Pillar Two Is Coming – Ready or Not

As CBIZ communicated in our previous article, Mark Your Calendars: Pillar Two Compliance Is Around the Corner , multinational enterprises can expect fundamental changes to global taxation. To date, 140 countries, including the majority of Europe and key Asian jurisdictions, have agreed to enact the Organization for Economic Development (OECD) Pillar Two model rules in time for tax years beginning Jan. 1, 2024. Despite the intention for the U.S. to enact legislation, many practical issues remain unresolved. However, the OECD, the United Nations and numerous non-member countries have made their intentions clear—these issues will be resolved later, preferring “good enough” to perfect.

Based on this agreement, each jurisdiction must enact its local interpretation of the model rules through its legislative process, which can certainly create additional administrative complexities. Understanding how your company is impacted by Pillar Two from a practical standpoint is critical, though it can be quite an administrative burden, requiring analysis and vigilance.

So Now What?

Pillar Two Model rules will require access to data and systems that historically have not been in the scope of a tax department’s purview. Additionally, the rules require knowledge of data at a level of granular detail greater than most tax departments currently review or prepare.

However, designing a system, standardized process and developing a team responsible for addressing Pillar Two, and ultimately filing a GloBE return, simply can’t wait until the 2024 compliance season—the time to act is now. Beyond this, key stakeholders such as auditors, investors and your board of directors will begin asking for more specific details about how Pillar Two model rules will impact your business. Answering these questions is not as simple as adjusting individual effective tax rates to 15%. There are many definitions in the model rules, which are creating unexpected results.

Pillar Two Items creating unexpected results include:

• Treatment of the U.S. Global Intangible Low-Taxed Income (GILTI) Regime
• Definitional inconsistencies between the rules enacted in jurisdictions and what is done in practice by businesses
• Timing differences
• Book to tax differences when tax base is calculated based on accounting standards
• Impact of common incentive regimes, such as R&D incentives and notional interest deductions, creating top-up tax

What should you do to prepare for Pillar Two implementation?

Proper preparation for the implementation of Pillar Two requires a comprehensive review of the information, systems and processes currently available and utilized by the tax department compared with those required by the model rules. Second, and equally important, is determining at a high level how the model rules would apply to the jurisdiction in which you operate.

• Do you meet a safe harbor?
• What is your effective tax rate by GloBE standards?
• If a top-up tax is levied, who would be responsible for paying, and would it have the cash to pay it?
• How would the organization be impacted if a particular jurisdiction is not compliant with the model rules?

How can we help?

As a first step, CBIZ will conduct an initial assessment, which offers a comprehensive analysis of the Pillar Two requirements, and how the model rules specifically apply to your organization. As part of this first step, we will collaboratively review your overall corporate footprint, tax profile, effective tax rate, data availability and other potential operational issues. These projects typically take six weeks to complete and will provide you with a comprehensive understanding of the opportunities to better prepare for implementation, as well as finding opportunities for planning to reduce any potential top-up tax.

Our process

Activities

• Meet with the CFO and head of tax
• Develop information request.
• Obtain a deeper and more complete understanding of tax position and effective tax rate in various jurisdictions and application of Pillar Two.
• Determine, if any, impact of Pillar Two on various aspects of the company.
• Develop strawman and impact on current structure, including a potential future state tax and transfer pricing structure.

Deliverables & Timing

• Report on impact of Pillar Two.
• Define a potential future state strawman structure, including high-level transfer pricing policy model, taking key design principles into consideration and make it Pillar Two compliant.
• Determine the roadmap of activities of the next phase.
• Meet with executives and present findings.

Remember, waiting until the last minute to begin the process for implementing Pillar Two will put your organization at a disadvantage. By acting now, you can help ensure you are well-prepared and mitigate the risk of non-compliance.

At CBIZ, our international tax, transfer pricing, accounting and IT experts stand ready to assist you with a comprehensive understanding of the Pillar Two rules, to assess the impact on your organization, and to work collaboratively with you to develop a customized approach to ensure future compliance. Connect with us today.