Welcome to the KPMG Aviation Thought Leadership Series, a series which has been designed to give you an in-depth look into topics within the aviation industry.
In this edition, we will explore the implementation of Pillar Two of the OECD’s BEPS 2.0 project in Ireland and the potential tax impact it has on aircraft lessors, airlines, and other groups in the aviation industry.
BEPS 2.0 is a two Pillar approach to reforming the international tax system which has been developed by the OECD Inclusive Framework and includes more than 140 member jurisdictions.
Pillar One of BEPS 2.0 is intended to ensure that profits are allocated to the market jurisdictions of multinational groups with global revenue in excess of €20bn (reducing to €10bn in seven years). Work is ongoing on reaching an agreed set of rules for the application of Pillar One.
Pillar Two of BEPS 2.0 is designed to impose a global minimum tax rate on groups with consolidated revenue in excess of €750 million in two of the preceding four years.
An agreement was reached by the OECD Inclusive Framework in October 2021 and was adopted in an EU Directive in December 2022. EU Member States, including Ireland, were required to transposethe Directive into local law by the end of 2023. Ireland introduced Pillar Two and the rules apply to accounting periods commencing on or after 31 December 2023.
Pillar Two, also known as the ‘Global Anti-Base Erosion’ (GloBE) rules, are designed to achieve a minimum Effective Tax Rate (“ETR”) of 15% in each jurisdiction in which a group operates.
At a very high level, this means that the financial information of each of the group members in any given jurisdiction must be adjusted as required under the rules in order to calculate a “GloBE income” amount, and then must be aggregated to enable an ETR to be calculated for that jurisdiction.
If the GloBE ETR for any jurisdiction is less than 15%, then top-up tax is payable to bring the effective rate in that jurisdiction to 15%. The top-up tax for a jurisdiction is then calculated and apportioned between the entities in that jurisdiction based on each entity’s proportionate share of GloBE income in that jurisdiction.
It is important to note that income, tax and the associated ETR for a jurisdiction as calculated under the GloBE rules may be different to local tax rules and as such top-up taxes could arise where not expected.
In addition, the jurisdictional blending approach can lead to unexpected outcomes where top-up tax may be payable by an entity whose ETR in of itself, is greater than 15%.
Various mechanisms exist under Ireland’s implementation of the rules to collect top-up tax that arises in respect of a group’s Irish or foreign operations.
The OECD has put forward a number of transitional safe harbours to reduce the compliance burden of in-scope groups by excluding such entities and jurisdictions from the scope of detailed GloBE calculations where it is expected that there is a lower-risk of top-up tax arising for the jurisdiction, thus enabling groups to focus compliance resources on jurisdictions more likely to incur a top-up tax liability.
Of particular note, is the transitional Country-by-Country safe harbour. Where certain conditions are met, groups can use Country-by-Country reporting and other data to determine whether a top-up tax liability would likely arise for a jurisdiction and, if the relevant safe harbour conditions are met, the group will not need to apply the detailed GloBE rules for that jurisdiction.
Implementation of these transitional safe harbours is permitted under the EU Minimum Taxation Directive and, importantly, Ireland has also included these in its implementation of the GloBE rules.
When assessing the impact of Pillar Two, it will be important to understand the rules and how they will apply to the fact pattern of a group in the aviation industry. There is no one-sizefits- all approach. We have set out below some practical points that a group may wish to consider when assessing Pillar Two.
As a primary step, it is critical for a business to consider whether it is part of a group with consolidated revenue in excess of €750m as constructed under the Pillar Two rules.
Note the rules regarding consolidation under Pillar Two can be complicated in certain instances (e.g. specific rules regarding joint ventures, deemed consolidation rules etc). Therefore, we suggest this step is considered carefully.
A number of Irish businesses in the aviation industry may not be in the scope of Pillar Two (and thus trading profits continue to be subject to the Irish headline rate of 12.5%).
However, a number of others will be in scope and therefore, a detailed assessment of the rules is required.
A number of items should be considered as part of assessing the potential impact of Pillar Two. These include the following:
Accounting data is a vital component of the Pillar Two rules. Groups should aim to identify the accounts that should be used for the purpose of top-up tax calculations and where relevant, consider the potential impact of different accounting periods, reporting currencies and accounting standards.
Consideration should also be given to the implications for entities that are excluded from consolidation on the basis of materiality, or due to the nature or size of an ownership interest.
There will also need to be a review of deferred tax balances that will be brought into the regime.
The time and resources needed to prepare for Pillar Two should not be underestimated. Groups should think about how the necessary data will be collated and how business functions will coordinate to manage this additional compliance obligation.
Consideration should be given as to whether safe harbours will apply to certain entities in the group and whether action is required to ensure that any relevant qualifying conditions are met.
Note a detailed Pillar Two information return (the GIR) in respect of each jurisdiction in which the group operates. The scale of disclosure in the GIR is substantial. However, for a transitional period, reduced disclosure may be permitted for jurisdictions that satisfy the safe harbours. Pillar Two tax will also need to be built in to tax accrual and disclosure process for interim and year-end financial accounts.
Pillar Two represents a significant challenge as affected lessors, airlines, and other groups in the industry grapple with these new rules. The calculations, and the compliance obligations, require an extensive data collection exercise, involving cross-functional teams and in certain cases the use of technology.
To find out more about Pillar Two and the impact it could have to your business, please get in touch with our KPMG team below.
