ask themselves if their current data model, systems, technology, and processes can support the requirements introduced by this new international tax framework.

PwC experts can help determine how to access the financial data needed to comply, identify gaps in the data needed for reporting, and reevaluate operations given the anticipated law changes in many countries.

Data Strategy

Identifying the data requirements and developing a comprehensive data strategy should be one of the first steps that taxpayers take in preparation for Pillar Two. The variety of data sources owned by a diverse group of stakeholders makes the collection and synthesisation of the data tremendously challenging. Early cross-functional engagement is critical to ensure that the appropriate data and system owners are aware of what will be required under Pillar Two, why it it is important, and how it may impact them going forward.

PwC professionals can help identify the data requirements and develop a data strategy rooted in systems and processes that can sustain reporting and compliance requirements upon enactment.

Quantitative analysis: PwC’s Pillar Two Engine

We can also help you meet your ongoing reporting, compliance and modelling needs. Pillar Two introduces new compliance and reporting requirements based on new calculation methodologies. While there is some overlap between the data points used for existing reporting and those required for Pillar Two, we recommend undertaking an assessment to confirm whether required data points can be extracted from source systems or whether change requests are required to capture required data.

PwC’s Pillar Two Engine is a structured model for assessing the impact of OECD Pillar Two, configured to support the inconsistent and unique adoption of Pillar Two rules around the world and allow for flexibility as those rules continue to evolve. Multiple different variations and interpretations of local rules will require an iterative modelling process for Pillar Two calculations. PwC’s Pillar Two Engine is flexible to allow for various data structures/sources. It also prioritises the key adjustments/elections. The modelling provides compliance and provision grade calculations as well as data visualisation to identify key territories where there is a risk of an OECD Pillar Two tax charge.

Our engine utilises a centralised database with a vetted calculation engine in consultation with PwC Global technical and policy leaders. The database is dynamically updated for rule changes and new legislation in each jurisdiction.

PwC’s Data Input Catalogue

PwC’s Data Input Catalogue is at the centre of PwC’s end-to-end process for Pillar Two. The Data Input Catalogue defines the data requirements for Pillar Two, giving MNEs a comprehensive understanding of the amount of work that lies ahead of them and can help MNEs anticipate the unique challenges they will face. Acting as the foundation to develop an extensive data strategy, assess operational preparedness, or determine a modelling approach, PwC’s Data Input Catalogue is the core to Pillar Two readiness.

Chris Maycroft, Pillar Two Director at PwC Middle East, dives into the fundamentals of Pillar Two and how this new global minimum effective tax rate of 15%, will affect businesses in the Middle East. Watch the full interview with PwC Academy here.