Pillar Two: How to prepare for the new minimum taxation

With new Pillar Two legislation soon to be implemented, multinationals and large companies face a substantial challenge. Does your company fall under the scope of the Minimum Taxation Act 2024? How can you map the consequences? What new obligations will arise, and is it necessary for your business to prepare for these changes? If you make the necessary preparations, you will know where you stand and whether it is necessary to adjust your structure or business operations. In this article, we will outline our roadmap and describe what steps your organisation must take in the short term to be well prepared for, and optimally compliant with, these new rules.

Although the Dutch legislative proposal for the implementation of the European Pillar Two Directive has not yet been approved, the Dutch government is required to transpose the Directive into national law by 1 January 2024. Since the Dutch government is expected to adopt the OECD approach, there is virtually no ambiguity around the new rules, and one thing is certain: if your company is subject to Pillar Two legislation, you should start analysing what is in store for you as soon as possible.

Our approach: 5 practical steps

Pillar Two may have far-reaching consequences, and the legislation is quite complex. It is therefore important to have a clear view of what this will mean for your business. Our specialized advisors would be happy to assist you. Baker Tilly’s methodical approach is divided into five specific phases:

• Phase 1: General analysis

• Phase 2: In-depth analysis and risk assessment

• Phase 3: Identifying any desired restructuring measures

• Phase 4: Implementation and process organisation

• Phase 5: Returns and compliance

Phase 1: General analysis

Since the Pillar Two rules for calculating the effective tax rate (ETR) are complex, it is good to start with a practical outline analysis, in order to determine what companies fall under the Pillar Two scope. We have developed a practical tool to quickly provide a first indication of the ETR by jurisdiction; we also use this tool to provide an initial estimate of the potential applicability of the so-called de minimis exclusion. Generally, if this exclusion applies in a specific jurisdiction, based on the limited size of the group, no top-up tax is charged in that particular jurisdiction.

Phase 2: In-depth analysis and risk assessment

The outline analysis provides an initial indication of the potential risks of a top-up tax being imposed in countries in which your company operates. During the second phase, we will take an in-depth look at the actual implications in these jurisdictions, based on historical data. Where necessary, we will use the local expertise of the specialists within our global Baker Tilly International network, we can take local tax law and other regulations into account.

For the entities located in these countries, we will work with you to determine the adjusted covered taxes in more detail along with the qualifying income, the two main variables for calculating any possible top-up tax.

The adjusted covered taxes are the taxes charged on the profits in any jurisdiction, reduced by certain excluded taxes (including, for example, regular top-up tax based on Pillar Two).

The figures included in the financial statements are used as a basis for determining the adjusted qualifying income, if necessary supported by further specifications and documentation. Several tax corrections are subsequently applied to this commercial income, based on the Pillar Two rules, in order to adjust i.a. specific R&D costs and dividends. A key element is to identify accrued and deferred tax liabilities, as these can potentially have a significant impact on the ETR.

The ETR can then be determined, based on the adjusted covered taxes and the qualifying income. Although the analysis in this phase is still based on historical data, this data does provide an indication of the future ramifications of Pillar Two.

Phase 3: Identifying any desired restructuring measures

The findings from phases 1 and 2 may warrant a critical look at the company structure and (parts of) the business model and the supply chain. Is any restructuring necessary? What is the economic impact of the top-up tax on your business model? Is there a reason to transfer functions or activities to entities located in other jurisdictions? And how would such changes affect your transfer pricing methodology? We are happy to provide input on the practical, economic and tax implications.

Phase 4: Implementation and process organisation

Once the risks, consequences and any desired adjustments or restructuring operations have been identified, we will proceed to phase 4: the implementation phase. During the implementation phase, it is important to consider the required (tax) returns and information provisions, along with the documentation that will be required. It must also be clear how compliance with local regulations is to be ensured. Are all group entities in all jurisdictions aware of their return, notification, or information obligations? Is Pillar Two integrated into all levels of the organisation? Consider for example the optimisation of the administrative processes to obtain the required information accurately, in full, and in a timely manner every year. It is important to start with the preparations and implementation in time. The required information is extensive, the calculations are complex, and the penalties for failure to comply with the information and return obligations are substantial.

Phase 5: Returns and compliance

During the previous phases, we have identified the relevant points of attention and the expected implications of the new legislation, and integrated the collection of the required information in your processes. The calculation of the actual top-up tax charge can, of course, only be calculated once the numbers for the first financial year are available. A proper preparation process will provide the required foundation, making it possible to process the current data. However, it is important to take into account any changed circumstances, including expansion of the group, or fluctuating financial results. Within 15 months of the end of the financial year, a top-up tax information return must be filed in which detailed information about the group is reported. The top-up tax return must be filed and completed within 17 months following the end of the financial year. Note that these terms may differ between jurisdictions.

Would you like to know more about the filing obligations and deadlines? Read our articles on the top-up tax return and the top-up tax information return.

Do not wait too long to get started!

Since Pillar Two may have a major impact on your organisation in the (very!) near future, it is important to start mapping the implications as soon as possible. Baker Tilly’s advisors can support your organisation with this complex and multinational issue. Drawing on our expertise and using our practical approach, we work with specialists from our international network to identify the risks, consequences and opportunities for your company. If you would like to know more about Pillar Two, the implications for your business, or our practical approach, our tax advisors would be happy to discuss with you how we can be of service to your business.

The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly consultant.