Background
The Finance Act includes the draft Irish legislative provisions to implement the Pillar Two rules. The rules will come into effect for in-scope businesses with accounting periods beginning on or after 31 December 2023.
Overview
Pillar Two aims to ensure that in-scope businesses (those with consolidated group revenues of €750m or more in at least two of the four preceding fiscal years) pay at least a 15% effective tax rate on their profits in each jurisdiction they operate in. Delivering this outcome requires the following:
The computation of a new tax base (GloBE income), which will initially be based on accounting profits and requires a series of adjustments for book-to-Pillar Two differences.
Businesses will also determine the adjusted covered taxes based on the total tax charge in the financial statements, with specific adjustments.
Steps one and two are calculated for each constituent entity in the first instance and aggregated on a jurisdictional basis to calculate the jurisdictional effective tax rate. This is calculated by dividing adjusted covered taxes from step two by GloBE income in step one, with the result being the jurisdictional effective tax rate percentage.
The difference between 15% and the percentage from step three is multiplied by the GloBE income (less any substance-based income exclusion). The result is the top-up tax for Pillar Two.
Adoption of the OECD guidance
The Pillar Two rules to be implemented in Ireland are derived from the OECD model rules and the EU Directive. However, the rules are further supplemented through the OECD guidance. The legislation anticipates that further OECD guidance will be released over time, including after the rules come into effect.
The guidance issued to date is referenced in the legislation and it is confirmed that the outcomes from that OECD guidance should be followed, unless those outcomes were inconsistent with the EU Directive. Future guidance would be adopted through Ministerial Order.
Accordingly, the rules in adopting the guidance legislates for the following provisions (not an exhaustive list):
Transitional country-by-country reporting (CbCR) safe harbour;
Qualifying Domestic Minimum Top-Up Tax (QDMTT) safe harbour;
Undertaxed Profits Rule (UTPR) safe harbour; and
Qualifying Domestic Minimum Top-Up Tax (distinct from the QDMTT safe harbour) and how the QDMTT applies in specific scenarios. In the Irish legislation that QDMTT is referred to as the QDTT, which is in line with the abbreviation in the EU Directive and is otherwise the same in substance.
Other aspects of the OECD guidance pertaining to the treatment of specific transactions, credits and so on are also adopted in the Irish rules.
Specific areas of note
Qualifying Domestic Top-Up Tax (QDTT)
The QDTT offers a jurisdiction the opportunity to claim the primary taxing rights over GloBE excess profits of low-taxed constituent entities located in that jurisdiction. The mechanics of the calculation of the top-up tax under the QDTT broadly align with the calculation under the Income Inclusion Rule (IIR) or the UTPR, with some exceptions. As a result, Ireland has chosen a short legislative provision for the QDTT, linked very closely to the IIR and UTPR sections, the EU Directive provisions for a QDMTT, and the administrative guidance on QDMTTs.
Some flexibility is offered to jurisdictions in, for example, the financial reporting standard upon which the calculations are based, with Ireland choosing to follow the Local Financial Accounting Standard (LFAS) rule. The Finance Act provides greater clarity for the use of local financial statements.
QDMTT safe harbour
Distinct from the QDTT is the QDMTT safe harbour. This simplification regime operates by setting the top-up tax to zero for a jurisdiction when an multinational entity (MNE) group qualifies for safe harbour in that jurisdiction. The Irish QDTT is intended to comply with the safe harbour requirements. Separately, Ireland has provided for the application of the QDMTT safe harbour in respect of constituent entities in other jurisdictions. This is an extremely welcome provision for MNE groups as multiple top-up tax calculations should not be required (e.g. calculation only needed for QDTT purposes if the safe harbour criteria are met).
The three criteria for a QDMTT to be considered a QDMTT safe harbour regime are as follows:
- Consistency standard: the consistency standard is met if the computations under the QDMTT are the same as those required under the GloBE rules, except where the OECD guidance explicitly requires the QDMTT to depart from the GloBE rules.
- Administration standard: the administration standard requires that a jurisdiction that benefits from the safe harbour must be subject to the same ongoing monitoring process as the GloBE rules.
- Local accounting standard: the implementing jurisdiction can choose for the QDMTT to be applied using the accounting standard of the UPE or a LFAS. The choice is at the jurisdictional level and not at the level of the MNE group (choice resting with the jurisdiction, not the business).
Local Financial Accounting Standard
Ireland has opted to follow the LFAS rule. Whether or not the LFAS can be applied by groups in computing their QDTT top-up taxes will require case-by-case review. We encourage businesses to start work on identifying what financial accounting standard should be used as a matter of urgency.
An OECD-led peer review process will be carried out to determine whether a jurisdiction’s QDMTT qualifies for the safe harbour. However, the details of such reviews are not yet clear. Without these peer reviews being completed, it is difficult for businesses to determine with certainty whether or not the Irish QDTT can be treated as a QDMTT or whether the QDMTT safe harbour criteria are met for Ireland.
Standalone Entities
Ireland has moved slightly beyond the scope of the OECD and EU Directive rules by introducing the concept of a QDTT that applies to standalone entities (i.e. non-consolidating entities) which breach the €750m threshold themselves. Helpfully however, the rules have applied a carve out to “investment entities” (as defined). It is therefore anticipated that the standalone provisions are likely to have limited impact on Irish non-consolidated taxpayers given the significant revenue threshold.
UTPR safe harbour
The UTPR acts as a backstop to the IIR so that top-up taxes can still be collected where an IIR may not apply.
This UTPR safe harbour applies with respect to ultimate parent entity (UPE) jurisdictions. If an MNE group avails of this safe harbour, the UPE jurisdiction must have a statutory corporate tax rate greater than 20%. This safe harbour results in a one-year delay in implementing the UTPR for the UPE jurisdiction. The safe harbour applies for fiscal years that are no more than 12 months in duration, beginning on or before 31 December 2025 and ending on or before 31 December 2026.
Linked changes to the R&D tax credit
The research and development (R&D) tax credit has been amended in the Finance Act The amount of expenditure qualifying for the relief will increase from 25% to 30%. Because the R&D tax credit will be taxed as GloBE income (as it’s a qualified refundable tax credit) for in-scope businesses from 2024, this increase in the R&D tax credit rate ensures that there is no net impact of the taxation of the R&D tax credit and it will in fact result in a net benefit for companies. We also note that the Digital Gaming Tax Credit has been designed to be a qualified refundable tax credit.
Administrative provisions
Below is an overview of the registration, filing and payment obligations for the purpose of Pillar Two. These administrative requirements are additional to the existing corporation tax requirements; thus, Pillar Two top-up tax liabilities are in addition to the current corporation tax payment obligations.
Registration requirements
These apply to:
Any entity subject to IIR and/or UTPR top-up tax in Ireland; and
A qualifying entity (as defined), which includes each Irish constituent entity and Irish joint ventures (JVs) within an inscope group.
Top-up tax information return (GloBE information return) or notification of filer
This must be filed by each Irish constituent entity unless a designated local entity is appointed.
Top-up tax returns (collectively, GloBE return) and associated payments
IIR return and payment: submitted by relevant parent entity (as defined).
UTPR return and payment: submitted by each relevant UTPR entity or, if appointed, the UTPR group filer.
QDTT return and payment: submitted by each qualifying entity (as defined) or, if appointed, the QDTT group filer.
Revenue has the right to impose penalties where there is a failure to comply with the administrative provisions and can also serve notices on group members where the appointed UTPR/QDTT group filer defaults on payment.
Key actions businesses can take today
1. Know your disclosure requirements
Pillar Two disclosures will be required for impacted groups’ financial statements very soon, in some cases in respect of the current accounting period. Knowing your disclosure requirements before closing out your accounting period is key to preparing for your next and future audits of tax, which will have a Pillar Two element. You should also prepare a robust Pillar Two balance sheet for deferred taxes.
2. Undertake safe harbour analysis
If you have not already started, now is the time to assess whether your business can potentially avail of any transitional or permanent safe harbours. Accessing a safe harbour can significantly simplify your overall Pillar Two compliance burden and reporting requirements. For those already analysing their applicability for safe harbours, the publication of the draft legislation should allow you to finalise this work.
3. Unanticipated outcomes
Businesses should take time to understand the unanticipated outcomes from Pillar Two.
4. Determine applicable accounting standards
Different accounting standards can apply to different aspects of the Pillar Two rules. Knowing exactly where to start and what set of accounting standards to use for Pillar Two is critical.
5. Pillar Two analysis for all future transactions
In the future, all transactions (be they acquisitions, divestments, mergers, refinancings, reorganisations, etc.) will need to be considered from a Pillar Two perspective, as well as in light of the existing corporate tax rules.
We are here to help you
The good news is that even if you are at the early stages of thinking about Pillar Two, there is still time to get “Pillar Two-ready” before 1 January 2024.
PwC has specialist teams to support your business with everything from understanding the technical aspects of the rules, identifying the data points needed to perform the calculations, offering technology-driven solutions, supporting restructuring activities, building your in-house teams to be Pillar Two-ready, and much more. Pillar Two requires businesses to reimagine how their tax function will collect new information and meet new requirements. Contact us today to see how PwC can help.
