Compliance Briefing — December 15, 2022
The EU Pillar Two directive compels €750m+ groups to implement 15% minimum tax calculations by 2024, driving governance, data, and control upgrades to deliver accurate GloBE reporting and manage top-up tax exposure.
Executive briefing: On the Council of the European Union unanimously adopted Directive (EU) 2022/2523 implementing Pillar Two of the OECD/G20 Inclusive Framework, introducing a 15% global minimum effective tax rate for multinational enterprise (MNE) groups with consolidated revenues of at least €750 million. Member states must transpose the directive by ; the Income Inclusion Rule (IIR) applies for fiscal years beginning on or after , and the Undertaxed Profits Rule (UTPR) applies one year later. Tax, finance, and technology teams must accelerate readiness programmes spanning data collection, systems, governance, and control testing to calculate GloBE (Global Anti-Base Erosion) income, effective tax rates (ETR), and top-up taxes across jurisdictions.
The directive aligns with the OECD Model Rules, embedding the IIR, UTPR, and Qualified Domestic Minimum Top-up Tax (QDMTT) mechanisms. It also introduces safe harbours, administrative simplifications, and filing obligations, including the annual GloBE Information Return (GIR). EU-headquartered groups and non-EU groups with EU subsidiaries or permanent establishments fall within scope. Non-compliance can trigger top-up taxes imposed by other jurisdictions and penalties under national law.
Governance and programme mobilisation
Boards and audit committees should oversee Pillar Two programmes, approving governance structures, resource plans, and risk assessments. Establish steering committees spanning tax, finance, IT, legal, transfer pricing, and compliance. Define programme milestones—gap assessment, data remediation, technology enablement, policy updates, dry runs, and compliance execution. Integrate Pillar Two into enterprise risk management, documenting key risks such as data quality, system readiness, and financial statement impacts.
Assign accountable executives (e.g., Group Tax Director) and establish reporting cadences to senior leadership. Update tax governance frameworks to include Pillar Two, ensuring alignment with OECD tax risk management guidelines and EU cooperative compliance expectations.
Data requirements and systems
Pillar Two calculations require granular data beyond traditional tax provisioning. MNEs must gather financial accounting data at constituent entity level, including revenue, expenses, covered taxes, deferred tax attributes, and substance-based income exclusions. Map data sources across ERP, consolidation, tax compliance, and local ledgers. Identify data gaps—such as tracking eligible payroll, tangible assets, and related party transactions—and implement remediation plans.
Technology enablement may involve enhancements to tax data warehouses, consolidation systems, and reporting tools. Evaluate commercial Pillar Two solutions or develop in-house models capable of handling jurisdictional calculations, safe harbour thresholds, and GIR population. Implement data governance frameworks with defined data owners, quality controls, and lineage documentation. Consider automation for data extraction, transformation, and validation to reduce manual effort and audit risk.
Calculation methodologies and safe harbours
The directive requires calculation of jurisdictional ETRs using GloBE income and adjusted covered taxes. Develop standardized calculation templates reflecting OECD administrative guidance, including deferred tax adjustments, blending of entities, and treatment of hybrid arrangements. Monitor evolving guidance on safe harbours—such as the Transitional Country-by-Country Reporting (CbCR) safe harbour—which may temporarily exempt jurisdictions meeting ETR and substance tests. Document criteria for claiming safe harbours and implement controls to reassess eligibility annually.
Where jurisdictions implement Qualified Domestic Minimum Top-up Taxes, integrate local rules to avoid double taxation. Track legislative developments across EU member states and non-EU jurisdictions adopting QDMTTs (e.g., UK, Japan, Korea). Update models to reflect local variations, filing obligations, and payment timelines.
Financial reporting and forecasting
Pillar Two impacts financial statements, requiring disclosures under IAS 12 or equivalent standards. IFRS guidance (December 2022 amendment) allows temporary relief from deferred tax accounting but mandates qualitative and quantitative disclosures. Finance teams should coordinate with external auditors to assess materiality, disclose affected jurisdictions, and explain implementation progress. Incorporate Pillar Two effects into forecasts, budget planning, and capital allocation decisions.
Assess potential top-up taxes and their impact on effective tax rates, earnings per share, and cash flows. Evaluate interactions with existing tax incentives, loss carryforwards, and transfer pricing arrangements. Scenario analysis can help gauge sensitivity to legislative changes, safe harbour expiry, or profitability shifts.
Policies, controls, and documentation
Update tax control frameworks to encompass Pillar Two processes. Document policies covering data sourcing, calculation procedures, review protocols, and sign-off. Implement segregation of duties between data preparers, reviewers, and approvers. Establish control testing plans to verify accuracy of calculations, consistency of adjustments, and timeliness of filings. Internal audit should include Pillar Two readiness in audit plans, assessing governance, data quality, and control design.
Maintain comprehensive documentation supporting positions—e.g., safe harbour eligibility, substance-based calculations, deferred tax adjustments, and QDMTT claims. Prepare for potential inquiries from tax authorities or joint audits. Align documentation with OECD guidance to facilitate cooperation procedures.
Compliance and reporting
MNEs must file the GloBE Information Return within 15 months of fiscal year end (18 months for the first year). Determine which entity will file (usually the ultimate parent) and coordinate data contributions from all constituent entities. Establish reporting calendars aligned with local tax deadlines to manage dependencies. Develop processes for reconciliation between GloBE data and local tax filings, ensuring consistency.
Monitor member state implementation for additional requirements—such as local registration, estimated payments, or penalties. For groups with decentralized structures, provide training and guidance to local finance teams on data collection and compliance expectations.
Technology testing and dry runs
Conduct dry-run calculations using historical data to validate models, identify data gaps, and stress-test controls. Simulate multiple scenarios, including safe harbour application, QDMTT interactions, and deferred tax adjustments. Use dry runs to inform executive reporting, investor communications, and audit committee updates. Capture lessons learned and update processes before statutory deadlines.
Leverage testing to evaluate integration with existing tax provisioning, CbCR, and transfer pricing systems. Ensure APIs and data feeds operate reliably, and implement monitoring dashboards to track data quality and calculation status. Establish incident response procedures for system failures or data integrity issues.
Stakeholder communications and change management
Communicate Pillar Two impacts to investors, analysts, and credit rating agencies through earnings disclosures and sustainability reports. Explain anticipated top-up taxes, mitigation strategies, and long-term planning. Engage with lenders and rating agencies regarding covenant implications.
Coordinate with human resources and training teams to educate finance and tax staff on Pillar Two concepts, safe harbours, and reporting obligations. Provide learning modules for local controllers and shared service centres. Update transfer pricing policies, intercompany agreements, and treasury strategies to reflect Pillar Two considerations.
Policy monitoring and advocacy
Maintain a regulatory watch across OECD and EU forums for ongoing guidance, safe harbour updates, and dispute resolution mechanisms. Participate in industry associations (BusinessEurope, Tax Executives Institute) to share insights and advocate for practical implementation. Engage with national tax authorities to clarify data requirements, filing formats, and administrative relief.
By mobilising cross-functional programmes, strengthening data and control environments, and performing early dry runs, MNEs can meet the EU Pillar Two directive’s aggressive timelines while minimizing compliance risk and financial surprises.
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