The Maze of Pillar 2: A Dive into the Compliance Burden for Multinational Groups

Chris Danes, Steve Davies, and Alex Lubbock delve into the implications of Pillar 2 for multinational groups, shedding light on whether it is mainly a compliance burden for most groups.

As the global economy evolves, multinational enterprises (MNEs) have been capitalising on discrepancies in tax regulations across different countries to minimise their tax obligations. This practice, known as base erosion and profit shifting (BEPS), prompted the Organisation for Economic Co-operation and Development (OECD) to introduce BEPS 1.0 in 2015.

However, with the digitalisation of the global economy, BEPS 1.0 was not fully effective, leading to the development of a new tax framework, BEPS 2.0. BEPS 2.0 comprises two pillars: Pillar 1 focuses on profit allocation, while Pillar 2 aims to establish a global minimum corporate tax rate of 15%. The implementation of Pillar 2 legislation in the UK as of January 1, 2024, ushered in a new era of tax compliance for multinational groups.

The global minimum tax under Pillar 2 ensures that MNEs pay a minimum level of tax regardless of their operating jurisdiction. This initiative seeks to curb BEPS practices by imposing a top-up tax where the effective tax rate falls below 15%. However, the complexity of determining this minimum tax rate has drawn criticism from tax and finance professionals within MNEs, due to the modest amounts of tax involved for most groups.

Challenges and Considerations

One of the key challenges for MNEs is the increased compliance burden resulting from multiple additional tax returns being due under Pillar 2. Despite the expected yield of over £2 billion annually to the UK Treasury, the actual amount of additional tax paid remains uncertain, especially as major economies globally implement the various aspects of the Pillar 2 rules.

The implications of Pillar 2 extend beyond tax compliance to impact various aspects of multinational operations. From financial statement disclosures to ongoing compliance and data management, Pillar 2 necessitates a coordinated effort across finance, reporting, IT, and legal departments within MNEs.

Seeking Certainty Amid Complexity

The introduction of temporary safe harbours aim to alleviate the compliance burden for MNEs, offering simplified calculations based on certain criteria. However, challenges such as data accuracy, jurisdictional differences, and eligibility criteria may limit the practical benefits of these safe harbours.

Cost and Compliance Burden

Despite anticipated yields for the UK Treasury, the compliance burden associated with Pillar 2 outweighs the financial gains for many MNEs. The significant costs incurred for compliance, coupled with modest tax implications, underscore the challenge of aligning regulatory requirements with commensurate tax compliance requirements, when Heads of Tax generally strive for certainty in a complex environment.

The Future Terrain

As UK multinational groups traverse the complex terrain of Pillar 2 compliance, collaboration, innovation, and strategic alignment emerge as essential elements of success. By embracing technological solutions, fostering cross-departmental synergy, and advocating for clarity in regulatory frameworks, MNEs can navigate the evolving landscape of global taxation with resilience and agility.