The OECD’s Global Anti-Base Erosion Rules – commonly known more simply as ‘Pillar Two’ rules – have been described as the most significant international treaty on taxation in more than a century.
Introduced in 2023, Pillar Two established a global base rate for the effective corporation tax paid by large multinational enterprises. With 137 nations agreeing to a minimum 15% rate for corporations with a turnover of more than $750m, the aim is to discourage the practice of ‘profit shifting’, or moving the accounting of profits from high-tax to low-tax countries in order to reduce tax liabilities.
The Pillar Two regime operates via a series of ‘top up’ mechanisms which apply if the tax paid by an enterprise in any participating country it operates in falls below 15% of qualifying profits. This is calculated across an entire multinational group, taking in profits from all subsidiaries operating in all participating jurisdictions.
The mechanisms are as follows:
Income Inclusion Rule (IIR)
The primary Pillar Two mechanism states that, if the tax paid by every company in a group totals less than 15% of the group’s overall profits, the parent company must pay a top-up to reach the 15% floor in the country it is registered in.
Qualified Domestic Minimum Top-up Tax (QDMTT)
This mechanism allows individual countries to introduce a top-up tax regime domestically and apply it to subsidiaries operating in their own country to bring the effective rate of tax paid up to 15%. This is relevant to countries like Ireland where the main rate of corporation tax is below the Pillar Two base rate. And it is also a way for individual jurisdictions to secure tax receipts, rather than see top-ups paid in another country where a parent organisation is registered.
Undertaxed Profits Rule (UTPR)
Finally, UTPR is intended to serve as a backstop to situations where neither the IIR nor the QDMTT apply (so in the latter case, where there is no domestic top-up regime in place). An example of this would be where otherwise permitted deductions on foreign earnings in certain jurisdictions lead to overall liabilities for a multinational group falling below 15%. It’s a failsafe against some of the most sophisticated ways multinationals can leverage local tax rules in highly complex international structures specifically to reduce tax.
The way that these mechanisms relate to one another, including the hierarchy of who pays any top-ups due and where makes for a dense and complex set of regulations. There have been long been concerns raised about the burden placed on organisations first of all to understand the implications of the new rules and then to meet the necessary reporting requirements.
In our next blog, we examine how the OECD has sought to address these concerns by introducing a series of ‘safe harbours’ into Pillar Two. In the meantime, contact our Global Mobility tax specialists to find out more about the tax planning implications on your business.
