Pillar Two is a significant step in the global effort to ensure multinational enterprises (MNEs) pay a fair share of tax wherever they operate.
Emerging from the OECD/G20 Inclusive Framework on BEPS, which involves over 130 countries, Pillar Two introduces the Global Anti-Base Erosion (GloBE) rules.
At its heart lies the proposal for a Global Minimum Tax rate of 15 per cent, aimed at preventing countries from undercutting each other on tax rates to attract business, a practice that has eroded the tax bases of many countries.
The rationale behind Pillar Two is simple yet ambitious: to provide governments with a robust mechanism to protect their tax bases from profit shifting and ensure that multinational enterprises contribute their fair share to the economies they benefit from.
It addresses the challenges digitalisation brings to international taxation by making it harder for companies to shift profits to low-tax jurisdictions.
Pillar Two is not a standalone effort but part of a broader initiative that also includes Pillar One, focusing on reallocating taxing rights among countries.
However, Pillar Two’s Global Minimum Tax has captured widespread attention due to its direct impact on MNEs’ global tax liabilities, so we wanted to cover it here and provide you with guidance on dealing with its affects.
Who will Pillar Two affect?
The primary targets of Pillar Two are the largest and most profitable multinational enterprises.
Specifically, the GloBE rules apply to business groups that exceed a €750 million (around £640 million) revenue threshold, as reported in their consolidated financial statements.
This criterion means that Pillar Two will predominantly impact major global corporations, sparing smaller businesses from its complexities.
The impact of Pillar Two will vary across sectors, with highly digitalised businesses, such as tech giants, and companies with extensive intellectual property, like pharmaceutical firms, in the spotlight.
These sectors have historically benefited from tax planning strategies that Pillar Two seeks to counteract.
Geographically, the effects of Pillar Two will also be uneven.
Countries with traditionally low Corporate Tax rates may need to adjust their policies to align with the Global Minimum Tax, affecting MNEs operating within their jurisdictions.
Conversely, countries with higher corporate tax rates may see less direct impact but will benefit from the levelling of the playing field.
The distinction between large and small enterprises under Pillar Two is clear, with the rules designed to exempt smaller businesses and focus regulatory efforts on where they are most needed – among the world’s largest corporations.
