Applying IFRS – International Tax Reform - Pillar Two Disclosures (2024)

FAQs

What is the pillar 2 of the international tax system? ›

Specifically, Pillar Two would establish a minimum effective tax at a proposed rate of 15 percent applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world.

Pillar 2 ('input') calculations are derived from consolidated financial statements. This is the first time that tax payments/returns will have been directly driven from those accounts.

Simplified ETR test

The Simplified ETR is calculated by dividing the simplified covered taxes (income tax expense reported in the MNE's financial statements, minus any taxes that are not covered taxes or taxes relating to uncertain tax positions) by the profit or loss before tax reported in the MNE Group's CbCR.

The tax would be applied to groups with revenue of at least EUR 750 million. The global minimum tax attempts to limit tax competition by introducing a globally uniform floor, below which the effect of low tax rates or fiscal policy measures would be largely obviated.

The Pillar 2 requirement is a bank-specific capital requirement which supplements the minimum capital requirement (known as the Pillar 1 requirement) in cases where the latter underestimates or does not cover certain risks.

What are the Pillar Two Rules? The OECD's Pillar Two framework aims to ensure MNEs with global revenues above €750 million pay a minimum effective tax rate on income within each jurisdiction in which they operate.

Pillar Two aims to ensure that income is taxed at an appropriate rate and has several complicated mechanisms to ensure this tax is paid.

While the implementation of Pillar 2 legislation in the U.S. remains uncertain, the pressure to act may intensify as other countries implement crucial components of Pillar 2 in 2024 and 2025. Despite U.S. inaction, the implementation abroad will affect U.S. MNEs in various ways.

The Pillar Two effective tax rate (ETR) calculation for investment entities is similar to the standard ETR calculation, however, there is an important twist in that the top-up tax is adjusted for minority interests. There is no adjustment for minority interests under the standard ETR calculation.

What is the de minimis exclusion for Pillar 2? ›

De Minimis Exclusion (Article 5.5) • For jurisdictions where the MNE has (i) an Average GloBE Revenue that is less than €10m and (ii) an Average GloBE Income or Loss that is either a loss or less than €1m, computed on a three-year average basis.

PwC's Pillar Two Country Tracker provides the status of Pillar Two implementation in different countries and regions. Under an OECD Inclusive Framework, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalization of the economy.

Pillar 2 rules apply to multinational groups with global revenues exceeding a €750 million threshold, in line with current Country-by-Country Reporting (CBCR) obligations. A group is defined as a collection of enterprises that are consolidated for financial accounting purposes.

Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue over €750m are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. With respect to Pillar Two, the global minimum tax of 15% is estimated to generate around USD 150 billion in additional global tax revenues annually.

These rules are typically referred to as “Pillar 2” of the OECD's plan. A UTPR would apply additional tax on a subsidiary of a multinational that has low-taxed profits outside the jurisdiction applying the UTPR.

GILTI and Pillar Two

The administrative guidance confirms that GILTI will be considered a qualifying controlled foreign company (CFC) tax regime under the Pillar Two rules. Specifically, the guidance provides that GILTI is an example of a “blended CFC tax regime.”

Pillar 2 establishes a new minimum tax of 15 percent on the global income of MNCs. The OECD also developed Pillar 1 to set new rules on the allocation of taxable profits of large MNCs in countries where they sell their goods and services.