Pillar Two has now been enacted into law in over 25 non-US jurisdictions (as of our publication date*). Calendar-year companies with interim reporting requirements will soon be required to report on the forecasted effects of Pillar Two in their 2024 Q1 income tax provision. In addition to the estimated financial statement impact, board members and executive leadership should also be updated on the required disclosures, global tax planning and compliance efforts that go well beyond the tax provision impact. GTM has compiled a “checklist” of four action items below to make sure you are on track to assess your Pillar Two exposure for 2024, taking into account new Administrative Guidance issued by the OECD as well as IRS Notice 2023-80, both issued in December 2023:
Action Item 1: Determine MNE Groups and Constituent Entities
- Identify the MNE Group and the constituent entities of the MNE Group
- This may include entities under common ownership that do not join in filing consolidated financial statements
- Determine correct treatment of JVs, partially owned parent entities, etc.
- Determine if the MNE Group is subject to Pillar Two in 2024.
- MNE Groups with revenues of €750 million or more in at least two of the prior four years are generally subject to Pillar Two GloBE rules.
- Note: December 2023 Administrative Guidance clarified the application of the consolidated revenue threshold.
- Identify which MNE Group jurisdictions have implemented Pillar Two in 2024.
- For US-patented MNE Groups, identify jurisdictions where the MNE Group has constituent entities that will have QDMTTs and IIR in effect for 2024.
Action Item 2: Evaluate Transitional CbCR Safe Harbor
- Assess whether the MNE Group’s CbCR is prepared from Qualified Financial Statements. The December 2023 Administrative Guidance includes new requirements for Qualified Financial Statements:
- The purchase price for accounting (PPA) adjustments disqualify Financial Statements for Transitional CbCR Safe Harbor purposes unless consistent reporting conditions are satisfied and specified goodwill impairment adjustments are made.
- Consistent use of data from the same type of Qualified Financial Statements (determined separately for each jurisdiction).
- Additional guidance on permitted adjustments to Qualified Financial Statements (e.g., post-year-end transfer pricing adjustments are not permitted).
- Analyze which jurisdictions may qualify for transitional CbCR safe harbor. The December 2023 Administrative Guidance includes new guidance on applying the simplified ETR test and treatment of Hybrid Arbitrage Arrangements.
Action Item 3: Perform Full Pillar Two Calculations for Jurisdictions Not Meeting the Transitional CbCR Safe Harbor
- Note: December 2023 Administrative Guidance clarifies the allocation of blended CFC taxes.
- Note: Notice 2023-80 describes forthcoming proposed regulations that would:
- Generally disallow US foreign tax credits and deductions for IIRs and certain Domestic Minimum Top-up Taxes but not QDMTTs; and
- Clarify that legacy (pre-2024) dual-consolidated losses are generally not triggered due to being taken into account in determining the Net GloBE Income for a jurisdiction.
Action Item 4: Prepare Q1 Pillar Two Disclosures
- Communicate early with external auditors to lay out your Pillar Two plan for Q1 and understand their expectations around timing and required documentation.
- Tax should have a speaking role during upcoming Audit Committee meetings, explaining the forecasted 2024 impact of Pillar Two, associated internal controls, and tax compliance obligations.
GTM’s International Tax Services team can assist with your Pillar Two analysis and disclosures for Q1 2024 and beyond in a full range of capacities. Contact us below to explore how we can help.
*Read the overview of the implementation status of the Pillar Two rules in 72 countries here.
