What are Pillar Two’s immediate provision and disclosure requirements?
Pillar Two disclosures will be required for impacted groups’ financial statements very soon, in many cases for the current accounting period. Knowing your disclosure requirements before closing out your accounting period is key to preparing for future audits of tax, which will have a Pillar Two element. To get a better understanding of the financial statement disclosures required, refer to PwC’s Illustrative consolidated financial statements under IFRS Accounting Standards (Note 6(g)).
You should also prepare a robust Pillar Two balance sheet for deferred taxes. This will help build your documentation to support both disclosed and undisclosed attributes for use in the future. Documentation at this stage is vital in terms of the Pillar Two implications of arrangements, transactions and attributes.
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.
The available safe harbours include:
Temporary
- Country-by-Country Reporting (CbCR) safe harbour: a simplification allowing for the reduction of Pillar Two top-up taxes to nil for jurisdictions that meet one of three tests.
- Undertaxed Profit Rule (UTPR) safe harbour: a temporary delay in applying the UTPR for ultimate parent entity (UPE) jurisdictions for one year.
Permanent
- Qualified Domestic Minimum Top-Up Tax (QDMTT) safe harbour: this simplification regime operates by setting the top-up tax to nil for a jurisdiction when a multinational group qualifies for the QDMTT safe harbour in that jurisdiction.
- De minimis threshold: jurisdictions with average profits of less than €1m and average revenues of less than €10m.
For those already analysing their applicability for safe harbours, the publication of the Irish legislation should allow you to finalise this work.
Analyse existing structure for specific issues, including unanticipated results
Unanticipated outcomes are a common result of Pillar Two modelling exercises. By having a better understanding of what transactions, arrangements or business units are causing such outcomes, you can take action.
What accounting standards apply to you?
Different accounting standards apply to different aspects of the Pillar Two rules and, within that, different entities or different jurisdictions. You may find that the financial reporting standard (FRS) used for the QDMTT is not the same as the FRS used in the CbCR safe harbour or the Income Inclusion Rule (IIR). Knowing what accounting standards to use for Pillar Two is critical, as that forms the starting point for calculating top-up taxes.
The UPE’s consolidated FRS and a local FRS may result in different outcomes for Pillar Two. Similarly, data from the audited consolidated accounts may give you a different answer than the data from the local statutory accounts. Certain entities will not have audited financial statements or local statutory accounts, and there are rules governing the data to be used for such entities. Knowing which data you must use for your Pillar Two calculations is critical and will avoid surprises in the future.
As part of the QDMTT safe harbour, Ireland requires entities to use the local accounting standard for computing the Pillar Two top-up tax, but there are associated conditions.
From 1 January 2024, every transaction will need a Pillar 2 analysis
Every new transaction, arrangement, acquisition, disposal or merger will need to be reviewed from a Pillar Two perspective from 1 January 2024 to avoid unintended tax consequences.
This requires new procedures and controls for your finance and tax teams to ensure the risks are identified. Tax due diligence will need to adopt a Pillar Two perspective. Financing or refinancing will need to be carefully considered in terms of the location and effective tax rates of lenders and borrowers, if intra-group. Pricing arrangements in accordance with the arm’s length principle are more important than ever.
How does Pillar Two apply to your group?
Estimating the impact of Pillar as soon as possible is critical. This should involve identifying which entities are subject to the rules, and the financial, administrative and disclosures impact for these entities.
Working through each of the five steps above will help your group understand how Pillar Two applies. The statutory auditors will review the Pillar Two exposures and/or disclosures as part of upcoming audits, and it is advisable to prepare for this as much as possible.
