Pillar 2 – points to consider from an offshore perspective

Pillar Two, what is it and who will it impact?

A continuation of the OECD’s work in addressing the tax challenges arising from the digitalisation of the economy, the Pillar Two framework aims to ensure multinational enterprise (“MNE”) Groups with annual global revenues of €750 million or more in the consolidated financial statements of the ultimate parent entity (“UPE”) shall pay a minimum effective tax rate (“ETR”) of 15% on income within each jurisdiction in which they operate. Commonly referred to as GloBE (Global Anti-Base Erosion Rules), the framework imposes a Top-Up Tax on profits arising in jurisdictions where the ETR is below 15%.

Some of the most significant aspects of Pillar 2 are that it operates based on the principle of jurisdictional blending and furthermore the ETR calculation is computed based on both the current tax and deferred tax position.

This shall pose some specific complexities from an offshore perspective where groups are necessarily required to consider the “tax attributes” of companies that are subject to tax at 0% and indeed shall even be obliged to consider recognising deferred tax assets/ liabilities in these entities, notwithstanding the application of a 0% tax rate locally.

Are there any exclusions available for a Group that has revenues exceeding the €750 million threshold?

Notably from an offshore perspective, pension and investment funds / real estate investment funds that are an UPE are expressly excluded entities from the scope of Pillar 2. For more information on excluded entities and how these exclusions operate in practice, please view our report here.

Will Pillar 2 still apply to companies and structures that are based offshore?

In a word, yes. The Pillar 2 framework has been designed as such that even where a particular jurisdiction does not implement the Pillar 2 rules, a top-up tax can be levied on any ‘undertaxed profits’ recognised in a jurisdiction – either by way of the implementation of a qualifying domestic minimum top-up tax, or alternatively by a third-party jurisdiction by operation of either an income inclusion rule (“IIR”) or an undertaxed payments rule. For examples of which jurisdictions have adopted these rules, please view our summary here.

What specific factors are there to consider?

If the group is in-scope:

• Undertake a high-level evaluation of how the rules could potentially impact the MNE - In particular, whether the Group can avail of any of the safe harbours contained within the Pillar 2 framework. Further details can be found in our report here.
• Exempt entities - Review each of the entities in each jurisdiction to determine whether any of them might qualify as exempt entities. 
• Financial statement disclosures - Consider whether there are any new disclosures required to be made in the 2023 financial statements, in accordance with the disclosure requirements under IAS 12.
• Deferred tax recognition - Entities should consider whether a deferred tax attribute should be recognised in the 2023 financial statements.
• Additional data needs - Identify data points required to complete both jurisdictional tax computations and returns under Pillar 2. In particular, consider how best to improve the tax-related data held in respect of those entities subject to tax the 0% rate.

If the group is out of scope:

• Financial statement disclosures - The entity may be required to make additional financial statement disclosure requirements under IAS 12.

When does it take effect?

This is one of the less clear areas of Pillar 2, as it is incumbent on each jurisdiction to decide when – and indeed if – Pillar 2 will be implemented domestically. Notably however, the OECD currently envisages that legislation to give effect to the Pillar 2 framework should be introduced by 31 December 2024.

We can however confirm from a Crown Dependencies perspective that it is anticipated that the relevant legislation implementing Pillar 2 into domestic law in each of the three jurisdictions shall come into effect by 31 December 2024 (i.e. effective from 1 January 2025).

So this is a 2025 issue?

Unfortunately, this does not mean this issue can be set aside for now, as many jurisdictions have implemented the IIR referred to above with effect from 31 December 2023.

Accordingly, in-scope Groups with a presence in IIR jurisdictions should start thinking about how they prepare for implementation now. In particular, the appropriateness of the tax disclosures contained within the 2023 financial statements as these will act as the [comparative/base] for the purposes of the 2024 ETR calculations.

For more information on BEPS 2.0 and Pillar Two from an offshore perspective, please contact our Crown Dependencies tax team.