Pillar Two is due to come into force in the coming months and years and in-house legal teams will need to consider making preparations now to support their organisation. Already on the agenda of many tax and finance teams, collaboration across the functions will be key to managing the changes.
What is the purpose of Pillar Two?
The Pillar Two global minimum tax rules have been developed and agreed by more than 135 members of the OECD Inclusive Framework as part of a two-pillar solution to reforming international tax.
The key purpose of Pillar Two is to ensure that a minimum effective tax rate (ETR) of 15% applies in every country in which multinational enterprises with group turnover of at least EUR 750m operate. Tax functions are already considering the impact of Pillar Two on their organisations including considering what the complicated new rules mean, how to collect the data required to apply and comply with the rules, as well as the impact of the rules on tax liabilities and, compliance and reporting in the short term (where certain ‘safe harbour rules’ apply) and the longer term.
Why does Pillar Two affect in-house legal teams?
Pillar Two could affect legal teams in a number of ways:
- Company data profiles – legal teams will need to assess the information needed for compliance, including company information for all group companies globally and details of the corporate structure, and then develop quick and efficient methods for collating and providing this information when needed. Systems will need to be reviewed if they are not currently set up to provide the information as required.
- Group restructuring - group restructuring projects may need to be implemented due to the new Pillar Two rules. For example:
- Rationalisation of the legal entities in a group may simplify or ease the Pillar Two compliance and reporting requirements. Legal teams may find themselves being asked by their organisation to implement rationalisation projects urgently.
- Additional specific due diligence may need to be undertaken on M&A transactions, including to establish whether any such transactions would bring the expanded group within the scope of Pillar Two.
- Review of technology – as tax functions are considering investing in new technology and systems (or modifications to existing ERP and tax reporting systems) to assist with their data collection and analysis, legal functions should also be considering whether the same technology can be used by them, whether the systems integrate or whether an upgrade of systems may be required.
When does Pillar Two come into effect?
Pillar Two rules will begin to come into effect in the UK, EU and various other jurisdictions from 2024 (with some jurisdictions implementing rules in 2025 and potentially later dates) so organisations have a small window of time to take any necessary preparatory action.
If you'd like to discuss any point from this blog post, or learn more about our International Business Transformations offering please contact:
Rachel Hossack - Corporate Reorganisations Partner
Nirosha Perera - Corporate Reorganisations Director
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