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Sebastián Ferreyra, director of transfer pricing at Grant Thornton Argentina comments that "the recommendations of Pillar 2 establish a coordinated tax system to guarantee that large multinational groups pay a minimum tax on the income obtained in each of the jurisdictions in which they operate. AND The rules create a "supplementary tax" that will be levied on profits made in any jurisdiction where the effective tax rate, calculated by each jurisdiction, is less than the minimum rate of 15%."
The new Pillar 2 model rules will help countries transpose the rules into their respective domestic legislation. They establish a coordinated system of interlocking rules that:
define MNEs that are within the scope of application of the minimum tax;
they establish a mechanism to calculate the effective tax rate of MNEs for each jurisdiction and set the amount of the complementary tax to be paid in accordance with said rules; and
they impose the complementary tax on a member of the multinational group in accordance with an order established by the agreed rules.
"The model rules of the Second Pillar address the treatment of acquisitions and disposals of group members and include a specific rule regarding certain holding structures and tax neutrality regimes. Finally, they address administrative aspects, such as the presentation of informative returns, and establish a transitory regime for MNEs that are subject to the global minimum tax", adds Sebastián.
Why is Pillar 2 strategically important?
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“Businesses are facing a whirlwind of upheaval and change, from green transition and digital transformation to the impact of geopolitical tensions, talent shortages and supply chain bottlenecks. OECD Pillar 2 cuts across all these trends and challenges. Addressing the impact of the tax shake-up right through the key areas of people, processes and technology is therefore critical in future-proofing strategies and operations for the opportunities and threats ahead,” says Aisling O’Keeffe, associate director, business consulting at Grant Thornton Ireland.
The business response to the prevailing disruption ranges from tactical adjustments to supply chains to an overhaul of recruitment and retention strategies. Companies may also be looking at more fundamental shifts in their business model and purpose. For example, digitisation is pushing more commerce online and opening up new platform and subscription service models. In turn, the growing focus on sustainability, social inclusion and other environmental, social and governance (ESG) priorities raises questions over what the organisation is in business to do and how it judges success.
Four key business imperatives for Pillar 2
So where does tax – and specifically OECD Pillar 2 – come into this transformation equation? Drawing on what we’re seeing in our work with a wide range of multinational enterprises (MNEs), four key business imperatives are coming to the fore:
1. It is a direct driver of restructuring and change
Pillar 2 is set to join factors such as talent shortages and supply chain disruption in being a major driver for operational restructuring and relocation in coming years. In a survey of more than four thousand MNEs we carried out in 2022, over 30% reported plans for major restructuring and business model change as a direct consequence of Pillar 2.
By levelling the playing field on minimum tax, Pillar 2 raises questions over where a business should best locate people, functions, assets and risks.
Addressing these questions now would allow sufficient time for transfer and recruitment, while making sure operations are in place before Pillar 2 comes into force from 2024 onwards.
2. It has the potential to raise costs and derail strategic plans
Even if Pillar 2 isn’t the primary driver for rethinking strategy, structures and operational locations, it will still have a significant bearing on plans.
Our MNE survey found that businesses expect an average 4.6% increase in their effective tax rate (ETR). The rise is significant in itself, adding to the already spiralling costs of materials, energy and pay. Just as significant is the redistribution of tax liabilities, with bills rising in some jurisdictions and the differential in others becoming less marked.
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“As businesses gear up for restructuring ahead, failure to build Pillar 2 into strategic evaluation and planning could undermine and even derail plans. In particular, businesses could be faced with unforeseen and possibly unsustainable costs that could erode profitability and competitiveness. Examples could include moving production to a more politically friendly location. This would improve supply chain resilience. But what if the extra tax burden makes the costs prohibitive?” says Matt Stringer, tax partner and international tax leader at Grant Thornton UK LLP.
3. If transformation is coming, it should include tax
Pillar 2 has significant implications for people, process and technology. The data and systems demands are likely to require a high degree of automation, new sourcing and staff upskilling. Pillar 2 also calls for closer integration between tax and finance systems and planning.
While tax teams are rarely first in line for tech investment, the exceptional demands of Pillar 2 will change this. The good news is that the tax functionality of enterprise resource planning (ERP) systems has come a long way in recent years, so the necessary capabilities may already be available. Thanks to the cloud, other tools may now be cheaper and easier to source and implement.
The other key consideration is talent. This is in short supply in tax and finance more broadly. So it’s important to harness technology and allow professionals to focus on the value-adding tasks, including the strategic evaluations surrounding Pillar 2.
Further openings include rationalising entity structures within each jurisdiction to help simplify and speed up data sourcing and tax computation.
4. ESG and ETR are intertwined
No evaluation of a company’s social impact is complete without an assessment of its tax contribution. This is the essence of the company’s commitment to being a responsible citizen.
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“The bar of expectation is rising from tax transparency to tax morality, where businesses are required to demonstrate their approach to tax that serves society. ESG will accelerate this. Just like greenwashing, increased tax authority information sharing and tech-based regulatory scrutiny will expose gaps between claims and reality,” says Vikas Vasal, global head of tax, Grant Thornton International.
Time to mobilise on Pillar 2
Pillar 2 is emerging as a critical test and differentiator for MNEs worldwide. Businesses with the confidence, agility and knowhow to build the operational and business model changes required by Pillar 2 into their wider strategy for transformation will increase resilience and minimise disruption. In short, acting today will make tomorrow easier and increase competitive advantage.
If you want our team of specialists to accompany you in the implementation of measures with a focus on Pillar 2, please contact us.
“Businesses are facing a whirlwind of upheaval and change, from green transition and digital transformation to the impact of geopolitical tensions, talent shortages and supply chain bottlenecks. OECD Pillar 2 cuts across all these trends and challenges. Addressing the impact of the tax shake-up right through the key areas of people, processes and technology is therefore critical in future-proofing strategies and operations for the opportunities and threats ahead,” says Aisling O’Keeffe, associate director, business consulting at Grant Thornton Ireland.
“The bar of expectation is rising from tax transparency to tax morality, where businesses are required to demonstrate their approach to tax that serves society. ESG will accelerate this. Just like greenwashing, increased tax authority information sharing and tech-based regulatory scrutiny will expose gaps between claims and reality,” says Vikas Vasal, global head of tax, Grant Thornton International.