When’s the last time you assessed your GloBE situation? Pillar 2 is here and its impact on the financial services sector should not be underestimated. Time is of the essence so don’t delay…Read on to find out what you need to do to get tax compliant by 2024!
On 20 December 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released the Pillar 2 Global Anti-Base Erosion (GloBE) model rules introducing a global minimum tax for large multinational groups (MNEs). As a response, on 15 December 2022, the EU Council formally adopted the EU Minimum Taxation Directive (EUMTD).
This marks an unprecedented level of international political agreement on the development of harmonized international tax rules.
Tax practitioners and market participants will undoubtedly have noticed that the recent international tax landscape is constantly gravitating towards more tax transparency, coordination and conformity across industries and jurisdictions.
The Pillar 2 rules take these commitments to the next level with a global minimum tax reform aiming to end the race to the bottom on tax rates. How? By ensuring that large groups are subject to at least 15 percent tax in every jurisdiction where they operate. More precisely, this goal is to be reached by setting this new minimum tax rate for large multinational and domestic groups with a consolidated group revenue of €750 million or more in at least two of the past four fiscal years immediately preceding the tested fiscal year.
There is no doubt that Pillar 2 sets the stage for a dramatic change in the international tax landscape. So, what could it mean for you and what is our recommendation?
Don’t miss this comprehensive overview of the EUMTD as well as a comparison with the OECD GloBE model rules.
Now, let’s take a look at some of the upcoming challenges, opportunities and potential consequences for your structure.
Getting Pillar 2 savvy
Both Pillar 2 and the EUMTD target large multinational and domestic groups with a consolidated group revenue of €750 million or more. Even if a group finds itself out of scope of country-by-country reporting (CbCR) obligations (which have a similar threshold), market players should not immediately assume they are exempted from the Pillar 2 rules. Most importantly – and contrary to the CbCR rules – financial sector players are not carved out, and these new rules will apply to banks, insurance companies and regulated management companies.
First and foremost, when assessing the impact of Pillar 2 in Luxembourg, you will then need to determine whether your group falls within the scope of the new rules. It will also be essential to identify and categorize the constituent entities of your group under the GloBE definitions — in particular the ultimate parent entity of your group, taking into account that the effective tax rate (ETR) will be calculated on a jurisdictional basis.
So, what are the three key elements of any Pillar 2 impact assessment?
- Identifying the group in scope
- Categorizing its constituent entities under the GloBE definitions
- Determining the ultimate parent entity of the group
Safe harbor rules and specific exclusions may apply, but market players should be ready to understand and embrace the new rules, as well as to rethink their approaches to group structuring within the Pillar 2 context.
Identify your tax risks
The Pillar 2 mechanism has already been called “diabolical”, “counterintuitive” or “separate from the domestic tax systems.” Needless to say, this appraisal creates ample space for the investigation of potential tax risks.
It is critical to understand that the new GloBE rules introduce valuation and recognition principles on certain items that may differ from both your group’s consolidated accounts as well as the local GAAPs of the entities in your group. Certain elements essential to the tax policy of your structure may be treated differently under the GloBE rules.
Market players may find out that some of their most essential tax governance items (e.g. deferred tax assets (including tax credits), exempt dividends, interest income and tax on insurance premiums) may be treated differently under the GloBE rules in comparison to how they are treated under their current accounting and tax regimes.
This may lead to a group being subject to the Pillar 2 minimum tax (i.e. the top-up tax) even though its entities are currently taxed above the 15 percent rate according to domestic tax rules. What’s more, a corporate structure itself may no longer be efficient from a tax governance perspective in this new and challenging environment.
Robust GloBE tax governance – the time is now!
With the adoption of the EUMTD on 15 December 2022, the formal implementation of the Pillar 2 rules is well underway in EU jurisdictions. The primary mechanism – the Income Inclusion Rule (IIR) – will be applicable from 31 December 2023, whereas the backstop mechanism – the Undertaxed Profits Rule (UTPR) – will be applicable from 31 December 2024.
While Luxembourg has not yet published its bill of law for implementation – which should happen before end of July 2023 – some major European jurisdictions (e.g. Germany, the Netherlands, Ireland and the UK) are now in post public consultation phase.
Pillar 2 planning is crucial for any large market participant and an important focal point for everyone else. Pre-implementation decision-making and arrangements could certainly put a group ahead of the pack.
Post-implementation management will be equally important. Market players will face new challenges in tax governance and compliance which will require an unprecedented understanding of the tax environment in various jurisdictions as well as an interlocking and multidisciplinary expertise to manage Pillar 2. Synergy between tax, accounting and compliance knowledge will be more important than ever before.