Many multinational enterprises (MNEs) need to prepare for new tax legislation around the world that will impose a minimum rate of tax in each jurisdiction where the MNE operates globally. Based on Pillar Two of the Organization for Economic Cooperation and Development’s (OECD) base erosion and profit shifting (BEPS) project, these rules are complex and have taken effect in some countries as of January 1, 2024. As such, MNEs should act quickly to determine how they are affected. This article discusses practical steps MNEs can take to assess the impact of Pillar Two legislation on their organizations.
The Fit for Pillar Two series aims to help tax teams of MNEs within the scope of Pillar Two prepare for the upcoming wave of international tax changes by putting theory into practice. In this series, Christian Athanasoulas, Tax Practice Leader – Services at KPMG in the US, and Global Head of International Tax and M&A Tax at KPMG International, will provide his insights and draw on experiences from professionals in KPMG member firms worldwide. Articles in the Fit for Pillar Two series will build upon each other and are designed to guide companies through the phases of Pillar Two readiness.
Is your company ready for Pillar Two’s Global Minimum Tax?
The OECD is working on the global implementation of tax proposals under two “pillars” as part of its BEPS project. Pillar Two focuses on ensuring that large MNEs pay a minimum rate of tax. Keeping up with Pillar Two legislation will be one of the biggest challenges MNE tax teams will face in the next few years. Most of the OECD’s member jurisdictions are moving steadily towards enacting Pillar Two rules, with close to 40 countries implementing the rules in 2024 and up to 60 countries expected to implement rules by the end of next year. As a result, 95 percent of in-scope MNEs will be affected in 2025 by Pillar Two Rules. This first article is designed for those clients just beginning their journey or those that have taken steps forward but need to validate work completed to date.
Key takeaways for tax leaders managing through Pillar Two
MNEs need to act quickly to prepare for the OECD’s Pillar Two Global Minimum Tax, which will be enacted in countries around the world as early as 2024.
MNEs with consolidated revenue above EUR 750 million are affected. Pillar Two imposes a 15 percent minimum tax rate in each jurisdiction in which an MNE operates.
To comply with these rules, tax teams will require substantial new forms of financial data they may not currently have access to within their organizations.
To prepare for Pillar Two, companies should begin with an impact assessment. This assessment will:
- Identify the MNE group’s Ultimate Parent Entity (UPE) and the accounting standards applied to consolidate the constituent entities of the MNE
- Perform a legal entity classification for each constituent entity of the MNE
- Assess eligibility for safe harbor rules that apply for the first three years that Pillar Two rules apply
- Model preliminary cash tax impacts
- Consider the impact of any planned M&A activity
- Prepare for new financial statement disclosures.
An impact assessment can lead to early identification of adverse outcomes from Pillar Two and enhance business planning.
