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What are the Pillar 2 rules?
Pillar 2 arose out of the OECD BEPS (Base Erosion and Profit Shifting) project and aims to end the ‘race to the bottom’ on tax rates by ensuring that multinationals pay a minimum effective corporate tax rate (of 15% regardless of the local tax rate or tax base).
Since October 2021, the OECD has released its proposed Model Rules (in December 2021) and Commentary (in March 2022) for Pillar 2. The Model Rules provide details on two interlocking measures, the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), whereby income taxed at less than 15% would be targeted for additional taxation. The IIR imposes a top-up tax on the ultimate parent entity of a low-taxed foreign subsidiary. The UTPR seeks to deny deductions, or take similar actions, with respect to deductions where low tax members of a group are not subject to the IIR.
In order to implement Pillar 2, each country will enact the rules into its local legislation. Although the OECD remains committed to setting an ambitious timeline (with the intention for the initial stage of implementation in 2023) there is not a global consensus on an appropriate timeline.
We provide a summary of the latest updates from key jurisdictions below:
Germany Ireland Italy The Netherlands Singapore United Arab Emirates (UAE) United Kingdom United States
United Kingdom (UK)
The current headline rate of corporate tax in the UK is 19% and this is currently due to rise to 25% in 2023. The UK has broadly welcomed the introduction of the global minimum tax.
The UK tax authority (HMRC) opened a consultation into the Pillar 2 implementation in January 2022, shortly after the release of the OECD Model Rules. This consultation concluded in July 2022. Despite the UK remaining committed to implementation, the effective date has been pushed back as a result of representations made during the consultation process. The Pillar 2 rules will now apply in the UK for accounting periods beginning on / after 31 December 2023. Alongside the consultation outcome, the UK has also released its draft legislation and commentary for the IIR and opened a technical consultation into the UK rules (which has now closed).

Pillar 2 tax rules: UK releases draft legislation
Within the last few weeks, there has been a change in tone from the UK Government which has brought about some uncertainty as regards to the general direction of the UK tax environment. Liz Truss, the UK’s new Prime Minister, has announced that she intends to reverse the planned rise in Corporation Tax to 25% next year and there may be a possible decline in enthusiasm for the introduction of Pillar 2. We will continue to monitor the situation as it continues to evolve.
United States (US)
Implementation of Pillar 2 in the US remains stalled, as proposed changes to the current US global minimum tax — the tax on global intangible low-taxed income (GILTI) — were left out of the recently enacted tax reconciliation bill, the “Inflation Reduction Act.”
While the Inflation Reduction Act does include a new 15% minimum tax on financial statement income for certain large corporations, the new tax is likely not a Qualified Domestic Minimum Ttop-up Tax (QDMTT) per OECD parlance. Previous proposals to change GILTI that some lawmakers hoped would bring the regime in line with Pillar 2 )including amending GILTI to apply on a country-by-country basis and increasing the GILTI effective tax rate to 15.8% (were not included in the final text of the Inflation Reduction Act and now appear unlikely to be enacted this year.
If Democrats cannot pass conforming legislation this year, President Biden will be forced to work with a new Congress in 2023. Recent polling suggests there is a possibility that Republicans could control the House — and, possibly, the Senate — after November’s midterm elections. Republicans are unlikely to support international tax reform (ie, conforming amendments to GILTI) without significant changes. Conversely, if Democrats can retain control of both the House and the Senate after the midterm elections, passage of legislation conforming GILTI with Pillar 2 would be more likely in 2023 — though passage would still be uncertain. Thus, the outcome for enactment of international tax legislation in the near-term is ambiguous — and could prove difficult. Still, the looming Pillar 2 deadline could help spur action.
The Netherlands
The introduction of Pillar 2 was well received and supported by the Dutch government, as it can serve as a mechanism to combat tax avoidance on a global scale. The impact of Pillar 2 on the Dutch economy is expected to increase the tax revenue by up to €0.5 billion annually. However, these expectations are accompanied by a lot of uncertainty.
The Dutch government as well as the Dutch business associations have expressed their concerns with respect to the additional administrative pressure Pillar 2 would have on the in-scope businesses. For now, it is expected that around 3,000 Dutch multinationals will fall within the scope of the rules. Therefore, along with multiple business associations the Dutch government aims for a simplification of the Model Rules to limit the administrative burden on multinationals. The Dutch government has not published or announced any draft legislation to date.
The details of the Dutch implementation of Pillar 2 remain unclear. It could be that the Dutch government will publish more information on Budget Day September 20th. Nevertheless, in a joint statement with France, Germany, Italy and Spain, the Dutch Government announced on 9th September it would introduce Pillar 2 by 'any possible legal means', possibly indicating that the countries intend to bypass the intended EU-wide implementation that would require unanimity; Hungary still appears opposed to implementation as the rules currently stand.
Germany
In a resolution passed in early September, the German coalition Government announced that it would initiate various measures to alleviate the financial burdens on citizens resulting from the current high energy costs.
Furthermore, it became known (albeit on the sidelines of the published decisions) that the German Government will implement the Pillar 2 concept unilaterally if necessary. This has been a somewhat surprising development, since up to now the official announcements had always referred to an at least EU-wide coordinated implementation of Pillar 2. On the other hand, it had already been discussed that Chancellor Scholz, who had made Pillar 2 "his" project as previous Finance Minister, was a strong advocate for implementation of Pillar 2 in Germany, probably with effect from 2024. This sentiment has been further bolstered by the joint announcement with the Dutch Government referred to above.
Currently, the Federal Ministry of Finance is working on a national implementation of the Pillar 2 Model Rules into German law. Draft laws have not been published or announced to date. From a German perspective, various details of the Model Rules are still subject to great uncertainties and risks.
In addition to implementation, discussion is moving forwards in Germany as to the practical implications for businesses of Pillar 2; it is clear that the compliance cost of Pillar 2 for German businesses will be considerable. On the back of a recent scientific study, it is currently being discussed whether for certain countries (where it is foreseeable that the minimum tax level of 15% will be exceeded), a determination of the GloBE income or the submission of a GloBE declaration can be waived, or simplified declaration obligations could apply.
At present, it is still unclear what the German way will look like in detail. For companies based in Germany that fall within the scope of Pillar 2, however, the announcement by the German Government means that they now must deal with implementation questions.
Italy
Italy is a member of the Inclusive Framework, supports the implementation of Pillar 2 and has expressed its willingness to introduce the rules in 2023. As referenced above, Italy was a party to the joint statement released by the Dutch government and is keen to implement Pillar 2 even if unanimity cannot be reached, coordinated through an enhanced relationship with the Dutch government and other interested parties. Furthermore, the Italian government have reaffirmed their commitment to implement Pillar 1 by signing a multilateral convention by mid-2023.
Draft legislation has not been published yet and it may be further postponed due to the upcoming political elections. Nevertheless, we expect publication shortly hopefully within a public consultation context.
Ireland
With a corporate tax rate of 12.5%, there was concern initially in Ireland with a proposed 15% (or higher) global minimum corporate tax rate. Nonetheless, Irish policymakers have broadly welcomed the Pillar 2 agreement as it removes the possibility of even higher increases. At 15%, the tax rate remains very competitive.
In addition, the existing 12.5% rate will be retained for groups with global turnover of less than €750 million. Only around 1,500 Irish businesses out of around 160,000 will fall into the Pillar 2 net.
Like many other EU states, those as mentioned above, Ireland’s domestic legislation is intended to follow the EU directive, which has yet to be agreed and could be subject to delay.
There is a view in Ireland that even 2024 may be an optimistic implementation target, with 2025 more realistic given a shift in many governments’ priorities in recent months.
United Arab Emirates (UAE)
The UAE is undergoing a major overhaul of tax policies as the federal state brings its previously limited tax landscape into line with prevailing international regulations. Following the roll-out of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), the UAE introduced BEPS-aligned substance rules and Country-By-Country Reporting (CBCR).
Taking it a step further, earlier this year the Ministry of Finance (MoF) announced the introduction of the Federal Corporate Tax and Transfer Pricing regulations. The Corporate Tax Legislation is still pending to be published, however expected to be released in the short term. To provide a high-level overview of the upcoming tax legislation the MoF issued a Public Consultation Document and published answers to Frequently Asked Questions on their website, covering the general framework of the future legislation. These two main documents state that the UAE Corporate Tax regime will adhere to the best practices and incorporate principles that are internationally known and accepted.
With the current Corporate Tax framework shaped under both documents, it is clear that the Ministry of Finance is taking steps towards the implementation of Pillar 2 in UAE. It is foreseen that the final law will establish corporate tax rates varying from 0% and 9% to an increased corporate tax rate applicable for large multinationals (following the definition of the OECD guidelines), which will comply with the objective of a minimum global tax standards. We are currently awaiting the final text of the legislation to be released to have more visibility on how this OECD principle will be implemented, but we can already interpret this as progress and a clear intention towards incorporating OECD standards into the UAE tax environment.
Singapore
Singapore is a signatory to the ‘inclusive framework’ and would therefore be obliged to bring taxation into line with OECD Pillar 2; however, the question of whether this is something Singapore would have chosen otherwise remains open. There have been no significant updates over recent months as to the proposed implementation of the Pillar 2 rules.
There are currently around 1,800 multinationals with consolidated revenues of over €750 million in Singapore. While the country’s headline corporate tax rate is 17%, an array of reliefs and reductions mean that most of these multinationals are currently paying less than 15%. The impact of Pillar 2 on Singapore could therefore be significant.
Tax incentives have helped Singapore to attract investment. But a peer review conducted in 2015 concluded that the most common tax incentives are not harmful tax practices. The country has always applied rigorous substance rules and many of these will continue. But under Pillar 2, Singapore would now be subject to a different set of formulaic substance based carve-outs. This could end up being just another layer of rules for rules sake.
Less attention has focused on what would happen if Singapore followed the UK in considering a domestic minimum tax alongside the OECD measures. As these are controlled foreign company (CFC) rules without the activity carve-out, they could turn the country’s source- based system of taxation on its head.
The way forward
With so many aspects of Pillar 2 still to be clarified in different countries worldwide, it’s important to keep a close eye on legislative developments and their potential impact.
It appears unlikely that any territories will enact and implement Pillar 2 measures within the ambitious 2023 target. Nevertheless, there is still a commitment by over 130 territories to introduce the rules. As such, you should be thinking ahead of time how Pillar 2 could impact your business so you can be ready ahead of implementation.
If you would like to discuss any aspect of Pillar 2 and how it may affect your business in further detail, please contact one of the authors below or speak to your local Grant Thornton expert.