Pillar Two – where are you in your compliance journey?

The implementation of the Organization for Economic Cooperation and Development (OECD)’s Pillar Two introduces complex challenges for Multinational (MNE) groups with consolidated revenue over €750m. Read our high-level overview of the Pillar Two rules here.

As MNE Groups tackle the magnitude and complexity of the OECDs Pillar Two rules, addressing the reporting and compliance obligations under Pillar Two represents a substantial challenge for most qualifying businesses. It is important that Groups adapt systems, technology, processes, governance and controls to meet evolving data requirements to ensure they remain fully compliant with the significant Pillar Two compliance obligations.

With significant Pillar Two experience, and a team of tax, accounting and technology specialists, we can support you and your business in its Pillar Two journey by applying a practical approach to understanding the specific risk to your business from a Pillar Two perspective, engaging with stakeholders and building a robust reporting process. 

Phase 1: initial assessment  

The first step on your Pillar Two journey is to understand the Pillar Two consolidation rules, and identification and classification of the relevant Group Entities for Pillar Two purposes.

Purpose - some of the complex technical issues to navigate include:

• Consolidation rules and the application of the Pillar Two Revenue Threshold Test.
• Identification of the UPE, Constituent Entities, and ‘Excluded’ entities.
• Complex ownership structures, including private equity or investment funds or large private companies, will require additional consideration to understand the scope of the Pillar Two rules.

Benefits - this will ensure Groups have a clear understanding of the application of the Pillar Two rules, including:

• Identifying key risk issues, and ensuring stakeholders are made fully aware of obligations arising early in the Pillar Two journey.
• Identifying areas of uncertainty around Pillar Two rules or their expected application.
• Confirmation of where additional confidence / robustness required from current processes.

Phase 2: modelling exercise / transitional safe harbour analysis

Phase 2 involves leveraging the Group’s Country-by-Country Report (CbCR) data to create an impact modelling exercise for your business, allowing the Business to assess the potential impact of Pillar Two and the availability of Transitional Safe Harbours.

The transitional safe harbours are an important concept under the Pillar Two rules and have been designed to ease the administrative burden of in-scope MNE Groups by excluding a group’s operations in lower-risk jurisdictions from the GloBE calculations for a transitional period. Therefore, an assessment of the availability of the Pillar Two Transitional Safe Harbours, and the jurisdictions where a top-up tax might apply, is a vital step in an MNE Groups Pillar Two journey. 
 

Purpose - A Pillar Two modelling exercise will allow MNE Groups to confirm the quality of CbCR data, availability of transitional safe harbours, and estimate any top-up tax liabilities:

• Analysis of CbCR data to (i) assess if it is “qualified”, and (ii) test the availability of the transitional safe harbours.
• For jurisdictions without safe harbours, an estimation of the jurisdictional Effective tax rate (ETR).
• Mapping of reporting requirements, including identification of IIR, QDTT, and UTPR risks.

Benefits - This step will enable Groups to:

• Identify availability of safe harbours, allowing focus on compliance in other jurisdictions.
• Quantification of estimated top-up tax and location.
• Information to allow discussions and raise awareness with key stakeholders.
• Proactive engagement with auditors around reporting in financial statements. 

Phase 3: data collection

As MNE Groups will have a variety of data sources, owned by a diverse group of stakeholders, the assessment, collection and management of the data for the purpose of Pillar Two Compliance presents a complex challenge for taxpayers, and every company will be unique in the challenges faced in relation to data collection.

Accordingly, there is no one-size-fits-all solution that can address the Pillar Two challenges and complexities, and therefore, taxpayers will need to take a holistic approach to determine how data will be sourced, processed, calculated, and reported for Pillar Two compliance. Early cross-functional engagement is critical to ensure that you have the appropriate data and your system owners are aware of what will be required of them for Pillar Two.  
 

Purpose 

We can help you develop a data strategy that can help you sustain reporting and compliance requirements;

• Mapping the data to systems and sources. 
• Assessing the detailed data requirements for the full GloBE Information Return (GIR), and any local QDTT filings.
• Preparation of an initial risk register to identify issues and build confidence in data quality.
• Defining a data upload process and implementing across borders.
   

Benefits

• Test GloBE return calculations and perform sensitivity analysis.
• Agree approach to complex tax / structuring elements of the test GloBE return.
• Identify key stakeholders and implement a governance process.
   

Phase 4: reporting obligations

The Pillar Two Compliance requirements, and notification / registration filing deadlines, will need to be considered across all relevant jurisdictions. 
 

Purpose 

• Coordination of Global filing requirements – registrations, notifications, GIR filing obligations, local filing obligations.
• Oversight and coordination of appropriate disclosures in financial reporting and tax computations.
• Selection and management of appropriate reporting software / data management software.
   

Benefits

• Clear mapping out the relevant filing obligations.  
• Identification of stakeholders within business that will require support with other Pillar Two obligations, and ensuring a consistent approach to those disclosures.

Phase 5: ongoing process enhancements

Pillar Two is likely to evolve and change over time as legislation is enacted across jurisdictions, and relevant stakeholders, including taxpayers and tax authorities come to grips with the rules.

Therefore, businesses should continuously monitor and keep abreast of changes to Pillar Two legislation, and continue to monitor internal Pillar Two compliance processes, to ensure that the Group can easily navigate changes or disruptions to remain fully compliant with the Pillar Two rules.