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The Pillar Two tax rules for multinational companies went live January 1, 2024. While some have planned for this eventuality, some — including many private businesses — may not have considered international investments and cross-border revenue levels. Read the private company highlights below, as well as the full Pillar Two Guide for US Multinational Enterprises.
What is Pillar Two?
- Under the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework, 140 countries agreed to enact a two-pillar solution to address challenges from the digitalization of the economy (refer to the Pillar Two Implementation Country Tracker for PwC’s tracking of legislative developments).
- The OECD’s Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” rules) introduce sweeping, global changes to the international tax framework.
- Large multinational businesses with greater than €750 million total revenue must pay a minimum effective tax rate under Pillar Two (“GloBE ETR”) of 15%, on income arising in each jurisdiction where they operate.
- The proposed Model Rules will begin to take effect for tax years beginning on January 1, 2024 in many jurisdictions.
Why should private companies care about Pillar Two?
Pillar Two will apply to many multinational enterprises and private equity groups — regardless of incorporation status, whether public or private — unless you’re an “Excluded Entity.'' But you won't know if your enterprise is an Excluded Entity until its structure and holdings are evaluated to see if they qualify, and at what level(s).
Some Pillar Two consequences to consider:
- Increased cash tax expense due to new minimum tax structure
- Increased data needs, controls and reporting rigor that will impact a variety of stakeholder groups — tax and non-tax — on a "by legal entity, by jurisdiction" basis
- Impact on existing tax and business structures
- Increased administrative burden / compliance costs to set-up, track, report and document a basis for Pillar Two information on a much more granulr level
Here’s what private companies need to know about Pillar Two:
If you’re a member of a multinational group operating in a Pillar Two jurisdiction then the Model Rules will likely apply.
Any group that has consolidated annual revenues of €750 million (or more in at least two of the preceding four fiscal years) will need to navigate Pillar Two. You'll need to assess if entities within your business structure are subject to the Model Rules or eligible for one of the transitional safe harbors. Transitional safe harbors may provide an avenue to significantly relieve administrative or compliance costs by temporarily delaying the requirement to perform the entire calculation contained in the Model Rules, and potentially eliminate Top-up Tax (otherwise payable under the full Model Rules).
While some safe harbors, like those based on your company’s Country-by-Country Reporting (CbCR) outcomes, can offer relief on a jurisdiction-by-jurisdiction basis, the CbCR needs to be “qualified.” That means preparation using an acceptable financial standard — which can be a roadblock, depending on the source and reliability of your data.
What challenges will private companies face?
Pillar Two computations are based on the accounting framework of the group’s parent entity. That’s US Generally Accepted Accounting Principles (US GAAP) for most US-headquartered entities.
This means that US GAAP books will be required at the local level for each Constituent Entity (CE). Identifying financial reporting consolidations at the CE level may require deep GAAP or International Financial Reporting Standards (IFRS) accounting knowledge, and could be a challenge for private companies.
For many private companies — who keep only statutory ledgers under local GAAP and apply US GAAP entries in consolidation — it could mean maintaining separate books and records that appropriately combine local GAAP and consolidated US GAAP entries applicable to each local entity to arrive at the appropriate figures needed to comply.
Management will need to implement a plan
Determining whether adjustments to the Top-up Tax are complete, including for GloBE Income or Loss and Adjusted Covered Taxes, will take work — and a plan.
So get ready. Understanding local tax laws for each jurisdiction means:
- Having a process for monitoring and evaluating legislative activity. Compliance with local requirements entails knowing each jurisdiction’s rules and local tax laws.
- Determining who owns each implementation step. Businesses will also need to know how centralized or decentralized ongoing controls and processes will be, including data collection.
- Making sure data is appropriately sourced. Information used in computations and safe harbor assessments must be accurate and include any required adjustments — or it may not be accepted by the local tax authority.
What about tax and financial reporting for Pillar Two? Check your tech
An ongoing plan for Pillar Two — especially if it means maintaining separate books, records and data — needs to bake in continued compliance and requires support across the enterprise.
This will likely create an immediate need for your businesses to invest in data and system updates, new controls and reporting procedures. And cross-functional teams — including Tax, Accounting, IT, Legal, HR and Financial Planning and Analysis — should be tasked with maintaining this new set of books that are essential for Pillar Two compliance. Modifications to existing tax and financial reporting are also a must.
Companies should consider using enhanced technology to gather data, perform complex calculations, interpret analyses and produce reports for global and statutory compliance. PwC’s Pillar Two Engine, a centralized, cloud-based calculation engine, was developed to support the inconsistent and unique adoption of Pillar Two rules around the world — while also allowing for flexibility and accuracy in calculations as those rules continue to evolve.
Act now to determine how Pillar Two will affect your company
If Pillar Two sounds complicated, that’s because it is. Without action, multinational enterprises risk being noncompliant in key jurisdictions as the effective dates approach.
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