Pillar Two – the OECD measures and their impact for Ireland 

The Global Base Erosion rules (GloBE rules) have been developed as part of the solution for addressing the tax challenges of the digital economy and are designed to ensure large multinational enterprises (MNE’s) pays a minimum level of tax of 15% on the income arising in each jurisdiction where they operate by a system of top-up taxes.

Ireland has transposed the EU Pillar Two Directive into national legislation with the rules to be applicable for fiscal years commencing on or after 31 December 2023. 

Ireland’s implementation of the Pillar Two rules will significantly impact how large businesses calculate  and pay corporate taxes in Ireland and abroad. 

Scope, who do the rules apply to?

All MNE groups that are within scope of the rules should consider the application of the rules as soon as possible. While the first return is not due until 18 months after the first financial period within scope, there are certain items which should be considered, which include, among others, the following:

• MNE Groups are in scope if the revenue in the  Consolidated Financial Statements as prepared in accordance with an acceptable Financial Accounting Standard of the Ultimate Parent Entity ("UPE") exceeds €750m, in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year.
• A "UPE" is an Entity that owns, directly or indirectly, a controlling interest in any other Entity and that is not owned, directly or indirectly, by another entity with a controlling interest or a UPE is a main entity of a group that is within an MNE.
• A “Constituent Entity” is any Entity that is included in a Group, and any Permanent Establishment ("PE") where the net income or loss of that PE is included in an Entity’s financial statements. 
• A PE that is a Constituent Entity above shall be treated as separate from the Entity that includes the net income or loss in their financial statements and is treated separate from any other PEs of that Entity.
  Certain entities are "excluded entities" for the purpose of the rules, which include, among others, a Government Entity, an international organisation, a non-profit organisation, a pension fund and an investment fund that is an UPE.
   

Calculation

Ireland will continue to retain the 12.5% statutory corporate tax rate for Irish trading constituent entities above and below the €750m threshold for Pillar Two from 2024, however a new Pillar Two Calculation will be required to ensure all Irish constituent entities within scope of the Pillar Two rules pay the minimum level of tax required under the new rules. 

• The Pillar Two calculation is based on the ETR of a constituent entity, which requires (i) a computation of a new tax base (GloBE income) for each constituent entity in the group, based on accounting profits as included in the financial statements of the constituent entity, with a series of adjustments for book to Pillar Two differences, and also (ii) a calculation of the adjusted covered taxes based on the total tax charge (current and deferred tax) in the financial statements, with specific adjustments.
• The main charging provisions for Pilar Two Purposes are as follows; 
  • Income Inclusion  Rule (“IIR”) - being the primary taxing mechanism which Imposes Top-up Tax on the Ultimate Parent Entity (UPE) with respect to the low-taxed income of a Constituent Entity, and 
  • Undertaxed Profit Rule (“UTPR”) - Entities in a UTPR jurisdiction pay residual Top-up Tax with respect to the low-taxed income of a Constituent Entity by disallowing deductions or other similar mechanisms
  • Qualifying Domestic Top-Up Tax ("QDTT") - Ireland has introduced a QDTT which allows Ireland to claim the primary taxing rights over GloBE excess profits of low-taxed constituent entities located in that jurisdiction.  

Safe harbours

A number of Safe Harbours have been introduced in the Irish rules, which aligns to the model rules, to help ease the transition in terms of the  increased compliance for MNE Groups within the scope of Pillar Two;

QDMTT Safe Harbour

• Distinct from the QDTT is the QDMTT safe harbour, with the simplification regime operating by setting the top-up tax to zero for a jurisdiction when a MNE group qualifies for safe harbour in that jurisdiction. The Irish QDTT regime is intended to comply with the safe harbour requirements.   
   

Transitional Safe Harbours

• The transitional safe harbours are a short-term measure to exclude a group’s operations in lower-risk countries from the compliance obligation of preparing full Pillar Two calculations.
• The temporary safe harbour sets out three routes to a nil top-up tax position in a specific jurisdiction for the three years of its application (Financial years 2024-2026). These transitional safe harbours are predominantly based on Country-by-Country Report (CbCR) data, and broadly, the safe harbour will apply if the CbCR report is ‘qualifying’, and one of the following three tests is met:
  • De minimis test - The group’s CbCR revenue in the tested jurisdiction is less than €10 million, and the group’s CbCR profit (or loss) before tax is less than €1 million.
  • Simplified ETR test - The tested jurisdiction has an ETR that is more than the transition rate for the fiscal year (15% in 2023 and 2024, 16% in 2025, and 17% in 2026).
  • Routine profits test -  The group’s CbCR profit (or loss) before tax in the tested jurisdiction is equal to or less than the substance-based income exclusion (“SBIE”) amount. The SBIE amount is computed based on the payroll costs and tangible assets in the jurisdiction.
• A ‘qualifying’ CbCR is a CbCR compiled with data drawn either from the group consolidated statement or from the individual entity accounts, provided they are prepared using an acceptable financial standard, as defined in the GloBE rules.

Other key concepts

Local Financial Accounting Standard ("LFAS")

• The Irish Pillar Two legislation has opted to follow the LFAS rule. Whether or not the LFAS can be applied by groups in computing their QDTT top-up taxes will require case-by-case review.
   

Substance Based Income Exclusion

• A substance based income exclusion is available  which provides that the GloBE Income (taxable base) is reduced by a percentage of payroll costs and the carrying value of tangible assets. 
• The percentage of payroll costs and tangible assets that qualify for the income exclusion starts at 10% and 8% respectively for 2024, with the percentages gradually reduced each year until 2033 when the rates for both payroll and tangible assets will be 5%.
   

Pillar Two elections

• The Irish Pillar Two legislation contains a number of elections, which may provide a benefit for certain Irish constituent entities when calculating its GloBE income for a period, for instance, (i) realisation method election which provides that gain or loss associated with an asset or liability will arise when the asset is disposed rather than as its value changes due to changes in market value or impairments, and (ii) stock based compensation election, which substitutes the amount of stock-based compensation allowed as a deduction in the computation of a Constituent Entity’s taxable income in place of the amount expensed in its financial accounts.
• As certain elections will apply to all constituent entities in a jurisdiction, while other elections will apply for a number of periods, taxpayers should understand the benefit and limitations of all elections, when undertaking any tax planning and modelling. 
   

Pillar Two elections

• In scope Irish constituent entiites will need to register and provide a notification to the Irish Revenue Commissioners within 12 months of the end of the first period it is within scope of the rules. 
• The first GloBe Information Returns will be due in 2026, 18 months after the end of the first financial period within scope, i.e. June 2026 in respect of financial periods ending on 31 December 2024.

Next steps

All MNE groups that are within scope of the rules should consider the application of the rules as soon as possible. While the first return is not due until 18 months after the first financial period within scope, there are certain items which should be considered. 

Read about our proposed phased approach to talking Pillar Two and ensuring that MNE Groups are ready for compliance obligations here.