Pillar Two of the BEPS initiative introduces a global minimum effective tax rate where multinational groups with consolidated revenue over €750m are subject to a minimum rate of 15% on income arising in low tax jurisdictions.
Many experts have warned that complying with the rules is a more complicated process than it initially appeared – particularly in the US which already has two minimum tax regimes in the shape of the global intangible low-taxed income (GILTI) regime and the corporate alternative minimum tax (CAMT).
Critically, every jurisdiction in which a group has operations will need to be considered separately to assess if its effective tax rate falls under 15% and if so, a top-up tax will need to be calculated and paid for any such jurisdiction. Additionally, specified payments made to related parties may also become subject to new withholding taxes.
“The new rules require detailed calculations for each jurisdiction in which a multinational entity operates and include specific rules that will likely need input from treasury teams to provide additional data points to their tax teams regarding financial and hedging transactions,” says Kash Javed, KPMG’s Head of International Tax in the UK.
The tax rate applicable to intra-group financing arrangements may be impacted under the new rules and treasury teams will need to work with their tax teams to ensure the post-tax effectiveness of hedges is not impacted.
“Cash flow plans may need to factor in new top-up taxes becoming payable in particular countries,” says Javed. “Treasury teams should ensure they closely liaise with their tax colleagues to ensure that the additional input needed is identified early and that tax team’s input into new transactions is obtained.”
In the past, jurisdictions have used low tax rates, tax holidays and various tax incentives to attract foreign direct investment explains Chad Hungerford, Partner at Deloitte Tax.
“Many of those levers will no longer be available following the enactment of Pillar Two,” he says. “In the area of corporate treasury and corporate finance this may significantly change where and how companies hold, invest and circulate available funds.”
Corporate treasury and inter-company financing have long relied on low or no tax structures to effectively redeploy excess funds within a group. Companies will have to reassess those structures post-Pillar Two as many may now result in significant tax costs.
“The transitional safe harbour (a short-term measure to exclude a group’s operations in lower risk countries from the compliance obligation of preparing full Pillar Two calculations applied to years beginning no later than 31st December 2026) and Global Anti-Base Erosion or GloBE regimes have targeted anti-abuse measures aimed at limiting the ability of groups to use corporate finance to achieve tax advantages,” says Hungerford.
“These rules are written broadly and may result in ordinary business transactions resulting in significant tax liability,” he adds. “Pillar Two considerations must be baked into corporate treasury decisions going forward.”
Regardless of whether or not the US implements BEPS, Jose Murillo – National Tax Department Co-Leader at EY – observes that widespread adoption by other jurisdictions has the potential to increase the corporate tax liability of in-scope US multinationals by as much as 18%.
“US multinational entities need to be modelling out the potential impacts, identifying actions they need to take, and engaging with US policymakers to explain how these rules will affect both their industry and operations,” he says.
