Components of the GloBE Information Return (Pillar Two)
In the month of July 2023, the OECD released a standard template for the Global Anti-Base Erosion (GloBE) Information Return (Pillar Two) (GIR) as provided under the GloBE Rules (also known as BEPS Pillar Two Model Rules). The GIR is designed to provide the information that tax authorities would need to perform risk assessment and evaluate the correctness of MNE Groups’ Top-up Tax liability under the GloBE Rules.
The GIR is a complex return that comprises of 28 pages and potentially about 480 data points covering all areas of the GloBE Rules. There are three main sections in the GIR. In the “MNE Group Information” section, the MNE Group is required to identify the Filing Constituent Entity submitting the GIR and provide general accounting information of the Ultimate Parent Entity (UPE), information on the corporate structure of the MNE Group and also a summary table of high-level information such as the range in which the effective tax rate calculation under the GloBE Rules (Pillar Two ETR) for each jurisdiction lies.
The second section, the “Jurisdictional Safe Harbours and Exclusions” section, covers the characteristics of each jurisdiction where the MNE Group has constituent entities or where members of joint venture group are located and exceptions to the GloBE computation that apply. If the MNE Group has made elections for safe harbours to apply, the MNE Group discloses information related to the safe harbours that it had elected for those jurisdictions.
Section 3, the “GloBE Computations” section, is where detailed information is provided for each jurisdiction to support the MNE Group’s Pillar Two ETR computation (ie computation of GloBE Income or Loss and Adjusted Covered Taxes) and Top-up Tax computation. Disclosures of jurisdictional elections and deemed distribution tax elections are also made in this section. The data points in this section also includes the following on a constituent entity (CE)-by-CE basis:
- various adjustments to the Financial Accounting Net Income or Loss, Current Tax Expense or Deferred Tax Expense
- cross-border allocation of income or loss between a Main Entity and a Permanent Establishment and from a Flow-through Entity (FTE)
- cross-border adjustments
- adjustments to the GloBE Income of the UPE under Article 7.1 or Article 7.2 of the GloBE Rules
- cross allocation of taxes
- elections made by the CE
- international shipping income exclusion
The Top-up Tax computation, Substance-based Income Exclusion computation, Additional Current Top-up Tax computation and Top-up Tax allocation and attribution also have to be reported in this section.
Practical challenges faced by tax teams of MNE Groups in completing the GloBE Information Return (Pillar Two)
Speaking at a panel discussion “Meeting your business needs and structuring your tax for Pillar Two” at the International Tax Review’s Asia Tax Forum on 25 April 2024, Andy Hung, Director of Product Management APAC, Wolters Kluwer, drew on an observation from the Wolters Kluwer BEPS Pillar Two Readiness Index Survey: the top hurdles that tax teams experience in getting started on the implementation of GloBE Rules compliance include legislative uncertainty, understanding data requirements and time constraints.
Additional challenges involve navigating local requirements, global coordination, and engaging non-tax stakeholders. With the GloBE Rules continually evolving and new jurisdictions coming on board of Pillar Two at different stages and each jurisdiction setting out different requirements for GIR filing and payment obligations, keeping track of such legislative changes is difficult.
There is also a need to bring data that are outside existing tax processes into the Pillar Two ETR computation and very often assistance from non-tax stakeholders is required. Tax teams of MNE Groups would likely need to explain the mechanism of computing Pillar Two ETR to non-tax stakeholders, as the Pillar Two ETR computation calculated based on a uniform set of rules specific to the global minimum tax which is different from the ETR computation under accounting standards that most are familiar with. This includes the need to explain what adjustments are to be made to the Financial Accounting Net Income or Loss, Current Tax Expense or Deferred Tax Expense to arrive at the Pillar Two ETR.
Tax teams may also need to work more closely with non-tax stakeholders to obtain data such as Eligible Payroll Costs, and Eligible Tangible Assets, which may not have been collected previously by tax teams but are now necessary for completing the GIR.
As the starting point for determining each CE’s GloBE income is the net income or loss that is being used to prepare consolidated financial statements of the UPE prior to the elimination of intra-group items, tax teams would also need to have deeper understanding of accounting consolidation process in order to make the appropriate adjustments to derive the Pillar Two ETR. For example, there would be a need to understand profit and loss adjustments related to intra-group transactions (consolidation adjustments and elimination adjustments) reflected in the consolidated financial statements.
Pillar Two technology solutions can help in GloBE Rules compliance
During the same panel discussion, Hung has also shared that Pillar Two technology solutions may be used by MNE Groups to streamline their GIR data management process and improve accuracy of their Pillar Two ETR calculations and set up their tax operations to be ready to prepare for disclosures and eventually submit its GIR to the relevant tax authorities on a timely basis.
Pillar Two technology solutions can also help MNE Groups cope with the demands of tracking the legislative changes in different jurisdictions to govern and manage risks on a real time basis.
In the process of GloBE Rules compliance implementation, MNE Groups would also need to perform data gap analysis and possibly find ways to leverage existing tax provision and / or Country by Country processes to retrieve as many data points as possible for the preparation of the GIR. Effective incorporation of questionnaires in Pillar Two technology solutions workflow can also be part of this data collection process.
Pillar Two technology solutions may automate most of the calculations and allow MNE Groups to perform real-time Pillar Two ETR calculations or simulations. MNE Groups can employ such real-time calculation capabilities to manage their GloBE tax liabilities. If a MNE group undergoes re-organisation, Pillar Two technology solutions can also be used to perform analysis of Pillar Two ETR for different re-organisation scenarios.
Some considerations in selecting a Pillar Two technology solution
The process of managing Pillar Two ETR could somewhat be similar to how MNE Groups conventionally manage their accounting ETR: it begins with the tax provisioning process and analysing the associated data as well as the Country-by-Country Reporting reports. Thereafter, ongoing analysis of the data collected would be performed. In these rather intensive processes, using proven off-the-shelf technology solutions can be a cost-effective way to identify data gaps early and stay up to date with changes as and when they are available.
Some of the questions that MNE Groups may ask when considering which Pillar Two technology solution to adopt would be:
- How is the data necessary for Pillar Two ETR calculations currently captured?
- What are the types of GloBE Rules reporting required internally?
- Does the Pillar Two technology solution facilitate effective collaborations between teams across jurisdictions (whether they are internal stake-holders or external advisors)?
- Total cost of ownership
At the same time, as there will be more guidance coming out from GloBE Rules, it may be more efficient for MNE Groups to adopt off-the-shelf Pillar Two technology solutions rather than bespoke so that MNE Groups can focus on the data management rather than the development of technology solutions.
