After years of negotiations at OECD level, legal regulations to ensure a global minimum tax (known as "GloBE or Pillar Two Rules") are expected to enter into effect from December 31, 2023. This is all the more likely after the European Commission, following publication of the OECD Model Rules for Global Minimum Tax on December 20, 2021, published a draft directive on the implementation of the principles developed by the OECD at European level and a commentary on the Pillar Two Model Rules in March 2022.
Pillar Two is a revolutionary tax system that will apply with uniform effect worldwide. It is designed to ensure that multinational enterprises pay a minimum tax of 15 % on the local income arising in each jurisdiction where they operate.
Global minimum taxation affects multinational enterprises with a minimum turnover of EUR 750 million. According to OECD estimates, this means that around 8.000 enterprises worldwide (including around 800 in Germany) will be subject to this tax. The intention of Pillar Two is to ensure that the income of enterprises arising in the countries in which they operate is taxed at an effective rate of at least 15 % through the levying of a "top-up tax".
Not all details of the Pillar Two rules have been fully clarified. Nevertheless, it is already clear that the forthcoming introduction of a global minimum tax will revolutionise international tax law and international tax competition.
The rules on global minimum tax are highly complex and it is already apparent that the corresponding tax compliance/accounting effort - as well as the time needed for this - will be immense. A comprehensive "Top-up Tax Information Return" must be filed for each company and permanent establishment to be included, and significant penalties may be imposed for a late or omitted submission. For the companies affected by this, the question now arises as to what potential impact the national implementation of Pillar Two rules will have on their internal processes and how future compliance can be ensured. This applies not least to central (IT) issues relating to information and data acquisition, data structuring and data analysis in order to be able to guarantee compliance to the new rules and the corresponding reporting by 2024 at the latest.
*The new compromise of the French presidency of the EU Council proposes to postpone the deadline for incorporation of the directive into national law to Dec. 31, 2023, and initial application of the rules from 2024.
In this respect, it is clear that by delaying Pillar Two's entry into effect by one year from the originally scheduled date of January 1, 2023 to December 31, 2023 (go live is scheduled for January 1, 2024), the companies affected by it will be given the much-needed time to adapt their internal processes.
Levying of the top-up tax will either take place at "Ultimate Parent Entity" (UPE) level, i.e. the parent company of the group, or in the country in which the companies are taxed at a lower rate (domestic top-up tax). In five application steps and on a country-by-country basis, the aim is to ensure that an effective minimum tax rate of 15 % applies in each jurisdiction in which one or more group companies and/or permanent establishments operate.
The first step is to identify the constituent entities of the group that are subject to Pillar Two and their role in respect of this minimum taxation (e.g. UPE, Partially owned Parent Entity (PoPE), Intermediate Parent Entity (IPE), Minority owned Parent Entity, permanent establishment, transparent company, joint venture, etc.). Subsequently, the qualifying income or loss is to be determined for each constituent entity based on the year-end result in accordance with the consolidated accounting standard, taking into account any adjustments required under Pillar Two rules. Thirdly, the covered taxes of each constituent entity are calculated, also taking into account any specific adjustments (especially deferred taxes). The next step is to calculate the effective tax rate (ETR) per jurisdiction by dividing the sum of the adjusted covered taxes of all constituent entities by the sum of the qualifying income of all constituent entities per jurisdiction. Finally, the jurisdiction's ETR is compared with the minimum tax rate of 15 % and the top-up tax is calculated, which then ensures a minimum taxation of 15 %. The substance-based income exclusion must be taken into account when calculating the top-up tax, which will reduce the low-taxed income accordingly.
Global minimum taxation will pose significant challenges to corporate groups due to the extensive data requirements (for the individual companies/permanent establishments and countries) as well as the complex rules for determining the ETR and the special rules for transparent companies, permanent establishments, joint ventures, Partially owned Parent Entities, restructurings, M&A transactions, etc.
The way in which the Pillar Two rules are to be implemented depends on the individual organisation, the processes, the data sources, the data consistency as well as the IT landscape of the respective company. Our interdisciplinary team of tax, accounting, data, process and IT experts will be happy to help you acquire a detailed understanding of the Pillar Two rules, analyse the impact on your company and work with you to develop a customised approach to ensure your company's future compliance to Pillar Two. We guide you through the following steps:
As a first step, we will meet with you to discuss the areas of your company that will be affected by Pillar Two. As well as creating a project schedule, we will support you in planning the project team and with internal decision-making. In this respect, an initial high-level impact analysis can help make the Pillar Two issue more "accessible".
Key features of our specialist support are determining the companies to be included, the qualifying income or loss, the adjusted covered taxes and the substance-based income exclusion of each entity to be included. The application of any special rules, e.g. for investment entities, also plays an important role in this respect. In addition, an analysis of data sources is a key factor in determining the taxation basis. Specialist support should, among other things, provide information as to whether and which information is missing for the Pillar Two tax bases or whether, for example, existing information needs to be more detailed.
As Pillar Two rules come with strict compliance requirements, we provide support with the creation and implementation of a compliance process as well as the definition of data sources, data flows and reporting channels. Working together with you, we will adapt existing (reporting) processes or introduce new ones, adapt the IT landscape and define the Pillar Two responsibilities to ensure an optimal integration of Pillar Two into the organisation, the Tax CMS as well as into any of your company's tax planning, restructuring and M&A projects.
We will support you in selecting, customising and implementing a tool that can, as far as possible, automatically calculate the qualified income, covered taxes, substance-based income exclusion, ETR and top-up tax using data from the ERP system. This enables both an IT-based completion of tax disclosure obligations (submission of Top-Up Tax Information Return per applicable unit) and a complete documentation of the compliance process as well as the modelling of tax burden effects. With respect to the tools, there are multiple options available (for example, SAP PaPM, SAP Analytics Cloud or AMANA GTC). We will support you in selecting and implementing the optimum IT tool for your requirements.
Corporations are part of our DNA. Thanks to our unique business partnering model, in which we take over complete or partial group tax management, we are more familiar with group tax structures than any other company. We have pioneered and established one of the most innovative tax advisory concepts on the market. We apply this special expertise when advising on the subject of Pillar Two and support our clients with a unique managed service concept. This means that we offer an integrated Pillar Two advisory package, which ranges from planning and control to implementation - for both German companies as well as for businesses with registered office outside Germany. In the latter case, we manage the projects in very close cooperation with our partner companies of WTS Global.
Through our worldwide WTS Global network, which is managed from Germany, we are able to smoothly coordinate Pillar Two policies with local entities in coordination with our partner companies in over 100 countries. All member companies of WTS Global deliberately refrain from carrying out auditing services. This way, we can rule out any conflicts with the Financial Market Integrity Strengthening Act (FISG). The member companies of WTS Global focus exclusively on tax advisory services. With respect to the implementation of the highly complex and drastic Pillar Two regulations for the companies concerned, it is not least a long-standing client relationship that provides a certain degree of security.
We look forward to hearing from you so that we can answer any questions you may have, explain our consulting approach in detail, and work with you to develop a customised approach for your business.
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