Pillar Two implementation and sustainability reporting

Pillar Two aims to create a level playing field by ensuring that multinational companies contribute a fair share of taxes to each jurisdiction in which they operate. The framework includes three primary mechanisms for tax collection: Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR), and Undertaxed Payments Rule (UTPR). Each mechanism has its own complexities and requires careful consideration by companies to ensure compliance.

Companies with €750 million in consolidated group revenue in two of the last four fiscal years fall under the scope of Pillar Two. To ease the transition, The Organization for Economic Cooperation and Development (OECD) has introduced various safe harbors, including the transitional country-by-country safe harbor. 

Learn more about the basics in our Hot Topic, Global Minimum Tax – Complexities abound.

The FASB staff has said that Pillar Two taxes are an alternative minimum tax; therefore, deferred taxes will not need to be recorded or remeasured as a result of Pillar Two. Instead, Top-Up Taxes will be expensed as incurred (i.e. a current period item).

The panelists stressed that companies need to assess their systems and processes, identify constituent entities, evaluate safe harbors and design new internal controls for compliance, including:

• Controls around country-by-country reporting that serves as a basis to evaluate the safe harbors.

• Controls around computing GloBE income.

• Controls around models and technology solutions that are being implemented. 

• Controls over the completeness and accuracy of the information used in the processes and the operation of the new controls.

In addition, because the entries and disclosure elements for the accounting may be coming from different people and parts of the organization, there may be a need to revisit the operation of existing controls.

Lastly, effective communication with your auditors is crucial for resolving issues on a timely basis and ensuring the completeness and accuracy of information used in Pillar Two processes. Open communication helps in planning for information needs, ensuring that all adjustments are accurately and timely reflected in the financial statements.

Panelists stressed that the first step is understanding what the company is in scope for and how that compares to the company’s current state of reporting. Dougherty noted that there are lots of regulations to monitor and much of the scoping is complex, including the level at which to report. From there, understanding effective dates as well as any available reporting relief and assurance requirements is key.

Garnett spoke about her focus on the California climate laws, and mentioned the recent relief that allows the reporting of GHG emissions data at the parent company level. There remains some uncertainty about the underlying regulations that the California Air Resources Board (CARB) is set to develop, and there are some unanswered questions, like what the reporting actually looks like and the 2026 reporting date, which is still to be determined by CARB. 

Panelists spoke about the recent enforcement notice published by CARB, which acknowledges that implementation of the GHG emissions law will take time for many companies. As a result, CARB plans to exercise discretion in enforcement. 

Dougherty pointed out that establishing strong governance structures and making sure the team has the necessary skills to manage sustainability data and processes is imperative. This includes setting up dedicated committees, training staff and integrating sustainability responsibilities into existing roles. Robust governance leads to accountability and oversight, which are crucial for reliable reporting.

Garnett stressed the importance of robust processes and controls. She specifically called out the judgment needed in conducting the materiality assessment that underpins sustainability reporting – highlighting the need for appropriate documentation that can withstand challenge. For more insights, read our report, Strengthen internal controls to navigate ESG reporting.

Dougherty emphasized that establishing a strong working relationship with your auditor early on facilitates better communication and collaboration throughout the assurance process. This leads to a more efficient and effective engagement, which ultimately benefits your sustainability reporting.