The new global 15% minimum tax: essential briefing for Treasurers

Background

On 20 December 2021 the Organisation for Economic Co-operation and Development (OECD) published an agreement to implement a global minimum tax rate of 15% for large companies. This was agreed by 137 countries who are either OECD members or part of the wider “inclusive framework”.

The proposals are part of a package of measures consisting of two ‘Pillars’, being a change to transfer pricing rules to allocate profits to the location of customers (Pillar 1), and the global minimum tax (Pillar 2). Pillar 2 rules will come into effect during 2023 and 2024 and will have a significant impact on the tax profile of all multinational companies with global turnover above €750m.

Although the headline purpose of the rules is to ensure that a minimum tax of 15% is paid on every jurisdiction’s profits, they have a much wider impact as this tax rate is determined via a very different method of tax calculation from the existing system, such that countries with a statutory rate significantly in excess of 15% can have a Pillar 2 effective tax rate below 15%.

Even if a group does not have a Pillar 2 tax liability, there will almost certainly be a significant operational tax impact due to the need to develop or upgrade reporting and compliance processes.

Outline of the global agreement

The Pillar 2 rules have the following key features:

All implementing territories will apply the same rules, working to similar timetables. The stated timetable involves the first set of rules being effective in 2023, though given the complexity of the proposals, it seems likely that in many cases the effective date will be during 2023 or 2024, depending on the territory.

The rules require a multinational group of companies to calculate on a territory-by-territory basis whether each territory has an effective tax rate (ETR) of at least 15% tax on its profits under Pillar 2 principles. If lower than 15% an immediate ‘top up tax’ to 15% is payable.

The Pillar 2 jurisdictional ETR is calculated by starting with jurisdictional tax and profit numbers contained within the ultimate parent entity consolidated accounts and then making a number of complex adjustments to them. For example, as part of determining the jurisdictional tax, deferred taxes have to be recalculated at 15% and deferred tax liabilities tracked to reverse out amounts to the extent that they do not crystallise within 5 years.

Jurisdictions with a statutory rate in excess of 15% can still have a Pillar 2 liability as a consequence of capping deferred taxes at 15%. Where tax losses arise or are utilised if there are permanent differences that result in a lower taxable profit than book profit (for example non taxable foreign exchange gains, loan waivers, derivative movements or enhanced deductions for capital expenditure, patent box deductions, etc) then this can result in a top up tax.

The rules are designed so that if a territory does not collect the top up tax itself (for example because it has not implemented the rules as a domestic tax charge), that amount of tax is collected by the group’s ultimate parent territory, or by any other territories in which the group operates which have implemented the rules.

Multinational companies will have to file a Pillar 2 rules tax return each year with the tax authority of their ultimate parent company. It will then be shared with other tax authorities worldwide.

Expected impacts

While the new international tax system is being designed to implement a ‘fairer, more transparent global tax system’, the changes necessary for its implementation may introduce a few growth pains for the multinationals within its remit. Finance and Treasury professionals in multinational groups need to manage the following impacts:

In many cases there will be a cash tax impact. The rules are very different from normal corporate tax computation and there can be many instances where a company in a high tax territory (e.g. UK, USA, France, Australia, Germany) has a Pillar 2 effective rate below 15% and therefore has a “top up tax” liability.

The calculation is complex and will require significant resources. Data from ERP and treasury systems are needed, beyond what is normally required for existing tax reporting and compliance, plus tax, treasury and management time.

Groups reporting under IFRS are generally required to disclose the impact of draft legislation once it is published. This is likely to be during 2022.

An additional layer of complexity and risk is added to business planning and internal structuring including loans.

The scrutiny from tax authorities may lead to additional international tax audits and disputes.

How should you approach this to be Pillar 2 ready?

It is important for each group to map out their route to determine the financial impact of Pillar 2 and understand how they will achieve Pillar 2 reporting and compliance. We have set out an illustrative approach to be able to assess, report and comply with the new Pillar 2 global tax regime which we believe our corporate clients need to focus on as the detail becomes clearer in the next few months. The PwC team would be happy to assist you in this regard.