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Pillar Two: Is your business ready?

HMRC has this month started sending letters to UK businesses it believes could come under the scope of the imminent Pillar Two regulations, informing them of the new rules and providing an opportunity for any issues to be clarified in advance.

And it’s not just organisations in the UK that need to be prepared for Pillar Two; more than 140 countries around the world have signed the OECD’s Inclusive Framework, meaning they will enact a two-pillar solution to address challenges created by the digitalisation.

What is Pillar Two?

Pillar Two is the second of the OECD’s two-pillar scheme to tax the digital economy framework. It was agreed in 2021 and implementation is now looming.

It was devised by the OECD to combat any potential ‘race to the bottom’ on tax rates by mandating rules that mean every multinational must pay a fair amount of tax.

Specifically, Pillar Two will implement a global minimum effective tax rate of 15% on income, ensuring an appropriate level of tax is collected from global organisations.

It will be applied regardless of local tax rates or tax bases and must be paid by all multinationals with consolidated revenue in excess of €750 million and will apply to income generated in low-tax jurisdictions.

Pillar Two is comprised of Model Rules set out by the OECD in late-2021 and 2022. These Model Rules outline the two interlocking measures that provide the structure of the system; the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), which will see any profits taxed at less than 15% subject to additional taxation.

The IIR is designed to levy a top-up tax on parent companies of subsidiaries trading in low-tax jurisdictions, while the UTPR will deny deductions to ensure tax is collected that would otherwise not be.

When does Pillar Two start?

The OECD has recommended that the majority of Pillar Two regulations come into effect in 2024, although the Undertaxed Profits Rule (UTPR) will not be introduced until 2025.

All EU member states agreed to implement the Minimum Tax Directive in December 2022. The legislation included a requirement for each country to transpose Pillar Two into domestic laws by 31st December 2023.

Many other countries outside the EU are currently in the process of implementing Pillar Two rules within their tax legislation.

Incidentally, some organisations are already subject to Pillar Two rules, as the regulations were applied to a limited range of specific transactions from 30th November 2021, although widespread implementation remains set for next year.

The full timeline of Pillar Two’s introduction looks like this…What does it mean for your business?

Before we answer that question, it’s worth remembering that the full extent of Pillar Two remains unknown. Some uncertainties are yet to be resolved, but what is definite is that the regulations will be a pivotal moment for tax teams and create a seismic shift in the way tax is managed.

Data will be critical to the success of Pillar Two, with companies needing to ensure they have the data required to both accurately and efficiently forecast and model in the interim and maintain reporting and compliance duties in the long term.

Pillar Two extends beyond tax and also encompasses other stakeholders within a business – including financial planning and strategic leaders – who must understand the full extent of its impact and ensure adequate technological capabilities are in place to ensure smooth management.

In the short term, businesses that believe they could meet the criteria for Pillar Two should register for the new taxes.

How can we help?

As a collaborative partner of Alteryx, we’ve joined forces with the world’s most powerful data analytics platform to develop a bespoke four-step service to help businesses comply with the Pillar Two regulations.

Our carefully crafted workflows are designed to automate every process that contributes to compliance; from retrieving data from source to cleansing and mapping it to Pillar Two.

For more details on how we can help, view our guide to using Alteryx for Pillar Two or contact our Alteryx team.