What do asset managers and sovereign wealth funds need to do to get ready for Pillar Two?
The OECD’s Pillar Two global anti-base erosion ("GloBE") rules, which were agreed to by the OECD/G20 Inclusive Framework on BEPS ("F") in December 2021, are beginning to be enacted into law now. In December 2022, South Korea enacted legislation applying the GloBE rules from 2024, while the European Union ("EU") agreed a Directive committing EU member states to implement to a similar timeline. In the past couple of months we have seen similar announcements from other jurisdictions, including Hong Kong (SAR), China, Japan, Singapore, and the UK.
A common misconception is that asset managers and sovereign wealth funds ("SWFs") are automatically "excluded" from Pillar Two. Like everything Pillar Two related, the rules are not quite that simple. This article sets out the steps that firms in the asset management space need to take to determine whether or not they are in-scope of Pillar Two following the Administrative Guidance for the Pillar Two GloBE Rules1 released by the OECD on February 2, 2023.
For asset managers or SWFs that are potentially in-scope of Pillar Two, or where the application of the scope rules outlined below are uncertain, now is the time to think about next steps. The OECD is still seeking to issue clarificatory guidance and this could help to address areas where the Pillar Two rules have unintended consequences. Seeking an external review of how the rules apply could help groups identify these scenarios, and quantify their potential Pillar Two exposure, but also design and develop the processes they will likely need to introduce to manage their compliance and reporting obligations. For a three-year transition period, an external review may also help to protect against penalties.
When considering the Pillar Two implications, asset managers will need to think about the implications from an investment fund, portfolio company and management company perspective.
Even in situations where Pillar Two will not result in additional tax being paid, it is important for firms to establish who is responsible for any compliance and reporting obligations.
If situations arise where independent portfolio companies are treated as a being part of the same MNE Group, issues around data access will become particularly important.
From a practical standpoint, SWFs with master holding company structures (or other structures that result in Pillar Two applying to an aggregation of portfolio companies that have historically operated independently) raises the question of who within the multinational enterprise (“MNE”) group will be responsible for performing the Pillar Two calculations and completing the relevant returns.
The design of Pillar Two means that the person responsible needs access to financial information for every constituent entity in the MNE Group and thus, it is unlikely that responsibility can be delegated to the portfolio companies, without significant support from the SWF.
Principal, Washington National Tax, International Tax
KPMG in the US
Managing Director, US Tax Services (London)
KPMG in the US