Understanding BEPS Pillar Two

A cautionary tale of global minimum tax

How will OECD Pillar Two impact businesses in Asia Pacific?

10 April 2023 | 15 minute read

Insights

Unprecedented change in the global tax system is marching near. Global companies in Asia Pacific brace for impact as two things are certain: higher taxes and complex compliance requirements.
 

In the last 18 months, the OECD have published the Pillar Two Model Rules, Commentary and the Implementation Framework (collectively the ‘Model Rules’) for the Inclusive Framework jurisdictions to implement the Global Minimum Tax regime in their respective local legislation. A few first-mover jurisdictions are leading the charge by affirming the adoption of Pillar Two as early as 31 December 2023.

These changes have been catalysed by many interlinked and complex factors. Accelerated digital transformation has led to unparalleled economic and societal impacts, including wide ranging tax implications. Global geopolitics, significant pressures on government revenues in part due to the pandemic and the dynamic operating business model - as demanded by global investors - have cultivated a highly complex digital-led world. Governments no longer regard current tax rules as fit for the intended fiscal policy as the digital economy has led to a ‘race to the bottom’ - tax competition among territories to attract foreign investment.

Pillar Two (specifically the Global Anti-Base Erosion ‘GloBE’ tax regime) is designed to ensure large multinationals pay a minimum level of tax on profits earned in the jurisdictions in which they operate. It introduces a global minimum Effective Tax Rate (ETR) benchmark where multinational groups with consolidated revenue over €750 million are subject to a minimum ETR of 15%. This is estimated to generate around USD $220 billion in new tax revenues globally per year. GloBE tax regime offers a set of prescriptive rules with respect to which tax jurisdiction(s) gets the right to collect this new tax.

OECD reported that the average statutory tax rates have declined significantly between 2000 and 2022. Pillar Two presents a heightened phenomenon for Asia Pacific. In 2022, the average corporate tax rate for Asia Pacific (23 Asian and Pacific economies) had fallen to 19.2%, well below the OECD average of 30.2% as reported in 2000. This thereby presents a motivation for revenue authorities to support Pillar Two adoption and enable the collection of their fair share of ‘global minimum tax’ in their respective jurisdictions. However, implementing the GloBE tax regime demands taxpayers to consider rather complex analyses and Pillar Two-based adjustments. The eventual GloBE-based ETR could become well below 15% despite the statutory tax rate being above 15% in Asia Pacific jurisdictions.

At present, the OECD recommends implementation of Pillar Two by 2024 (originally 2023). The European Union has announced unanimous support to adopt the rules in 2024. The Directive was published on December 2022 (Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union). Similarly several Asia Pacific jurisdictions are prepared to follow suit. For example, South Korea and Japan have become the first movers to pass Pillar Two in their domestic legislation with an effective date in 2024. Investment hubs such as Hong Kong SAR and Singapore have announced implementation of Qualified Domestic Minimum Top-up Tax in 2025 whilst Malaysia is pursuing a 2024 adoption. We expect other Asia Pacific jurisdictions will progressively adopt Pillar Two in the latter part of 2023.

The OECD’s ambitious plan on Pillar Two is expected to create wide-ranging impacts for companies and jurisdictional tax authorities alike. We expect multi-facet challenges which include collecting the necessary data for analyses and reporting, interpreting and applying the complex rules in each jurisdiction, developing an auditable approach and implementing multilateral dispute resolution should such circumstances arise.

More importantly, the recently published Pillar Two safe harbour rules could offer companies in scope a temporary relief from paying ‘Pillar Two Tax’ and preparing ‘Pillar Two Returns’. More tax directors are expected to dive into their Country-by-Country (CbC) Reporting methodology, as the baseline requirement to satisfy the ‘temporary safe harbour’ is to ensure the in-scope group prepares the Qualified CbC Report. Organisations also need to pay attention to the financial accounting disclosure requirements as and when the Pillar Two laws become substantially enacted in the local tax jurisdictions.

Get ready for Pillar Two, have the first mover advantage to stay ahead

For governments, being the first mover has advantage in preserving its rights to tax the in-scope companies under the OECD Model Rules. It is important for revenue authorities to adopt Pillar Two as close to the Model Rules as possible to ensure the local Pillar Two legislation passes the peer review by the Inclusive Framework members. It is also expected that the tax authorities will provide further clarity in resolving future disputes on a multilateral basis as need be. Financial Accounting Standards regulators have also responded to the Pillar Two developments where draft guidance has been issued to promote transparency and clarity on financial accounting disclosure requirements.

In circumstances where governments offer concessionary tax regimes as part of their foreign direct investment strategy, we expect governments would establish unique local responses to realign their concessionary tax design to maintain its attractiveness to foreign investments. This is particularly true for Asia Pacific since many territories here are offering tax incentives that drive effective tax rates below 15%.

In general, Pillar Two would likely negate the benefits of the legacy tax holiday design. Singapore, Thailand and Malaysia, to name a few, may feel this impact. It follows that global companies are seeking support from governments in another form. These global companies would obviously favour any form of cash grants from governments considering the rapid rising operating costs in certain Asia Pacific jurisdictions. If a tax credit route is chosen, the challenge remains that the scheme must satisfy the conditions and features of refundable credits under the Model Rules to yield a favourable treatment in computing the jurisdictional GloBE ETR. It remains to be seen how governments would embed the Pillar Two rules in their fiscal policy design whilst achieving their intended Foreign Direct Investment strategy.

For multinational companies within scope, to ensure readiness for Pillar Two, there is a need to consider a three-pronged approach:

  • Understand and evaluate the current rules and implementation framework. Financial reporting and disclosures are baseline statutory requirements that large corporations (especially the listed companies) must meet on a recurring and consistent basis. Companies must understand the developing local Pillar Two rules in the context of their business and industry, existing legal ownership structures, merger and acquisition activities and certain financial accounting components to determine two key components of the jurisdiction GloBE ETR, i.e. “Globe Income” and “Covered Tax”. The rules also contain multiple elections, which could mitigate certain negative impacts to overall Pillar Two calculations. In addition, the temporary safe harbour could offer companies a relief on Pillar Two compliance and top up tax liability.

    When assessing the overall impact from the rules, companies may take the opportunity to revisit their group structure, supply chain model, intellectual property holdings and financing arrangements - to evaluate whether the current operating model remains viable and optimal.
  • Understand data requirements and build data and overall operating governance. Pillar Two compliance demands enormous efforts in data collection – about over 230 data points per legal entity within a Pillar Two reportable group. Companies should put in place a systems-based tech-led approach to achieve data accuracy as well as capturing the data universe in computing its top-up tax liability. Same data could be used in various parts of the Pillar Two calculations. It is therefore imperative for companies to design or adopt a technology platform that is able to preserve the single source of truth in computing the Pillar Two outcome.

    To achieve operational readiness for Pillar Two reporting, it is important to identify responsible functions leading each actionable workstream in the process design. It is also critical to nominate a Pillar Two champion to take charge of the end-to-end project and stakeholder management.
  • Model out the Pillar Two impact including performing safe harbour analysis with a multi-functional team. Pillar Two compliance should not be seen as a single function responsibility. The in-house tax department should lead the change in raising awareness within the organisation, and seek collaboration from the key functions (such as finance, IT, legal, HR, etc.). The common challenges companies will face are a gap in resources to lead such a game-changing initiative. Upskilling and recruiting the right talent are vital for success. The person at the helm must be able to address the questions and challenges across people, process, data and technology. A Pillar Two champion(s) who appreciates and comprehends the underlying tax law, and the purpose and drivers behind Pillar Two is a must. In addition to tax capabilities, accounting skills are essential as Pillar Two calculations rely on a fair bit of the accounting-based adjustments and concepts.

Brace for impact

The “Pillar Two journey” ahead could get more complex as the devil is always in the details. While the implementation framework published in December 2022 aims to simplify compliance, many companies found that in practice, the framework demands for another set of calculations with an obvious mandate of attaining a qualified standard of CbC Reporting to meet safe harbour rules.

Pillar Two marks a new international tax reality that is set to disrupt the global tax system. As companies are counting down to 2024, now is the time to stand up an actionable plan to accept and be ready for this new reality. Those companies with transformative vision in their tax governance will be best placed to gain the first mover advantage and stay ahead of the evolving tax disruption.

Contact us

Lennon Lee

Tax Leader, PwC Singapore

+65 8182 5220

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Tan Ching Ne

Partner and Corporate Tax Leader, PwC Singapore

+65 9622 9826

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Irene Tai

Partner, Corporate Tax, PwC Singapore

+65 9756 8439

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Paul Lau

Partner, Financial Services Tax, PwC Singapore

+65 8869 8718

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Rose Sim

Tax Reporting and Strategy Leader, PwC Singapore

+65 9623 9817

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Tan Tay Lek

Partner, Corporate Tax, PwC Singapore

+65 9179 2725

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