As per our previous publications and alerts, we had the opportunity to communicate a significant development - the introduction of BEPS 2.0 Pillar Two or Global Minimum Tax. The European Union unanimously adopted a directive in December 2022 (the ''Minimum Tax Directive'').
Currently, the tax community is focusing on Pillar Two and it is on top of the agenda and minds of tax directors, advisors and tax authorities as they discuss and elaborate on the technicalities.
Even though Cyprus has not yet transposed the rules into the domestic legislation, it is expected to enact the new legislation in the next couple of weeks with a retroactive effect as of 31 December 2023.
The elements of Pillar Two rules
The Minimum Tax Directive provides a common framework for Member States to implement the Global Anti-Base Erosion (GloBE) Model Rules into their national laws, as agreed by the OECD/G20 as part of BEPS 2.0 project ''Addressing the Tax Challenges of the Digitalisation of the Economy''.
In principle, the Pillar Two rules provide a coordinated system of interlocking rules which are designed to ensure that large multinational and domestic groups pay at least 15% effective minimum tax in every jurisdiction in which they operate.
Such interlocking rules include:
1. the Income Inclusion Rule (IIR),
2. a Qualified Domestic Minimum top up tax (QDMTT) as well as
3. the Undertaxed Profits Rule (UTPR)
Since December 2022, the OECD/G20 Inclusive Framework (IF) on BEPS has released a series of documents in the form of administrative guidance that focus on clarifying the Pillar Two rules. What is relevant to note is that in November 2023, the EU Council issued a statement effectively adopting the administrative guidance issued by the Inclusive Framework in December 2022, February 2023, and July 2023, including the Safe Harbours, confirming that such guidance is compatible with the Minimum Tax Directive. The Council also reiterated the need for Member States to remain consistent with the afore-mentioned guidance when transposing the Minimum Tax Directive.
Challenges faced by MNE groups and large-scale domestic groups
Quoting from the preamble of the Directive, ''For an efficient application of the system, it is crucial that procedures are coordinated at a group level. It will be necessary to operate a system ensuring the unobstructed flow of information within the MNE group and towards tax administrations where constituent entities are located.''
The effectiveness and fairness of the global minimum tax reform heavily relies on its worldwide implementation and the compliance of multinationals with their relevant obligations. However, outside of the EU, Pillar Two is not mandatory but rather takes the form of an optional common approach. It is interesting to note that besides the adoption of Pillar Two in the EU, there is little to no activity in Africa and Americas. For example, the US is yet to introduce Pillar Two. In addition, in Asia-Pacific, there is a first implementation wave of jurisdictions adopting Pillar Two rules but with different policy decisions (e.g., some countries, such as Japan, are only adopting IIR). Moreover, there are certain countries that decided to postpone the implementation to 2025. Finally, Switzerland has decided to adopt only QDMTT for the time being. Inevitably, the inconsistent adoption of the rules increases complexity and makes tax compliance harder.
Apart from the tax challenges faced by multinational enterprises (MNEs) and large-scale domestic groups in light of the staggered implementation and the need to monitor the Pillar Two developments in relevant jurisdictions (as mentioned in the previous paragraph), in-scope groups are also required to deal with the administrative aspects associated with the application of the rules and their design.
Pillar Two involves a sequence of reporting procedures such as:
• Multi-year forecasting to support financial planning and analysis (FP&A) and budgeting (i.e., forecasted cash tax and effective tax rate (ETR) impacts of the new minimum taxes)
• Estimated annual ETR
• Minimum tax estimated payments to the various jurisdictions
• Year-end tax provisions
• Country-by-country reporting
• Minimum tax information reporting and tax compliance filings
Technology is a key enabler for Pillar Two readiness
Technology is a key enabler that can empower MNEs and large-scale domestic groups to address the data challenges posed by BEPS 2.0 Pillar Two.
No doubt that in-scope groups are required to navigate through the complexities of Pillar Two heavy compliance and reporting demands. Impacted multinationals are making a coordinated enterprise-wide effort to holistically address the Pillar Two compliance requirements by increasing the capacity of their tax function and by redesigning their IT systems in such a way that enables them to respond to the data challenges posed by Pillar Two through automated processes.
The new approach of data gathering and processing is a matter of business strategy concerning C-suite leadership as the digitization and automation play crucial role as compliance with Pillar Two through manual massive-in-size data gathering, consolidation and reconciliation would be extremely complex and could include data gaps which could give rise to penalties and tax leakages.
Even though structured data can be extracted from established accounting or enterprise resource planning systems, such information is sourced from different datasets such as business unit forecasts, legal entity forecasts, and actual full-year financial results. Challenges arise in evaluating the availability, quality, completeness and accuracy of such data and in organizing such in a headquarters-driven project through solutions which consolidate the data into an overall system that is appropriately designed to respond to the rules of Pillar Two. The solutions should enable the users in interpreting the information and exposures, take informed decisions in tackling those and ultimately enable the tax provisioning and administration.
In-scope groups are recognizing the need to evaluate the data analytic requirements of Pillar Two and consider leveraging their existing systems or design new data collection and processing systems which can respond adequately to the new reality. The deployment and testing of solutions and their implementation can either be undertaken in-house or be outsourced to service providers, so that the solution can effectively and efficiently extract data and align such with the relevant computations and develop relevant analytics.
What’s more to data processing and tax provisions is that a crucial opportunity is presented to MNEs and large-scale domestic groups to showcase the value of data collected to influence strategic decisions and shape their corporate strategy using, for example, valued data for other strategic decisions related to environmental, social and governance or sustainability reporting (ESG).
EY Globe Engine (Saas)
EY has a long and strong experience with software as a service (‘SaaS’) solutions for our clients. Examples of such solutions include:
• FIRST, our AEOI (Automatic Exchange of Information) reporting solution
• MDR (Mandatory Disclosure Rules) Web
• GVRT (Global VAT Reporting Tool)
EY, having performed several Pillar Two impact assessments assisting our clients with understanding the impact of Pillar Two as well as their readiness to comply with the new regime, has further developed the EY GloBE Engine for Pillar Two compliance. The EY GloBE Engine is web-based solution that enables companies to perform the calculations necessary (including transitional safe harbor analysis), to support provisions in their accounts and generate their GloBE information returns.
The GloBE solution is scalable and customisable to be adapted to our clients’ operating model needs. The output of our solution can be fed into existing processes and software solutions while Application Programming Interface (API) capabilities can be offered as a customisation item. The GloBE Engine solution provides comprehensive support from data collection, reporting and tax filing, to tax provisions and compliance support.
Eleni Papachristodoulou
Director, International Tax and Transaction Services
Elena Christodoulou
Assistant Manager, International Tax and Transaction Services
