In our previous article Pillar Two 101: Getting to Grips with the New Global Tax Regime, we introduced some of the key features of the OECD’s international tax treaty aimed at limiting profit shifting by multinational companies to limit tax liabilities.
The so-called Pillar Two rules set a minimum 15% base rate for corporation tax for large multinational enterprises with revenues over $750m.
To handle the complex structures of many large corporations and the fact that revenues, profits and taxation are often spread across many subsidiary entities operating in different countries, the OECD devised a system of ‘top-up’ mechanisms to a) calculate tax liabilities across an enterprise as a whole and b) create a means of bringing total liabilities up to the 15% floor should they fall short.
As is always the case with matters of taxation, the devil is in the detail when it comes to understanding Pillar Two rules and their implications. Aside from building global consensus, the biggest challenge facing the scheme has always been the colossal task of administration. In short, the regime creates significant new reporting and accounting requirements. Corporations and governments alike have long raised concerns over the resource and cost implications, the timescales for implementation, and the compliance ramifications.
As part of the negotiations ahead of countries agreeing to the treaty, the OECD made a number of concessions to these concerns. Specifically, it built a series of ‘safe harbours’ into its plans – permitted ways to simplify the financial disclosures required under the Pillar Two scheme. These safe harbours are:
- The Country-by-Country Reporting (CbCR) Safe Harbour, which allows enterprises to assume zero liability for top up on a per country basis as long as financial data from each country meets one of three criteria;
- The Undertaxed Profit Rule (UTPR) Safe Harbour, which delays consideration of the ‘backstop’ UTPR mechanism;
- The Qualified Domestic Minimum Top-Up Tax (QDMTT) Safe Harbour, which avoids the need for organisations to account separately for overall liabilities on a per country basis under the Pillar Two regime and for local top-up liabilities in situations where a country has implemented its own domestic top-up tax under the QDMTT rules.
Each of these protocols serves to reduce the administrative burden of complying with Pillar Two rules. However, only the QDMTT safe harbour is a permanent fixture in the regulations. The CbCR safe harbour is available until 2026, and the UTPR safe harbour is only in place for one year. They are therefore transitional arrangements intended to give businesses time to adjust to the ‘full fat’ obligations.
In Ireland, Pillar Two regulations became active under law on 31st December 2023, meaning that disclosure arrangements will apply to all financial periods which commenced after that date. That means multinationals based in or with subsidiaries operating in Ireland can make use of the CbCR safe harbour up to and including accounting periods starting after 31st December 2025 but before 31st December 2026, and the UTPR won’t apply until after 31st December 2024.
While that does create valuable headroom for transition, we would advise all affected entities to act without delay in planning their route to full compliance by 2027. Regardless of the safe harbours, there is still a considerable amount of complexity to get to grips with, and a lot of work required to ensure full, watertight compliance in less than three years. Specific issues to pay attention include:
- Understanding the potential barriers and risks posed by your corporate structure to achieving full compliance, or throwing up any unintended tax consequences;
- Understanding the different accounting standards that may apply to different mechanisms (e.g. global vs domestic top-up regimes) and safe harbours;
- The potential tax consequences under Pillar Two rules of mergers, acquisitions and disposals going forward.
For these reasons, we would strongly recommend undertaking a full audit of your accounts, financial structure and tax position under the lens of Pillar Two, so you can get a clear view of next steps in plenty of time for implementation.
For further advice and guidance, contact our Global Mobility tax team.
