Pillar Two compliance: Steps multinationals should take now

28 June 2023
Pillar Two is part of the Organisation for Economic Cooperation and Development and G20’s project to combat perceived corporate tax avoidance. It was unveiled in December 2021 and aims to implement a global minimum corporate tax rate of 15 percent for multinational enterprises with more than €750 million in revenues in two or more of the preceding four years.

Pillar Two’s rules, which are unilaterally passed into law by participating countries, will create new compliance obligations and administrative complexities for large multinationals and may affect smaller organisations in the medium to long term. 

This article provides background information on Pillar Two and recommends some steps multinational enterprises (MNEs) can take now to prepare for new and forthcoming regulations.


The OECD estimates that profit-shifting practices result in a yearly worldwide loss of USD100 to 240 billion in corporate income tax revenues. In response, the OECD and G20 countries jointly developed an action plan in 2013 to address base erosion and profit shifting by MNEs. Essentially, profit shifting occurs when multinationals exploit tax legislative gaps between countries to reduce or eliminate the taxation of cross-border economic activities. In October 2020, roughly seven years after developing an action plan, the OECD/G20 Inclusive Framework on BEPS (consisting of Pillar One and Pillar Two) was released. 

Pillar One examines the allocation of taxation rights and profit allocation between countries and the associated tax nexus. Pillar Two, meanwhile, “seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax.” Also known as the Global Anti-Base Erosion Proposal (or GloBE) proposal, Pillar Two focuses on challenges posed by the digital economy, but “goes even further and addresses these challenges more broadly.”

According to the OECD, as of June 2023, over 135 countries and jurisdictions have joined its two-pillar plan to reform international taxation rules and ensure that MNEs pay a fair share of tax wherever they operate. Pillar Two’s rules will take effect in some countries — including the UK, Germany, Japan and South Korea — on or around 1 January 2024. That said, it should be emphasised that timelines for implementing Pillar Two’s rules, and the details of the rules themselves, will vary by country.

Details on Pillar Two implementation and application

Once one moves beyond the “global tax at 15 percent” headlines related to Pillar Two, the difficulty of interpreting and applying the new draft tax provisions becomes apparent.

Many countries, for example, are adopting a two-step approach to implementing Pillar Two that includes the following:

  • Income inclusion rules. At a high level, these rules subject income streams and entities to a multinational top-up tax and a domestic top-up tax (also called a minimum tax).
  • Undertaxed payments rules. These rules trace and potentially deny tax deductions for certain outflows.

This approach does not take into account the existence of many safe harbours, exceptions, carve-outs and other complicating factors. These realities make the domestic application of Pillar Two provisions a minefield of detail and complexity.

This quagmire becomes even denser in light of international entities and intra-group and third-party flows, which also must be accounted for as individual countries unilaterally implement OECD draft guidance.

The complexities and wide scope of the new provisions will inevitably result in additional compliance burdens for MNEs. Authorities in many countries have recognised this reality and are allowing for multi-year implementation and no-penalty periods.

Why MNEs are struggling to prepare for Pillar Two

In addition to grappling with the core technical difficulties of Pillar Two, it’s been difficult for MNEs to prepare for the rules because each country is applying them at its own pace and in its own way. The jumbled process has likely left many tax directors and C-level executives feeling adrift because they can’t plan in detail for the reforms until seeing draft legislation and formal guidance from their countries of operation.

There is related uncertainty about what information multinationals will need to capture and report on to comply with various country-specific legislation related to Pillar Two. Multinationals should not assume that their current accounting and enterprise resource planning systems will readily provide the necessary information. So, it will be critical to keep abreast of new and changing laws and identify what systems and operations will need to be updated to collect the required data.

Even more questions remain unanswered for MNEs. Most obviously, what should they do in jurisdictions with corporate tax rates below 15 percent? For example, Qatar’s corporate tax rate is 10 percent. It’s unclear if MNEs profiting in Qatar (which adopted the OECD’s minimum global tax rate in February 2023) will be mandated to pay the additional 5 percent there or in their home countries. This decision could also dramatically affect emerging markets that have instituted low tax rates to attract investment.

However Pillar Two’s rules are implemented locally, multinationals’ compliance and finance departments can expect extra work. As mentioned there’s little doubt that complying with the many related country-specific rules will create serious administrative burdens.

Next steps for multinationals

Per the OECD, most MNEs will receive three fiscal years of compliance relief for the Industry Issue Resolution (IIR) and two fiscal years of compliance relief for the undertaxed profits rule (UTPR).

Despite compliance-relief periods and the many questions that remain with Pillar Two implementation, there are steps multinationals should take now to prepare for new and coming country-specific regulations. Here are four actions we recommend:

  • Map out the flows between your multinational organisation and third-party entities, and the taxes that arise from those transactions.
  • Determine the country-specific information requirements and the availability and location of the information.
  • Start reviewing country-specific and OECD tax rules and explanatory notes related to Pillar Two. Again, Pillar Two rules are being independently applied and regulations and guidance can total thousands of pages per country.
  • Seek help. Coming to grips with the regulations of a single country is difficult enough, but the complexity of the situation is staggering when an organisation operates in multiple jurisdictions. Obtaining authoritative information and advice from third parties will add costs, but at the same time significantly reduce administrative burdens and the financial and reputational risks that can arise from noncompliance.