Pillar Two: Global minimum tax

The Pillar Two rules are applied on a jurisdiction-by-jurisdiction 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”.

Groups should assess how the rules interact with existing structures, cross-border arrangements, tax incentives and planned business changes. The analysis should consider potential top-up tax, available safe harbours, filing requirements and the documentation needed to support the group’s positions.

The Income Inclusion Rule (IIR) acts as a primary taxing rule under Pillar Two. This rule may impose top-up tax at the level of a parent entity in respect of low-taxed income earned elsewhere in the group.

Jurisdictions may also apply a Qualified Domestic Minimum Top-Up Tax (QDMTT), which takes priority over the IIR and allows the jurisdiction where the low-taxed income arises to collect the top-up tax. The Undertaxed Profits Rule is designed as a backstop where top-up tax has not been collected under a domestic minimum top-up tax or the IIR. The timing and application of the rule depend on the legislation adopted in each relevant jurisdiction.

Pillar Two creates financial reporting and disclosure considerations related to potential top-up tax exposure.

Groups should consider how financial reporting, local statutory accounts and country-by-country reporting information support their Pillar Two calculations. Differences among accounting, tax and reporting data may create additional reconciliation, review and documentation.

The rules also include transitional and permanent safe harbours that may reduce the calculation burden or provide relief from top-up tax where the applicable conditions are met. Under the Transitional Country-by-Country Reporting Safe Harbour, an MNE group may qualify for relief in a jurisdiction by meeting one of three tests: the de minimis test, the simplified effective tax rate test or the routine profits test. If a jurisdiction qualifies, its top-up tax is treated as zero and the group is generally not required to complete the detailed Pillar Two calculations for that jurisdiction for the fiscal year.

Eligibility should be assessed separately for each jurisdiction and fiscal year using qualifying information and appropriate supporting documentation. Organizations should also monitor changes to the availability, duration and conditions of relevant safe harbours.

The calculations of the jurisdictional ETR under these rules, which can differ from the accounting computation of ETR, can be complex with potentially hundreds of data points required across multiple countries. MNEs should identify and resolve data gaps and establish clear processes for data collection, calculation, review, filing and documentation. Technology and automation may help organizations manage the volume of data and differences among jurisdictional requirements. KPMG’s BEPS 2.0 Automation Technology (KBAT) is one solution designed to support this process.

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.

Coordination may be required where the GloBE Information Return (GIR) is filed centrally but local returns, notifications or tax payments remain due in individual jurisdictions. Groups should confirm which entity is responsible for each filing, where the GIR will be filed, whether the relevant exchange conditions are satisfied and which local obligations remain.