Challenges and Compliance for Multinational Enterprises

Pillar 2, developed by the OECD, mandates that large multinational and domestic groups pay a top-up tax to ensure their effective tax rate (ETR) is not below 15%. Over 140 countries are expected to implement these regulations by 2024 or 2025. The European Union, through a directive, has incorporated Pillar 2 principles, and Poland, as an EU member, is preparing to implement these rules, which will affect approximately 8,000 companies operating in the Polish market.

"From a Global Business Services perspective, this shift poses significant challenges and requires comprehensive compliance strategies. The new regulations will apply to international and domestic capital groups with annual revenues of at least EUR 750 million in at least two of the four tax years immediately preceding the tax year in question,” said Michał Stępień, Senior Manager in International Tax Services team at PwC Poland.

This means that financial results from 2020-2023 will be critical for determining which capital groups are subject to the new rules. All companies included in the consolidated financial statements of the capital group will need to be included in the Pillar 2 calculations, irrespective of their scale of operations, even if their local legislation does not adopt Pillar 2 regulations. The only way to defer the implementation of Pillar 2 is to qualify for one of Transitional Safe Harbors, which requires diligent analysis and documentation.

Tax collection mechanisms

If the ETR in any jurisdiction is below 15%, one of the following mechanisms will apply:

• Income Inclusion Rule (IIR): Effective from December 31, 2023, this mechanism requires the top-up tax to be paid in the country of the ultimate parent entity (UPE) or the intermediate parent entity.
• Undertaxed Profits Rule (UTPR): Effective a year later, UTPR applies if the jurisdiction of the UPE or intermediate parent entity has not implemented minimum tax provisions. The top-up tax must then be paid in the country of residence of the relevant subsidiary.

These mechanisms aim to prevent tax avoidance by ensuring taxes are paid where economic activities occur and value is created.

Compliance and Challenges

Implementing Pillar 2 will pose significant challenges for affected companies, primarily due to the extensive data collection and reporting requirements. The OECD's Globe Information Return necessitates tracking over 240 data points, increasing compliance burdens. Companies must also manage the complexities of calculating ETRs, which involve numerous exceptions and allocations of qualified income across entities. "Pillar Two Data Input Catalog", helps to determine whether the company has all the data necessary for the purposes of determining the minimum tax.

Poland is actively transposing the EU directive on Pillar 2. A draft Act was published on April 25, 2024, with adoption by the Council of Ministers expected by Q3 2024. The law will generally be effective from January 1, 2025, with optional retroactive application from January 1, 2024. Public consultations on the draft Act are ongoing until May 17, 2024.

The introduction of a Qualified Domestic Minimum Top-Up Tax (QDMTT) in Poland, starting January 1, 2025, will give priority to Poland in collecting the top-up tax. Please keep in mind that other countries may implement QDMTT starting from 2024 or after 2025. Pillar Two Country Tracker provides the status of Pillar Two implementation (including QDMTT) in different countries and regions.

QDMTT in each country may be calculated based on different accounting principles (accounts used for preparing the consolidated financial statements or accounts based on a local financial accounting standard).

“The implementation of Pillar 2 will require several steps, usually starting with evaluating new requirements and analyzing the data gap. Once this is completed the new process for relevant data gathering, processing and reporting needs to be established. This will require adapting existing technology solutions or implementing a new system. Additionally the new process needs to be embedded in the internal control system and compliance policies. As a final component, the upskilling of relevant staff is equally important as streamlined processes and efficient technology,” commented Bartłomiej Duchnowski, Senior Manager in Accounting Advisory team at PwC Poland.

The implementation of Pillar 2 marks a significant evolution in global tax policy, aiming for fairness and reducing profit shifting by large enterprises. As Poland prepares for its rollout, companies must navigate the complexities of compliance, data collection, and reporting to meet the new regulatory standards.

From the perspective of GBS organization the level of complexity is multiplied by the number of different entities and their jurisdiction-specific rules. GBS responsible for tax compliance would especially need to set-up a process for calculation of top-up tax for various jurisdictions. This will require strategic planning, resource allocation, and proactive management to align with the new international tax landscape. GBS should implement a tool with a centralized calculation engine including Constituent Entity analysis, IIR, UTPR, QDMTT and Transitional Safe Harbour logic.

“All companies subject to new regulation must stay abreast of legislative developments and ensure that their compliance frameworks are updated accordingly. This proactive approach will be crucial in managing the transition smoothly and mitigating any potential risks associated with non-compliance," said Piotr Kocot, Partner in Assurance team at PwC Poland.

If you want to find out more about Pillar 2, visit our website dedicated to the minimum tax: Pillar 2 minimum tax - stay informed | PwC