CCH® Tagetik Global Minimum Tax

BEPS Pillar Two is the OECD's global minimum tax directive. Its goal is to stop large multinational entities (MNEs) from committing tax erosion and profit shifting. Under BEPS Pillar Two, MNEs must pay a minimum effective tax rate of 15% in every country they operate — if that country has agreed to BEPS Pillar Two. A top-up tax must be paid if an MNE (the parent or group company) has an effective tax rate below the minimum in a jurisdiction.

Relief is available from some BEPS Pillar Two obligations via safe harbors. For example:

1. Companies can apply for the Transitional Country-by-Country Reporting (CbCR) Safe Harbor, which temporarily excludes MNEs operating in lower-risk jurisdictions from the top-up tax.
2. Companies can apply for a Simplified Calculations Permanent Safe Harbor, which permanently allows an MNE to reduce the number of complex calculations required or perform simplified calculations instead.

1. Determine the scope of BEPS Pillar Two: Which group entities will require the Pillar Two top-up tax? This could include consolidated companies of the corporate group, materially relevant unconsolidated entities, and permanent establishments. In-scope entities, like joint ventures, will also have to determine group entities that can be excluded from the top-up tax calculation if they meet "excluded entities" status. Determining the scope of BEPS Pillar Two will require tax and finance consolidation teams to work together to determine qualifying entities.
2. GloBE income calculation: Calculating income based on your IFRS/US GAAP accounting standard might seem straightforward. However, income calculations for constituent entities under BEPS Pillar Two are far more complex because constituent entities might not apply the same accounting rules.
3. Calculating covered taxes: Taxes owed on individual financial statements must be adjusted for Pillar Two, which will affect deferred taxes. Again, this makes for a messy calculation process.
4. Calculating Effective Tax Rate (ETR) and Top-up Tax: Entities that calculate a tax rate below 15% must pay a top-up tax to get them to 15%. This can be avoided if the group has certain investments like tangible fixed assets and employees or if they qualify for a safe harbor.
5. Tax liability under the Income Inclusion Rule: Tax liabilities can arise at the parent, holding, or low-taxed company levels. If you can't avoid a top-up tax, the question becomes who should pay.

Eight thousand MNEs worldwide will be subject to BEPS Pillar Two. These companies will have to:

• Determine the constituent entities in the group covered by Pillar Two. Is the entity an ultimate parent entity (UPE), partially-owned parent entity (PoPE), intermediated parent entity (IPE), minority-owned parent entity, permanent establishment, transparent company, or joint venture.
• Collect and manage 250 new data sets per jurisdiction
• Embed the new ETR & UTPR calculations in the financial consolidation process between legal and constituent entities
• Detemine GloBE income via the consolidated accounting standards and adjusted by Pillar Two
• Determine the covered taxes of each constituent entity
• Calculate the effective tax rate (ETR) per jurisdiction by putting the adjusted covered taxes of all constituent entities next to the qualifying income for each jurisdiction.
• Determine eligibility for temporary and permanent safe harbors
• Compare the jurisdiction's ETR with the 15% minimum tax rate and calculate any top-up tax to get to 15%.
• File a "top-up tax information" return for each company and permanent establishment
• Determine which level of entity is responsible for remitting the top-up tax