BEPS 2.0: Global Minimum Tax

The Base Erosion and Profit Shifting (BEPS) 2.0 initiative is a significant reform of the international tax system led by the Inclusive Framework and the Organisation for Economic Co-operation and Development (OECD). This initiative includes a substantial change for large multinational groups with the “Pillar Two” proposal of a global minimum tax of 15 percent.

This is a new paradigm in global taxation, requiring a proactive approach to evaluate and prepare for its impacts. Canada has committed to implement the primary taxing rule in Pillar Two as of 2024, and has recently released draft legislation to enact a Canadian "Global Minimum Tax Act”.

Who’s affected?

Multinational enterprises (MNEs) with annual revenues above 750 million Euros are in scope of Pillar Two rules.

Three key implications for Canadian MNEs

1. A complex set of rules that can increase taxes-payable and global effective tax rate (ETR):

The Pillar Two rules are applied on a country-by-country basis, meaning that an MNE that is determined to be in-scope must calculate its ETR in every jurisdiction in which it operates, based on a detailed and complex set of rules. For example, higher taxes in one jurisdiction cannot offset lower taxes in another. If the jurisdictional ETR falls below 15 per cent (which can happen even for jurisdictions with high headline tax rates or accounting ETRs above 15 percent), the company is generally required to pay a “top-up tax”.

If top-up tax impacts are expected, consider a review of existing global structures, value chains, the location of activities, and the effectiveness of existing tax concession claims.

The Income Inclusion Rule (IIR) acts as the primary taxing rule for Pillar Two application. Generally, the jurisdiction in which the MNE is headquartered imposes a tax to collect any shortfall between the global minimum tax rate and the jurisdictional ETR in the various countries in which the MNE group operates. However, jurisdictions can also choose to apply a Qualified Domestic Minimum Top-Up Tax (QDMTT), which takes priority over the IIR and allows them to address the shortfall and collect tax themselves. A third possibility is the case where an MNE’s headquarter country (or an intermediate country) fails to impose the global minimum tax (through the IIR), and an amount equivalent to the global minimum tax rate is not collected under one or more QDMTTs is the collective application of a UTPR (Undertaxed Profits Rule).

2. New financial statement disclosures and requirements

Recent changes to accounting standards include new pre-regime disclosures in relation to operations with indicators of a potential exposure to top-up tax. A closer look at standalone financial statements will also be essential to ensure the requirements of transitional safe harbors and/or the Pillar Two complex computations and adjustments are met. To ease transition to the new regime, new safe harbor rules apply for the first three years of the new regime. If an MNE passes one of three tests for a jurisdiction (a de minimis test, a simplified ETR test and a routine profit test) it will not be required to perform detailed Pillar Two calculations and will not be subject to a top-up tax in that jurisdiction.

3. Increased compliance costs and coordination

The calculations of the jurisdictional ETR under these rules (which can often differ from the accounting computation of ETR) is complex with potentially hundreds of data points required across multiple countries. MNEs should work to identify and resolve data gaps early in the process with the necessary solutioning and automation. Transition and ongoing compliance costs can be significant even if no top-up tax ultimately arises. Planning and budgets should factor in multi-stakeholder complexities and resourcing needs to manage potential system changes over a multi-year period.

When does Pillar Two take effect?

The Canadian government first announced its intention to implement Pillar Two, including a QDMTT, in the 2022 Federal Budget. The 2023 Federal Budget confirmed this intention and provided effective dates.

On August 4, 2023 Finance released draft legislation to implement a proposed Global Minimum Tax Act, which is largely based on the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) model rules and other OECD source documents. Under the draft Pillar Two legislation, Canada would implement the IIR rule and the QDMTT for fiscal years that begin on or after December 31, 2023. The draft legislation also has a placeholder for the UTPR, which is expected to take effect one year later, i.e., for fiscal years beginning on or after December 31, 2024.

Around the world, most of the 137 countries of the OECD Inclusive Framework are aiming at the implementation of the Pillar Two rules in 2024, with the UTPR taking effect as of 2025. The US is a notable exception to this relatively global implementation of the Pillar Two rules. For in-scope MNEs with operations in the US, a top-up tax that is in the form of an IIR (if an MNE is headquartered outside of the US) or a UTPR (if the MNE is headquartered in the US) can still apply to the extent the US jurisdictional ETR falls below 15 percent.

How KPMG can help

Our solution portfolio provides an end-to-end service across the many disciplines that can help support as you navigate planning, implementation and compliance.

BEPS 2.0 Modelling
High-level modelling to help estimate numerical outcomes based on financial data and map out the impact on the effective tax rate (ETR) and cash taxes under various scenarios.

Accounting advisory services
Coordinated approach to address systems and data related issues, including planning based on a choice of accounting treatments.

Legal entity simplification
Assist with restructuring in cases where the group structure and value chain are no longer appropriate.

Impact analysis
Review the group structure to identify the scope of the group for Pillar One and Pillar Two purposes. Further identify required market disclosure statements.

Data, systems & compliance
Critical understanding of data sources, systems and maintenance to support implementation and production of tax sensitized information in standard and adaptable forms.

Tax planning
Identify planning opportunities to manage the impact of BEPS 2.0 rules and new measures adopted in relevant countries.