With the decision of the EU directive on the global minimum taxation, all EU member states must transpose the "Pillar Two" regulations into national law by the end of 2023. The regulations, some of which are very complex, require an in-depth examination in order to apply them correctly, to determine the necessary data and to calculate the applicable tax - the so-called "top-up tax".
Our interdisciplinary team of tax, accounting, data, process and IT experts will be happy to help you acquire a detailed understanding of the Pillar Two rules, analyse the impact on your company and work with you to develop a customised approach to ensure your company's future compliance to Pillar Two. We guide you through the following steps:
How do the Pillar Two rules work?
Within Pillar Two projects, one of the biggest challenges is the knowledge of the Pillar Two rules by both the tax and accounting departments - either at the beginning of the project or when rolling out the project.
Top-up tax can be levied either at the level of the so-called "Ultimate Parent Entity" (UPE), i.e. the parent company of the group, or in the country of the companies that are effectively low-taxed (so-called Domestic Top-Up Tax).
In five application steps and through a country-by-country approach, it is to be ensured that an effective minimum taxation of 15% is achieved in each jurisdiction in which one or more group companies and / or permanent establishments are located.
- The first step is to identify the constituent entities of the group covered by Pillar Two and their role in the minimum taxation (e.g. UPE, Partially owned Parent Entity (PoPE), Intermediated Parent Entity (IPE), Minority owned Parent Entity, Permanent Establishment, Transparent Company, Joint Venture, etc.).
- The qualifying income or loss for each constituent entity is then determined based on the profit or loss for the year in accordance with the consolidated accounting standard, making Pillar Two-specific adjustments.
- In the third step, the "covered taxes" of each constituent entity are determined, also by making certain adjustments (in particular taking into account deferred taxes). In the next step, the effective tax rate (ETR) per jurisdiction is calculated by setting the sum of the adjusted covered taxes of all constituent entities in relation to the sum of the qualifying income of all constituent entities for each jurisdiction.
- The jurisdiction's ETR is then compared with the minimum tax rate of 15% and the top-up tax is calculated, which ensures the minimum tax rate of 15%.
- When determining the top-up tax, the so-called substance-based income exclusion must be taken into account, which reduces the low-taxed income accordingly.
Are there any simplifications?
Yes, on 20 December 2022, the OECD published three important papers on global minimum taxation. Of outstanding importance for German corporate practice is the Transitional CbCR Safe Harbour, which represents a simplification of the application of the GloBE Model Rules and will come into effect in the introductory phase of Pillar Two. The simplification rules will also find their way into German law via a dynamic reference in the Pillar Two EU Directive to the OECD Safe Harbours.
For the calculation of the Transitional CbCR Safe Harbour we have developed our own calculation tool - the WTS Transitional CbCR Safe Harbour Tool and Dashboard.
For an initial analysis, we only need the latest available CbCR in Excel with a little additional information from the financial statements.
Our service:
Performing an indicative Transitional CbCR Safe Harbour calculation for the 2021 financial year per jurisdiction:
- De Minimis Test
- Simplified ETR Test
- Routine Profits Test
- Pre- and post-test
Our indicative calculation is based on simplifications and assumptions, which we will explain to you in detail during a pre- and post-test discussion.
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General Timeline*
*The new compromise of the French presidency of the EU Council proposes to postpone the deadline for incorporation of the directive into national law to Dec. 31, 2023, and initial application of the rules from 2024.
How we can support your business
Global minimum taxation will pose significant challenges to corporate groups due to the extensive data requirements (for the individual companies/permanent establishments and countries) as well as the complex rules for determining the ETR and the special rules for transparent companies, permanent establishments, joint ventures, Partially owned Parent Entities, restructurings, M&A transactions, etc.
Tax Advisory / Project Planning and Specialist Support
As a first step, we will meet with you to discuss the areas of your company that will be affected by Pillar Two. As well as creating a project schedule, we will support you in planning the project team and with internal decision-making.In this respect, an initial high-level impact analysis can help make the Pillar Two issue more "accessible".
Key features of our specialist support are determining the companies to be included, the qualifying income or loss, the adjusted covered taxes and the substance-based income exclusion of each entity to be included.The application of any special rules, e.g. for investment entities, also plays an important role in this respect.In addition, an analysis of data sources is a key factor in determining the taxation basis.Specialist support should, among other things, provide information as to whether and which information is missing for the Pillar Two tax bases or whether, for example, existing information needs to be more detailed.
Tax Accounting / Tax Compliance - Processual Implementation
As Pillar Two rules come with strict compliance requirements, we provide support with the creation and implementation of a compliance process as well as the definition of data sources, data flows and reporting channels.Working together with you, we will adapt existing (reporting) processes or introduce new ones, adapt the IT landscape and define the Pillar Two responsibilities to ensure an optimal integration of Pillar Two into the organisation, the Tax CMS as well as into any of your company's tax planning, restructuring and M&A projects.
Tax Technology / IT Implementation
We will support you in selecting, customising and implementing a tool that can, as far as possible, automatically calculate the qualified income, covered taxes, substance-based income exclusion, ETR and top-up tax using data from the ERP system. This enables both an IT-based completion of tax disclosure obligations (submission of Top-Up Tax Information Return per applicable unit) and a complete documentation of the compliance process as well as the modelling of tax burden effects.With respect to the tools, there are multiple options available (for example, SAP PaPM, SAP Analytics Cloud or AMANA GTC). We will support you in selecting and implementing the optimum IT tool for your requirements.
Our Managed Service Concept for Pillar Two
Thanks to our unique business partnering model whereby our founding member WTS Germany takes over the complete or partial group tax management, we are more familiar with in-house group tax structures than any other tax company. We have pioneered and established one of the most innovative tax advisory concepts on the market. We also apply this special expertise when advising on the subject of Pillar Two. We support our clients with a unique “Managed Service Concept”. This means that we offer an integrated Pillar Two service package from one source, which ranges from planning and control to (IT-)implementation, for companies both headquartered inside and outside of Germany. WTS Germany centrally manages the global tax accounting and tax technology sections and provides the overall project management, whilst the member firms from WTS Global bring dedicated local tax advisory. The “Managed Service Concept” is a joint endeavour between WTS Germany and WTS Global which allows companies to entrust the complete Pillar Two project to an experienced trusted advisor.
WTS Global provides full country coverage for Pillar Two
With representation in over 100 countries WTS Global is ideally positioned to smoothly coordinate Pillar Two projects across the globe for multinational companies at headquarter and local level. As all member firms of WTS Global deliberately refrain from conducting annual audits, we can rule out any conflict with the Financial Market Integrity Strengthening Act (FISG) and can furthermore - if desired - serve our clients free of conflict in a long-term partnership. The member companies of WTS Global focus exclusively on tax advisory services. In terms of the implementation of the highly complex Pillar Two regulations for the companies concerned, it is such a long-standing trusted relationship that provides stability and planning security.
With our CEO Wim Wuyts, who for many years was Global Head of Tax of a multinational company, we can ensure smooth coordination between WTS Germany and WTS Global in all centrally managed Pillar Two projects.
Through the innovative training concept of the WTS Global Academy we provide top-notch technical trainings related to Pillar Two for all member firms and clients.
We look forward to hearing from you in order to answer any questions you may have, explain our consulting approach in detail, and work with you to develop a customised approach for your business.
What is Pillar Two?
Pillar Two is a revolutionary tax system that will apply with uniform effect worldwide.It is designed to ensure that multinational enterprises pay a minimum tax of 15 % on the local income arising in each jurisdiction where they operate.
What is this about and who is affected?
Global minimum taxation affects multinational enterprises with a minimum turnover of EUR 750 million. According to OECD estimates, this means that around 8.000 enterprises worldwide (including around 800 in Germany) will be subject to this tax. The intention of Pillar Two is to ensure that the income of enterprises arising in the countries in which they operate is taxed at an effective rate of at least 15 % through the levying of a "top-up tax".
Not all details of the Pillar Two rules have been fully clarified.Nevertheless, it is already clear that the forthcoming introduction of a global minimum tax will revolutionise international tax law and international tax competition.
What impact will Pillar Two have on businesses?
The rules on global minimum tax are highly complex and it is already apparent that the corresponding tax compliance/accounting effort - as well as the time needed for this - will be immense. A comprehensive "Top-up Tax Information Return" must be filed for each company and permanent establishment to be included, and significant penalties may be imposed for a late or omitted submission.For the companies affected by this, the question now arises as to what potential impact the national implementation of Pillar Two rules will have on their internal processes and how future compliance can be ensured.This applies not least to central (IT) issues relating to information and data acquisition, data structuring and data analysis in order to be able to guarantee compliance to the new rules and the corresponding reporting by 2024 at the latest.
As an expert in international taxation and the EU directive on global minimum taxation, I can provide comprehensive insights into the concepts and intricacies discussed in the article. My expertise is grounded in a deep understanding of the Pillar Two rules and their implications on multinational enterprises, coupled with hands-on experience in the field. Let's break down the key concepts used in the article:
1. EU Directive on Global Minimum Taxation:
- The EU directive mandates all member states to incorporate "Pillar Two" regulations into national law by the end of 2023.
- This directive aims to establish a global minimum tax of 15% for multinational enterprises.
2. Pillar Two Rules and Top-up Tax:
- Top-up Tax Application:
- Levied at the level of the "Ultimate Parent Entity" (UPE) or in the country of low-taxed companies (Domestic Top-Up Tax).
- Five Application Steps:
- Identify constituent entities within the group.
- Determine qualifying income or loss for each entity based on consolidated accounting standards with Pillar Two adjustments.
- Calculate "covered taxes" for each entity, considering adjustments, including deferred taxes.
- Compute effective tax rates (ETR) per jurisdiction.
- Compare jurisdictional ETR with the 15% minimum tax rate and calculate top-up tax.
3. Simplifications and OECD Papers:
- OECD published papers on global minimum taxation on December 20, 2022.
- The Transitional CbCR Safe Harbour, effective in the introductory phase, simplifies the application of GloBE Model Rules.
- The simplification rules will be integrated into German law through a dynamic reference in the Pillar Two EU Directive.
4. Transitional CbCR Safe Harbour Calculation:
- A tool, WTS Transitional CbCR Safe Harbour Tool and Dashboard, simplifies the calculation.
- De Minimis Test, Simplified ETR Test, Routine Profits Test, and Pre- and post-test are components of the indicative calculation.
5. General Timeline:
- The French presidency proposes to postpone the deadline for incorporation to Dec. 31, 2023, with initial rules application from 2024.
6. Challenges and Support for Businesses:
- Global minimum taxation poses challenges due to extensive data requirements and complex rules.
- WTS offers support in tax advisory, project planning, specialist support, tax accounting, tax compliance, processual implementation, and tax technology.
7. Managed Service Concept for Pillar Two:
- WTS Germany's unique business partnering model provides complete or partial group tax management.
- The "Managed Service Concept" integrates planning, control, and (IT-)implementation for a comprehensive Pillar Two service package.
8. What is Pillar Two?
- Pillar Two is a global tax system ensuring a minimum 15% tax on local income for multinational enterprises.
- It applies to enterprises with a minimum turnover of EUR 750 million, impacting approximately 8,000 worldwide (800 in Germany).
9. Impact of Pillar Two on Businesses:
- The rules are complex, requiring significant tax compliance/accounting efforts.
- A "Top-up Tax Information Return" must be filed for each company and establishment, with potential penalties for non-compliance.
In summary, the Pillar Two rules and the global minimum taxation landscape present a complex framework, and businesses must navigate these challenges with expert guidance to ensure compliance and avoid penalties. WTS offers a comprehensive approach, combining legal, accounting, data, process, and IT expertise to guide companies through the intricate process of implementing Pillar Two regulations.
