Pillar Two – Minimum Global Tax

What is Pillar Two?

Under an OECD Inclusive Framework, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalization of the economy. Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue of at least €750m are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

When does Pillar Two come into effect?

The OECD has recommended that the Pillar Two rules become effective in 2024, with the exception of the Undertaxed Profits Rule (UTPR) which is recommended to become effective in 2025. The EU Member States formally adopted the Minimum Tax Directive on December 15, 2022 and Member States had to transpose the Directive into their domestic law by December 31, 2023. In Romania, the transposition became effective officially on 1st of January 2024, with the publication of the Law no. 431/2024.

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Pillar II Guide for EMEA MNEs (PDF of 6.62mb)

Pillar II - Tax Alert

How will Pillar Two impact your business?

The impact of Pillar Two on the end-to-end operations of the tax department is monumental. Groups within scope will need to understand, evaluate, and model the impacts of Pillar Two across the organization. This includes, but is not limited to, assessing the additional data and reporting/compliance requirements, evaluating the existing technology ecosystem and capabilities, establishing processes and controls, preparing and training resources, and managing stakeholder expectations.

One of the common challenges many companies will face is a gap in resources to handle Pillar 2 requirements , especially when the person in this lead role must be able to address the questions and challenges across four broad categories: People, Process, Data and Technology.

What are the GloBe Rules?

The Global Base Erosion rules (GloBE Rules) are designed to ensure large multinational enterprises (MNEs), as well as large-scale domestic ones, pay a minimum level of tax on the income arising in each jurisdiction where they operate.

The Top-up Tax does not operate as a typical direct tax on income of an entity, but rather it applies to the Excess Profits calculated based on the GloBE Rules on a jurisdictional basis and only applies to the extent those profits are subject to tax in a given year below the Minimum Rate.

The GloBE Rules provide two rules for collecting the Top-up tax - that is, an Income Inclusion Rule (IIR) and a Undertaxed Profits Rule (UTPR) - that brings the total amount of taxes paid on an MNE’s Excess Profit in a jurisdiction up to the Minimum Rate. Additionally, various jurisdictions introduced a qualified domestic minimum top-up tax rule (QDMTT) to collect any top-up tax resulting in the respective jurisdiction, which could offset up to zero the top-up tax due for the respective jurisdiction under the IIR and UTRP rules.

Why is Pillar 2 important for a Romanian company?

The standard CIT rate in Romania is 16%. The common misconception is that this nominal 16% rate is already aligned to the requirement of the minimum global tax rate of 15%, being higher. However, the Pillar Two rules take into account the effective tax rate and not the nominal one.

The challenges for the Romanian companies would refer to determining the GloBE Income and Covered Taxes used for the computation of the Effective Tax Rate based on Pillar Two rules and methodology i.e. Deferred taxes and favorable tax regimes impact on Covered Taxes, adjustments between group-reporting standards and local accounting standards (OMF), specific tax adjustment in line with GloBE rules, applicability of safe harbors, and many other technical points.

Therefore, the effective tax rate applied could fall below the minimum 15%. As a result, considering that Romania introduced a QDMTT rule in the domestic legislation, a local top-up tax will be due in such a case for the low taxed constituent entities in Romania.

Also a Romanian subsidiary of a group that is in scope of Pillar Two should assess Transitional Safe Harbors that may apply to reduce the initial compliance and reporting burden up to 2026.

How PwC can help your company with Pillar Two

PwC professionals can help you assess and model the likely financial and operational consequences of Pillar Two.

Operational Readiness

Data Strategy

Quantitative analysis

PwC’s Pillar Two Engine

Pillar Two impact assessment on a Romanian Company

We can help you with assessing the impact that Pillar Two may have on the Romanian operational entity and evaluate any steps needed afterwards.

Modelling tax impact and top up tax
Data availability
Optimizations and reliefs
Tax incentives
Upskill and training

Modelling tax impact and top up tax

Perform computations in line with GloBE rules and domestic implementation of EU Directive, once is transposed locally
Perform clean-up on deferred taxation items that will impact local ETR, for historical and current positions
Estimate the ETR based on GLoBE rules and potential local top-up tax
Assess any sensitive points that may be addressed locally or escalated at group level

Data availability

The data required for Pillar Two computations is complex and may be available in many systems or locations, with almost 200 data entry points needed. We can help a data gap analysis and optimization for preparing local and group Pillar Two reporting.

Optimizations and reliefs

We can help you assess transitional safe harbours that may apply locally to reduce the initial compliance and reporting burden.

Tax incentives

We can help you assess the impact on tax incentives or state aid schemes applicable in Romania and how to address them.

Upskill and training

We can help you prepare your tax teams and relevant process owners to be ready for local and group reporting and compliance, on Pillar Two matters. Remember that Pillar Two requires a complex set of skills and know-how, combining local tax concepts, tax accounting and deferred taxation concepts, together with the new GLoBE Rules.

PwC’s Market Taxation Analyser

To get initial insights into how the Pillar Two rules may impact your business, PwC has developed the Market Taxation Analyser (MARTA). The tool is part of the pilot impact analysis as described above. PwC’s MARTA tool quantifies and visualises the impact of the Pillar Two rules on your business in various scenarios. The tool is fuelled by your own financial data submitted via an Excel based information request, taking into account the Transitional Safe Harbour, GloBE Rules and Commentary to the GloBE Rules. MARTA forms an important step in testing the applicability of the Transitional Safe Harbour rule and will indicate which countries are part of the Safe Harbour rules and are initially excluded from the detailed Pillar Two calculations.

21/05/23

PwC’s Market Taxation Analyser tool

PwC’s Pillar Two Engine

PwC’s Pillar Two Engine is a structured model for assessing the impact of OECD Pillar Two, configured to support the inconsistent and unique adoption of Pillar Two rules around the world and allow for flexibility as those rules continue to evolve. Multiple different variations and interpretations of local rules will require an iterative modelling process for Pillar Two calculations. PwC’s Pillar Two Engine is flexible to allow for various data structures/sources. It also prioritises the key adjustments/elections. The modelling provides compliance and provision grade calculations as well as data visualisation to identify key territories where there is a risk of an OECD Pillar Two tax charge.

Our engine utilises a centralised database with a vetted calculation engine in consultation with PwC Global technical and policy leaders. The database is dynamically updated for rule changes and new legislation in each jurisdiction.

PwC’s Data Input Catalog

PwC’s Data Input Catalog is at the centre of PwC’s end-to-end process for Pillar Two. The Data Input Catalog defines the data requirements for Pillar Two, giving MNEs a comprehensive understanding of the amount of work that lies ahead of them and can help MNEs anticipate the unique challenges they will face. Acting as the foundation to develop an extensive data strategy, assess operational preparedness, or determine a modelling approach, PwC’s Data Input Catalog is the core to Pillar Two readiness.

click here for PwC's Pillar Data Input Catalogue