On December 15, 2022, by written procedure, the European Union (EU) unanimously adopted the Pillar Two directive. The directive requires EU member states to implement Pillar Two in their domestic legislation by December 31, 2023. Formal adoption of the EU directive occurred shortly after the December 12, 2022 announcement of an anticipated agreement by the Permanent Representatives Committee II (COREPER II) meeting. Adoption of the Pillar Two directive is perhaps the most significant development to date in the Organisation for Economic Co-operation and Development/G20 Inclusive Framework’s efforts to bring a truly global minimum tax to life. Adoption of the directive means that EU countries will require in-scope companies to be taxed at 15% locally and that in-scope EU parented multinational organizations will be subject to a country-by-country 15% global minimum tax worldwide.
With an official EU directive implementing the Global Anti-Base Erosion (GloBE) rules, multinational enterprises with average annual global revenues of at least EUR 750 million are likely to be affected and can expect that the 2023 calendar year will introduce additional developments (and clarity) as EU member states are now obliged to adopt national laws implementing the GloBE tax. Implementation of the GloBE tax in the EU raises many issues on the tax function of U.S. multinational enterprises. Notable considerations include the following:
- Robust Data System Requirements for Computing GloBE Tax. Computation of the GloBE tax is expected to require more than 120 data points applied on a country-by-country basis, which has historically been unavailable to even some of the most sophisticated multinational enterprises. FORVIS recommends that in-scope multinational enterprises with operations in the EU review their internal data systems and consider a data gap assessment to help them source relevant data to calculate GloBE taxes and comply with any required GloBE tax and informational returns. FORVIS further recommends that entities begin evaluating what entities would be constituent entities subject to a jurisdictional computation and how the organizations will coordinate the sharing of information needed for jurisdictional computations.
- Uncertainty Regarding Treatment of the U.S.’ GILTI Regime Under the GloBE Tax. Implementation of the GloBE tax in the EU carries substantial implications with respect to how taxes paid under the U.S.’ global intangible low-taxed income (GILTI) regime are treated for purposes of determining the global effective tax rate for purposes of computing the GloBE tax. Specifically, the current GILTI regime is not a qualified income inclusion rule under Pillar Two’s GloBE tax because, among other things, it allows jurisdictional blending of income, losses, and taxes. Without additional legislative action by the U.S., in-scope U.S.-based multinationals face significant uncertainty as to how to reconcile the differences between GILTI and the GloBE tax. If GILTI is not amended, then U.S.-based multinationals could be subject to U.S. GILTI and also to one or more qualified income inclusion rules as early as 2024. FORVIS recommends in-scope U.S.-based multinationals consult with their tax advisors to understand how the current GILTI regime may interplay with the GloBE tax and to begin scenario modeling to confirm they can calculate the GloBE tax and forecast its potential impact on the organization.
- Increased Compliance Costs & Administration for Global Reporting. Under the Inclusive Framework Initiative for Pillar Two, GloBE tax returns are expected to be filed annually to report the GloBE tax and other relevant data points once Pillar Two is implemented in a jurisdiction. As a result, in-scope multinational enterprises with operations in the EU are likely to be faced with additional compliance costs and administrative burdens in each jurisdiction that adopts Pillar Two’s GloBE tax. FORVIS recommends that in-scope multinationals consult with their tax advisors to understand the heightened level of reporting and administration needed to comply with implementation of Pillar Two.
- Enhanced Cooperation with Foreign Controllers & Related Parties. In-scope multinational companies will likely require increased cooperation with their respective foreign controllers and related parties so foreign tax law is properly applied and relevant information is timely accessible to compute and report the GloBE tax. FORVIS recommends multinational enterprises consult with their tax advisors to evaluate their current internal communication processes, procedures, and information systems to confirm that the proper level of cooperation between and within foreign jurisdictions is met both within the organization and with relevant related parties.
- What We Don’t Know. As mentioned above, we don’t know if the U.S.’ GILTI regime will be amended to be Pillar Two compliant (a so-called qualifying IIR). We don’t know if U.S.-based multinationals will still be required to file GloBE returns if GILTI is amended to be Pillar Two compliant. We don’t know how and to what extent safe harbors will limit the compliance burdens associated with Pillar Two.
As noted above, the EU directive requiring implementation of the GloBE tax is a significant milestone for Pillar Two implementation and, as a result, multinational enterprises face substantial increased complexity and uncertainty as EU member states begin to enact Pillar Two legislation before December 31, 2023. FORVIS recommends in-scope multinationals consider the implications noted in this FORsights™ article and consult with their tax advisors about how Pillar Two implementation might affect their existing businesses and related accounting and compliance processes.
For more information regarding how we can assist with implementation of the Pillar Two GloBE tax, please reach out to our International Tax Services Team at FORVIS or submit the Contact Us form below.