Pillar 2: A roadmap to compliance in a dynamic landscape

Catherine McIsaac: One of the key challenges multinational groups are already facing into is keeping up with the fast pace of technological and global tax policy change from implementation of the Pillar 2 regime against the backdrop of ongoing geopolitical uncertainty.

To explore these challenges, I'm joined by Kash, our Head of International Tax, and Harriet and Allister from our Global Tax Transformation and Compliance teams here in the UK.

So, Kash, what are the key priorities for impacted groups to keep on top of as they prepare for their Pillar 2 implementation?

Kashif Javed: That's a great question, Catherine, because clearly there's an evolving landscape with the Pillar 2 legislation.

We've seen across all of the OECD member jurisdictions a quick pace in terms of enactment and there's still further to go. We estimate that there's about 95% of in-scope MNEs are going to be subject to Pillar 2 rules in some form during 2025. But it's fair to say that not all groups are actually prepared, right? So, they've done impact assessments, they've understood the position, but they haven't really got into the detail of all the evolving changes.

So, keeping on track of all of those changes as they're impacted in different countries is going to be a key area for them to focus on. I'd say that the second key area is what's going on in the US. So, groups absolutely need to keep an eye on the evolving tax policy landscape, in particular under the new and incoming Trump administration. We've seen that there are going to be tax policy changes in the US.

One impact for example for groups with the US presence is that there is what is known as an under-taxed profits rule and that could well impact US parented groups in terms of trying to recapture the benefit of incentives that exist at the parent company. We've already heard that there might be retaliatory measures against countries that are adopting the UTPR rule to try and recapture some of that benefit for the US. So, that's an area that groups absolutely need to be on top of and keep an eye on those developments.

I’d say that the third area is around getting prepared for tax audits, so the overall management process around tax audit readiness. And we've seen different countries adopt the rules in very slightly different ways and there's no consistent interpretation or application given some of these deviations that exist across different countries. Groups absolutely need to be documenting their positions, how they've formed those conclusions and the basis for them and making sure that they can evidence the controls that they've got around how they formed those conclusions.

And then I'd say really the last area that perhaps groups aren't really aware of is that as part of ongoing compliance checks when they come to filing their local Pillar 2 returns in different countries, groups are going to need to provide the underlying global information that maybe only exists at their parent company level, and actually make that available for local compliance checks to tax authorities in the subsidiary jurisdiction. So, many groups haven't even started to think about how they will share that information, who has got the access rights to be able to access that kind of information and share it with local tax authorities.

So, there's still plenty for groups to think about as the Pillar 2 legislation is enacted and adopted in various countries.

Catherine McIsaac: Absolutely. And given all of that work that's yet to be done, how can businesses really start to prepare for Pillar 2 compliance when a lot of the jurisdictions haven't even published their detailed rules yet or some of the operational guidelines?

Allister Weir: So, I guess this is building on some of the comments that Kash has already raised. The first thing I would say is definitely take a step back and think about the big picture here. Although local variations might change, the overall framework of Pillar 2 is pretty consistent: you've got the GloBE rules, you've got qualifying domestic top-up tax and you've got the safe harbour options that are all available to clients. So, what I would say is take a step back, take stock, understand the global framework and start to think about how that framework might really apply to your business from a risk perspective.

The second thing to think about is understanding your internal processes and your data. Pillar 2 will rely heavily on accurate and detailed information around your tax positions, your effective tax rates and your jurisdictional profits. Some of this information is information that they've not needed before from a tax filing perspective and the amount of data that will be required by businesses will be significant.

So, what I would say for businesses now is start to understand those data requirements so that you can really start to set the processes in place so that you're best placed for those developments as they come down the line.

I guess the third point is really understanding and keeping an eye on those developments as they arise. Essentially horizon scanning. You can do this a couple of ways. You can sign up to subscription alerts from people like KPMG, which will give you regular updates or probably more important, and probably a combination of the two is, you should probably assign this to somebody in your team to have an objective to make sure they're really monitoring these in real time and understanding the implications of those changes as they arise. But once again, if you've got the platform right, you should be able to adapt to those changes as they become known.

And I guess the fourth area that I would say is extremely important is just understanding your resourcing around this, both in terms of people and technology. Businesses don't have to do this all in-house at day one or even at all.

So, for instance, some businesses are thinking about how they might want to own the global data and management of that data centrally, but looking at external advisors to help them with jurisdiction-specific filings, whether that's the QDMTT filings or whether that's notifications or registrations. And it's that co-sourcing arrangement that's increasingly becoming an area of discussion. And of course, technology is extremely helpful.

There are already many compliance-based Pillar 2 solutions that can really help businesses adapt to these changes as they become known. So, fundamentally, what I would say is you don't need to know all the answers now. 90% of the framework is available to you. So, as long as you understand the framework, you understand the concepts of what data you're going to need, you should be in a really good place.

Catherine McIsaac: Thanks, Allister. That's really interesting for the medium and long-term plans that you need to prepare for.

Harriet, just coming to you, thinking more short-term, as we go through this audit and reporting cycle, what are the key things that you think businesses in scope need to be doing to prepare?

Harriet Morgan: Absolutely. So, I think as we approach year end, it's essential that businesses prepare for Pillar 2 BEPS reporting requirements. And with those deadlines just around the corner, we're recommending businesses take five key steps to support with their year-end preparations.

So, the first step we're recommending businesses take is to review their country by country reporting, their C by CR, and more specifically, ensuring that country by country reporting is qualifying against the globe rules. Transitional safe harbours allow businesses to take advantage of a simplified compliance pathway for the first three years, but only if that's backed by qualifying C by CR. So, it's really important that businesses review their methodology and process now, address any potential gaps, and that would be a great first step in terms of Pillar 2 readiness.

So, the second key step that we're recommending businesses take is to validate their FY23 safe harbour calculations. So, what we mean there is that businesses have checked that they've made the right adjustments, but also checked that entities are being treated correctly under the GloBE rules. So, this step really is critical in order to ensure reliance on the safe harbours.

The third step we're recommending businesses take is to prepare their FY24 proxy safe harbour calculations. And even if FY24 C by CR data isn't yet available, you can still rely upon your FY24 financials to create that proxy.

The fourth step we'd recommend businesses take is to review those jurisdictions and entities that don't qualify for the safe harbours. And for these failing jurisdictions or entities, you'll need to undertake a full Pillar 2 calculation. So, this involves designing a robust calculation process, considering the necessary elections and also collecting the right data at the right granularity in order to process that calculation.

The final step we're recommending businesses take is to review their accounts disclosures. So, if there are material exposures identified for FY24 or forward looking risks for FY25, your disclosures must be clear, compliant and audit ready. This step is vital for meeting reporting requirements, but also to ensure transparency for stakeholders.

So, year-end really is the time to act and by addressing these five key steps now will really help businesses get prepared for Pillar 2 compliance early.

Catherine McIsaac: Thank you, Harriet, thank you also Kash and Allister for joining me today. It sounds like there's plenty for businesses to be getting on with and some practical steps that you've shared, particularly against the backdrop of policy and geopolitical change.

So, as the final pieces of the overall Pillar 2 policy framework are falling into place, there's still plenty for groups to do to address potential impacts of further policy change as well as bedding in and adapting to the new global minimum tax regime.

Many thanks, Kash, Allister and Harriet for sharing your practical insights.