Pillar Two - Global Minimum Tax

With the decision of the EU directive on the global minimum taxation, all EU member states must transpose the "Pillar Two" rules into national law by the end of 2023. The rules, some of which are very complex, require an in-depth examination in order to apply them correctly, to determine the necessary data and to calculate the applicable tax - the so-called "top-up tax".

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:

How do the Pillar Two rules work?

Within Pillar Two projects, one of the biggest challenges is the knowledge of the Pillar Two rules by both the tax and accounting departments - either at the beginning of the project or when rolling out the project.

Top-up tax can be levied either at the level of the so-called "Ultimate Parent Entity" (UPE), i.e. the parent company of the group, or in the country of the companies that are effectively low-taxed (so-called Domestic Top-Up Tax).

In five application steps and through a country-by-country approach, it is to be ensured that an effective minimum taxation of 15% is achieved in each jurisdiction in which one or more group companies and / or permanent establishments are located.

1. The first step is to identify the constituent entities of the group covered by Pillar Two and their role in the minimum taxation (e.g. UPE, Partially owned Parent Entity (PoPE), Intermediated Parent Entity (IPE), Minority owned Parent Entity, Permanent Establishment, Transparent Company, Joint Venture, etc.).
2. The qualifying income or loss for each constituent entity is then determined based on the profit or loss for the year in accordance with the consolidated accounting standard, making Pillar Two-specific adjustments.
3. In the third step, the "covered taxes" of each constituent entity are determined, also by making certain adjustments (in particular taking into account deferred taxes). In the next step, the effective tax rate (ETR) per jurisdiction is calculated by setting the sum of the adjusted covered taxes of all constituent entities in relation to the sum of the qualifying income of all constituent entities for each jurisdiction.
4. The jurisdiction's ETR is then compared with the minimum tax rate of 15% and the top-up tax is calculated, which ensures the minimum tax rate of 15%.
5. When determining the top-up tax, the so-called substance-based income exclusion must be taken into account, which reduces the low-taxed income accordingly.

Digital implementation of Pillar Two 

We support you in the selection, customisation and implementation of a Pillar Two IT solution that ensures the implementation of all Pillar Two rules in an efficient and flexible manner. The automated data delivery using interfaces to relevant pre-systems as well as the relevant Pillar Two calculations based on this can also be carried out automatically: from the calculation of GloBE Income, Covered Taxes and Substance Based Income Exclusion to the calculation of the Effective Tax Rate and Top-up Tax - all in accordance with the Pillar Two rules.

The fulfilment of all compliance requirements and declaration obligations (filing of the Top-up Tax Information Return for each affected entity) are also possible.

IT solutions currently available on the market include:

• SAP PaPM/Fiori/BW
• AMANA GTC
• CCH Tagetik Global Minimum Tax
• DefTax

For more information, we refer you to our  Whitepaper, which discusses in detail the requirements and functions, but also possible challenges in implementing a good Pillar Two IT solution. It also explains how our SAP-based WTS Pillar Two IT solution enables automated end-to-end calculation in order to successfully master the new and complex Pillar Two regulations.

Are there any simplifications?

Yes, on 20 December 2022, the OECD published three important papers on global minimum taxation. Of outstanding importance for German corporate practice is the Transitional CbCR Safe Harbour, which represents a simplification of the application of the GloBE Model Rules and will come into effect in the introductory phase of Pillar Two. The simplification rules will also find their way into German law via a dynamic reference in the Pillar Two EU Directive to the OECD Safe Harbours.

For the calculation of the Transitional CbCR Safe Harbour we have developed our own calculation tool - the WTS Transitional CbCR Safe Harbour Tool and Dashboard.

For an initial analysis, we only need the latest available CbCR in Excel with a little additional information from the financial statements.

Our service:

Performing an indicative Transitional CbCR Safe Harbour calculation for the 2021 financial year per jurisdiction:

•     De Minimis Test
•     Simplified ETR Test
•     Routine Profits Test
•     Pre- and post-test

Our indicative calculation is based on simplifications and assumptions, which we will explain to you in detail during a pre- and post-test discussion.

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General Timeline*

How we can support your business

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.

Tax Advisory / Project Planning and Specialist Support

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.

Tax Accounting / Tax Compliance - Processual Implementation

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.

Our Managed Service Concept for Pillar Two 

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. 

In cooperation with WTS Global, we manage Pillar Two worldwide

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.