What Are Pillar Two’s Immediate Provision and Disclosure Requirements?
Pillar Two disclosures will soon be required for impacted groups’ financial statements, often for the current accounting period. Understanding your disclosure requirements is crucial for preparing for future tax audits, which will include a Pillar Two component. To get a better understanding of the financial statement disclosures required, our specialist team is here to help you.
You should also prepare a robust Pillar Two balance sheet for deferred taxes. This will help build your documentation to support disclosed and undisclosed attributes for future use. Documentation at this stage is vital for understanding the Pillar Two implications of arrangements, transactions, and attributes.
Pillar Two Compliance Roadmap: 7 steps approach
- Determination of scope
- Exemptions
- Safe harbours
- Data gathering
- Calculation and documentation
- Where is the top-up tax imposed?
- Filing return(s)
Exceptions to the Scope: Excluded Entities
Pillar Two rules include several exceptions. Regarding the scope, exceptions apply to certain government bodies, non-profit organisations, pension funds, and (under certain conditions) investment funds and real estate investment vehicles.
Safe Harbour Analysis
If you haven't already started, now is the time to assess whether your business can potentially avail of any temporary or permanent safe harbours. Accessing a safe harbour can significantly simplify your overall Pillar Two compliance burden and reporting requirements. The available safe harbours include:
- Temporary Safe Harbour Rules
- Permanent Safe Harbour Rules
Temporary Safe Harbour Rules for Pillar Two
Temporary safe harbour rules allow businesses within the scope of Pillar Two to avoid detailed computations and potentially be exempt from top-up taxes. This exemption applies to fiscal years starting before December 31, 2026, but not ending after June 30, 2028. For calendar year-end groups, the rules end on December 31, 2026.
To benefit, in-scope groups must have qualified country-by-country reporting (CbCR) and financial accounting data. This means that CbCR is prepared in line with the domestic and OECD Guidance on Pillar Two. Some amendments may be necessary for the current CbCR to become a qualified CbCR. Given the potential of the temporary CbCR safe harbours to reduce top-up taxes, we anticipate increased audits from tax authorities regarding CbCR.
If the information in the CbCR is incorrect, there is a risk that the entire CbCR could be disqualified for calculating the temporary safe harbour rules, not just the jurisdiction with incorrect information. The burden of proof for the application of safe harbour rules falls on the business. Therefore, businesses should not only prepare and file a robust information return but also provide supporting documentation that demonstrates the correct application of safe harbour rules.
Once the CbCR data have been properly reviewed, the transitional CbCR safe harbour may apply if at least one of the following tests is met:
De Minimis Test:
Jurisdiction with:
- Total CbCR Revenue < EUR 10m, and
- CbCR Profit (Loss) before Income tax < EUR 1m for the Financial Year
Effective Tax Rate Test:
Simplified ETR ≥ the Transition Rate in the jurisdiction for the Financial Year (FY).
Transition Rates:
- 15% for FY beginning in 2023 & 2024
- 16% for FY beginning in 2025
- 17% for FY beginning in 2026
Routine Profits Test
CbCR Profit (Loss) before corporate income tax ≤ to the Substance-based Income Exclusion amount as calculated under Pillar Two Rules.
Permanent Safe Harbour Rules – The Qualifying Domestic Minimum Tax
The QDMTT safe harbour generally applies to electing businesses for a particular jurisdiction if that jurisdiction has a Domestic Minimum Tax Top-up (DMTT) considered acceptable by the OECD/G20 Inclusive Framework. This means the DMTT must be consistent with the model rules and OECD commentary, applied using an acceptable accounting standard, and administered acceptably.
When the QDMTT safe harbour applies to an MNE group for a jurisdiction, the top-up tax for the group entities in that jurisdiction is deemed to be nil. This safe harbour eliminates the need for an MNE group to undertake a detailed second calculation of top-up tax under the Pillar Two rules.
Implications on Transactions
Every transaction, arrangement, acquisition, divestment, or merger will need to be reviewed from a Pillar Two perspective to avoid unintended tax consequences. This necessitates new procedures and controls for your finance and tax teams to ensure risks are identified. Tax due diligence must adopt a Pillar Two perspective. Financing or refinancing should be carefully considered in terms of the location and effective tax rates of intra-group lenders and borrowers. Ensuring that pricing arrangements align with the arm’s length principle is crucial.
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