Pillar Two – Key considerations for Irish securitisation entities

Introduction – the basics

Pillar Two is an OECD initiative which implements a global minimum tax rate of 15% with the aim of preventing entities shifting profits to low or no-tax jurisdictions. At a broad level, where the effective tax rate of an entity (as computed under specific rules) is less than 15%, there are various mechanisms in place to collect additional tax to bring it up to an effective tax rate of 15%.

Our asset management team explores the Pillar Two impact to businesses and the relevant key considerations for Irish securitisation entities in depth in the below article.

The rules

The rules, which are complex, are in force in Ireland for in-scope entities with fiscal years beginning on or after 31 December 2023.

An Irish tax resident entity should only potentially be in scope of the rules (i.e. ignoring any specific exemptions that might apply) where it is part of a multi-national (MNE) group or a domestic group which has consolidated revenue exceeding €750m for at least two of the preceding four fiscal years.

The two key starting points in assessing whether a securitisation entity is in scope are to determine:

Is the entity part of an MNE group or domestic group? and
If so, does the group exceed the consolidated revenue threshold?

To be part of an MNE or domestic group an entity must generally be consolidated on a line-byline basis. Many securitisation entities are legally established as orphan vehicles meaning that the expectation might be that they are not consolidated into any other entity.

That said, there are circumstances where consolidation could be required, such as the warehouse phase of a CLO where a proportion of the funding will be provided by the CLO manager.

In addition, securitisation vehicles are often included in broader fund complexes where there can be consolidation required in certain instances.

Consideration is therefore required on a case-by-case basis. It is worth noting that a securitisation vehicle may have Pillar Two compliance obligations even where it is not subject to Pillar Two tax.

Securitisation vehicles which are legally established as orphan entities can fall within the scope of the rules in some cases.

Philip Murphy

Partner

KPMG in Ireland

Pillar Two - key considerations for Irish securitisation entities

Scoping – determination of group status

The accounting consolidation position is critical in ascertaining whether an entity is part of a group. At its most basic level, the concept of a group is determined by reference to the consolidated financial statements prepared in accordance with an acceptable accounting standard (includes IFRS and a range of local GAAPs, including GAAP of any EU Member State), where the entity is consolidated on a line-by-line basis. However, there are a few additional points that need to be considered when determining the group for Pillar Two purposes:

If a parent entity is not required to prepare consolidated financial statements for any reason, there is a deemed consolidation test which must be applied i.e. it is necessary to consider the position in the event the parent was required to prepare consolidated financial statements;
If an entity is excluded from the consolidated financial statements solely based on its size (in the context of materiality) or on the basis it is held for sale, it is nonetheless required to be included in the group; and
There are specific rules under which joint ventures should be included in the group, where they are at least 50% owned by a group and accounted for in the group consolidated financial statements further to the equity method

There are also additional rules which can apply to permanent establishments however they are unlikely to be relevant to most securitisation entities.

Once the applicable group is determined, it is then necessary to consider whether the consolidated group revenue exceeds the €750m threshold.

Determination of consolidated revenue threshold

The basic test is whether the consolidated revenue of the group exceeds €750m in two of the preceding four fiscal years. The threshold amount is increased or decreased on a pro-rata basis where a relevant accounting period end is more or less than 12 months. Any revenue attributable to a vehicle or entity that is specifically excluded from the scope of Pillar Two (e.g. there are exclusions for certain types of defined entities such as pension funds and investments funds) must nonetheless needs to be included in ascertaining whether the threshold has been exceeded.

The level of additional work required to comply with Pillar Two compliance obligations should not be underestimated – it won’t be possible to collate necessary information at short notice where required.

Gareth Bryan

Partner, Head of Asset Management Tax

KPMG in Ireland

What if a securitisation entity is potentially in-scope?

Where a securitisation entity is part of a group which exceeds the revenue threshold, it does not necessarily mean that it will have an additional tax liability. There are a few different potential approaches that can be adopted to mitigate the incidence of a tax payment obligation arising where this is the case:

Where the securitisation entity is part of a broader fund structure (e.g. a subsidiary of a regulated fund) it could be fully outside the scope of the rules, as there is an exemption available for any entity which is at least 95% owned by an “Investment Fund” (as defined), which may require some analysis to confirm that the fund vehicle satisfies the relevant conditions; or
There is a specific rule which allows entities to be assessed on a standalone basis where their parent entity has an ownership interest of less than 30%, which would typically be the case in the context of an orphan vehicle which is being consolidated into an entity other than its shareholder. Where this applies, it is possible to assess the effective tax rate of the vehicle on a standalone basis independent of the group it is part of which, in the case of a securitisation entity, may result in the effective tax rate being above 15% (as most securitisation companies are subject to tax at 25%). That said, it is necessary to assess the effective rate of tax based on the computational rules for Pillar Two purposes, rather than based on accounting or the normal Irish computational provisions; or
Finance Act 2024 introduced a measure which allows for any domestic top-up taxes in respect of securitisation entities (as defined) to be imposed on other group members located in the jurisdiction, and not on the securitisation entity itself. This allows a securitisation to remain broadly tax neutral even where it is in scope of the rules and subject to an additional tax. That said, the definition of securitisation entity is very specific and not all Irish securitisation vehicles would qualify.

What needs to be done in relation to securitisation entities?

The key steps which need to be followed in respect of securitisation entities are:

Ascertain the consolidation position based on the specific rules, including the deemed consolidation rule;
If the entity is part of a group, assess whether the group turnover exceeds the threshold for in scope entities;
If the entity is part of a group which exceeds the revenue threshold, determine which of the three approaches noted is most suitable. Depending on the approach relied upon, the entity may be subject to Pillar Two compliance requirements, even where it doesn’t have any tax payment obligation.

Our BEPS Pillar 2 service catalogue

Group structure review
Entity classification/P2 tax mapping
CbCr process/qualification
Safe harbour assessment
Pillar 2 impact calculations (high level and deep-dive)
Scenario modelling (structural or transactional planning)
Scenario modelling (elections)
Subject to tax rule • Transitional/safe harbour planning
Legal entity rationalisation
Technical training
Governance (operating model design and documentation, controls review, RACI, SOP development)

Data prioritisation and relevance
Data sourcing
Data mapping and gap assessment
Data gap remediation
Data transformation
Data collection/ingestion
Data quality / completeness reviews

Tax technology review and vendor assessments
Pillar 2 technology implementation
Supplementary technology support (low code tools, workflow, analytics etc)
Testing support

Financial reporting/ provision
Statutory FS provisions and disclosure support
Safe harbour calculations
GIR calculations
QDMTT calculations
GIR filings
QDMTT filings
GIR notifications
Registrations
Compliance tracking and MI
Provisioning process review
Tax payment support

Audit assist – financial statement audit
M&A
Operational Transfer Pricing
Legal
Policy support
Controversy & Dispute anticipatory assistance
Revenue authority disputes
Long-term business restructuring

Get in touch

We can assist with all the contents in this article, providing any required technical accounting input as part of the analysis, in addition to advising on the optimal approach to adopt. Reach out to our team today to discuss more about Pillar Two and the potential impact for your business.