Pillar Two Experts Offer Considerations for Multinationals

The current state of the international tax community’s gradual adoption of the 15% global minimum tax on multinational enterprises (MNEs) was assessed at a virtual event March 7, including what the US’ reluctance to sign onto the Organization for Economic Co-operation and Development’s (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting may spell for US-based companies.

Crowe LLP hosted a 90-minute webinar walking through where are now with the global minimum tax, known as “Pillar Two” of the OECD framework. Presented by John Kelleher, Sowmya Varadharajan, and Matt Marek of the firm’s tax team, the webinar detailed the scope of the Global Anti-base Erosion (GloBE) rules, the mechanics of the three top-up taxes, effective tax rate (ETR) calculation, and issued guidance and transitional safe harbor.

Thus far, approximately 140 tax jurisdictions worldwide have agreed to implement, at least to some extent, the Pillar Two structure intended to end the ‘race to the bottom,’ a phrase commonly ascribed to the practice of MNEs targeting low-tax jurisdictions in their global strategy to pay as little in corporate income tax as possible. It is comprised of three main components: a ‘local’ country-level Qualified Domestic Minimum Top-up Tax (QDMTT), a ‘parent’ country-level Income Inclusion Rule (IIR), and a backstop known as the Under Taxed Profits Rule (UTPR).

But before an entity with cross-border activity can worry about calculating their global minimum tax, it must determine if they are within scope of Pillar Two rules. Webinar participants indicated in answering a polling question during the webinar that determining this is the biggest thing on taxpayers’ minds right now.

This did not come as a surprise to Kelleher, who told Checkpoint in an interview following the event that “there’s a lot of intricacies in the rules and determining who’s in scope,” and who isn’t; for instance, tax-exempt pension funds, investment entities, joint-ventures, and some partnerships. “I think there’s a lot of issues of trying to figure out who’s in your constituent group,” Kelleher said, adding that smaller companies may face more difficulties compared to large multinationals.

During the presentation, Kelleher noted that some excluded entities like nonprofit organizations and government entities may, in some situations, have in-scope taxable activity. “It looks like even though the exempt entity itself will not be subjected to Pillar Two, the fact that it’s got revenue in excess of $750 million means that everybody in that structure” will have met the threshold, he said. “You’re going to have to understand whether or not those taxable activities could potentially be subject to Pillar Two, either from a UTPR or an [IIR].”

Importantly, as the presentation observed, the OECD is not a legislative body and cannot mandate participating jurisdictions implement all three top-up components. As an example, an ultimate parent entity (UPE) may be in a jurisdiction with an IIR but have a subsidiary that has taxable activity somewhere with a QDMITT.

“If there’s a QDMTT in that lower tier, that subsidiary’s jurisdiction, then the IIR is not going to be applied at that level or in that particular jurisdiction, because they’re already going to be at 15% … because that local tax rate is going to be topped up to [15%],” Kelleher explained.

Because the US has not adopted Pillar Two, US-based MNEs should anticipate exposure to UTPRs to get to 15% “based on where they have either foreign branches or foreign subsidiaries,” he said during his presentation. European Union (EU) and United Kingdom Pillar Two jurisdictions were required to implement IIRs by December 31, 2023. New Year’s Eve 2024 is the EU’s deadline for implementing UTPRs, the backup vehicle for ensuring a minimum 15% ETR to supplement IIRs.

Claims of competitive disadvantages and threats to the benefits of certain US tax benefits by some US lawmakers have been a roadblock for US adoption of Pillar Two. The OECD has released on global-intangible low-taxed income laws under the Tax Cuts and Jobs Act and the IRS posted guidance on how the US foreign tax credit regime fits within Pillar Two GloBE rules to provide clarity for US MNEs.

However, concerns remain that some federal tax benefits may be nullified if a taxpayer’s ETR is reduced below the 15% minimum threshold, triggering top-up taxes. Refundable and transferable credits are treated as income for Pillar Two purposes, Kelleher illustrated, “as opposed to being a reduction in your tax rate,” like the research and development credit. For the US, the R&D credit has been a “controversial point” because it may result in a taxpayer having to “pay it back in another jurisdiction.”