Pillar Two adds complexity to the tax world

The global minimum tax rules for large companies, known as Pillar Two, trigger major changes in the international tax and compliance landscape. The directive is intended to reduce tax avoidance and tax competition between countries and at the same time increase tax transparency. A noble goal, but one that simultaneously increases the complexity of the tax world and leads to increasing compliance obligations. PwC experts Stan Berings and Jurriaan Weerman provide a step-by-step plan for preparation.

In concrete terms, the Pillar Two directive of the OECD and the G20 countries means that a global minimum tax of 15 percent is introduced for multinationals with a turnover of more than 750 million euros in two of the four preceding years. This concerns the turnover at holding or group level. So, even a relatively small Dutch company that is part of a group can be affected by this legislation. Does the profit in one of the countries where a company is active appear to be taxed at a lower effective rate than 15 percent, then there is a risk of additional taxation. More than 140 countries worldwide have signed the agreement of which Pillar Two is a part. They are currently implementing the directive in their own legislation, including the Netherlands in the Minimum Tax Act 2024.

Impact of Pillar Two: more complex tax landscape

With this new measure full of far-reaching tax changes, the international tax landscape has become even more complex since this year. We list a number of consequences:

• New profit tax system
  A minimum tax rate effectively means an entirely new profit tax system. And that requires a major change in the tax and compliance function of companies.
• Administrative burdens increase
  International companies are faced with an increase in compliance and reporting obligations in the various countries. In each country where a company is active, the effective tax rate must be determined to determine whether the company meets the minimum, and the company must file both national and global tax returns. This requires additional data and calculations. 
• Consistent data is becoming more important
  To deal with a global tax, companies need a uniform approach. Clarity in data, consistency in the method of delivery and a centralised, well-controlled process are necessary to maintain an overview and meet the various national compliance requirements. 
• Differences in implementation
  Pillar Two is not being introduced everywhere at the same time and in the same way. At present, this new legislation applies in approx. 50 countries or will be introduced in the short term. Approximately another 10 countries have taken concrete steps to implement the law (in the short term). The specific compliance requirements may differ per country, depending on how and when the relevant national tax authority adopts Pillar Two. It is therefore important to always stay well informed about the regulations in the countries where your company is active. 

Four steps to prepare for Pillar Two 

A major change such as Pillar Two requires a different mindset. For example, working with a different system, a different method and a different data strategy in each country is no longer feasible. Compliance processes within companies must be set up smartly and efficiently in order to comply with the new rules for multinationals. Are the necessary data available within your company to calculate the effective tax rate? Does Pillar Two apply to your company? We recommend you to take the following steps so that you are as well prepared as possible. 

• Step 1: Build an interdisciplinary team
  Bring your finance, tax, and data specialists together across borders to centralise your company’s tax and compliance processes, so you can have a single structure and approach that works for all countries. This interdisciplinary team can consist of internal resources, external specialists, or a combination of both. Collaboration between departments and offices around the world is essential to collect the right data. 
• Step 2: Ensure operational readiness
  Do your current data model, technology systems, and financial processes provide sufficient capabilities to meet the requirements of the new international tax system? Pillar Two impacts four key areas of your business: people, processes, data, and digital systems. Give each of these four aspects sufficient attention. 
• Step 3: Choose a data strategy
  The financial and tax data you need to provide in your Pillar Two reports is stored in many different systems and databases in most companies – often managed by different people in different countries. This makes collecting and merging the necessary data a major challenge. Getting reliable, complete data starts with a strong data strategy.
• Step 4: Conduct a quantitative analysis
  Consider conducting regular assessments to keep track of the impact of Pillar Two on your organisation. We recommend to also perform more detailed calculations, even if the CbCR Safe Harbour rules are applicable. This will help you understand the financial and operational implications and better prepare your team for what will be asked of them. We recommend to also perform more detailed calculations, even if the CbCR Safe Harbour rules are applicable. A tool like PwC’s Pillar Two Engine can help with this. 

Understanding global regulations with the Pillar Two Engine

With the advent of Pillar Two, global companies are facing a new and challenging compliance challenge. To support you in this and provide you with essential insight into the ever-changing regulations, we have developed a new tool: the Pillar Two Engine. The tool helps companies interpret the rules for each individual country in which they operate. We update the tool in real time, as regulations in many countries are still evolving. The Pillar Two Engine is flexible so it can process data from different systems. The tool then assesses the impact of Pillar Two on your situation and maps out in which countries you can expect to be subject to tax. 

The Pillar Two Engine is part of PwC's Connected Tax Compliance approach: an approach in which we connect data, teams and insights by using the expertise of our specialists as an extension of your team, combined with smart technology.