There has been a lot of talk about international tax and two big initiatives that are due to be put in place over the coming years called Pillar One and Pillar Two. These initiatives are all about dealing with the challenges posed by the digital economy and making sure that everyone pays their fair share of taxes, in the countries they operate.
In this short blog, we will provide a simple rundown of Pillar One and Pillar Two, explaining what they're all about and what they mean for large multinational companies.
Pillar One
Pillar One is all about making sure that taxable profits are distributed to the Countries where the market is and making the system fairer. It mostly affects those large multinational companies and tries to change how much tax they have to pay. Pillar One is still a work in progress and it will only happen if enough countries agree to it.
- Pillar One affects multinational companies all over the world with global revenues of over €20 billion
- The plan is to get rid of those digital services taxes and similar measures. The exact details on when and how this will happen are still being worked out
- Originally, Pillar One was meant to target those companies with heavy digital operations. But now, they've broadened the scope to include other industries too. Some areas like mining and regulated finance are exempt, but most other industries are fair game for Pillar One
Pillar Two
Pillar Two is all about making sure that companies pay a minimum tax rate no matter where they operate in the World. They are introducing a lot of new rules to make this happen.
- The OECD/G20 Inclusive Framework came up with the GloBE rules, which set a minimum tax rate of at least 15% for large multinational companies making over €750 million. There's been more guidance on these rules throughout 2022 and 2023
- The European Union plan to start implementing Pillar Two in 2024, while some countries might start in 2025
- The Model Rules didn't include a standard Subject to Tax Rule, but they're working on it and expect to have it ready in 2023. They'll also come up with a way to use this rule in treaties between Countries
- Pillar Two is a major shakeup in the tax world. It sets a minimum tax rate of 15% that everyone has to follow
Pillar One focuses on how profits are distributed and is reserved for multinational companies with revenues of over €20 billion, while Pillar Two sets a minimum tax rate globally for multinational companies with revenues of over €750 million. These initiatives could have a very big impact on multinational companies and their profits, so they need to think carefully and get ready for the changes. Governments also need to be ready to implement these new complex rules and ensure they are enforced properly.
Are you ready for Pillar One and Pillar Two?