WHAT IS THE PURPOSE OF THE PILLAR 2 RULES?

The objective of the Organization for Economic Co-operation and Development (OECD) Inclusive Framework project is to ensure that multinational enterprise groups pay a minimum level of tax on income from each jurisdiction in which they operate. This minimum level of taxation is set at 15%.

IF MOST COUNTRIES HAVE CORPORATE TAX RATES ABOVE 20%, WHY IS THE MINIMUM TAX SET AT 15%?

A large portion of corporate profits is subject to an effective tax rate (ETR) of less than 15%, despite the fact that the home jurisdiction of some multinational groups imposes corporate tax at a much higher rate. In addition, the OECD Inclusive Framework includes jurisdictions with corporate tax rates below 15%.

WHAT ARE IN-SCOPE ENTITIES?

Your group is considered an in-scope entity if:

1. It has companies or permanent establishments (PEs) in more than one jurisdiction, and
2. It has achieved an annual turnover of 750 million euros (or more) in the consolidated accounts for at least two of the four financial years preceding the year tested.

With regard to EU territory, please note that the European Commission has just proposed a directive to extend the scope of the Pillar 2 rules to national groups (that is to sayto groups that do not meet the first requirement above but reach the threshold of €750 million).

IF MY GROUP IS IN SCOPE, WHAT DO I NEED TO DO TO BE PREPARED FOR PILLAR 2?

1. Calculate your group’s ETR on a jurisdictional basis
2. Calculate the additional tax (that is to saythe amount due to achieve a 15% ETR in each jurisdiction)
3. Identify the entity liable for the additional tax. Typically this should be the top parent company of the group, but in some cases a collateral rule applies and the subsidiaries are liable for the additional tax.

Simplified modeling can be run to get a general idea of ​​the impact and consider any restructuring accordingly.

MY GROUP IS BASED IN THE USA AND IS SUBJECT TO GILTI RULES. DOES PILLAR 2 ALSO APPLY IN THIS CASE?

Yes, pillar 2 also applies in this case. From a technical point of view, the coexistence between Pillar 2 and the Global Low-Tax Income Rules (GILTI) has not yet been determined, although the OECD stands ready to ensure smooth coordination and fair competition. To date, the GILTI rules may not be considered fully compliant with the Pillar 2 rules as they do not provide for country-by-country application of the GILTI regime.

WHAT ARE THE NEXT STEPS?

In the first quarter of 2022, the OECD is expected to publish a commentary on the model Pillar 2 rules, providing further details on the application of Pillar 2. As of today, the first application of the Pillar 2 rules is set for year 2023. However, the implementation of the 15% minimum taxation rules at the national level of each State is required and this may well cause a delay.

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