Are you ready for BEPS 2.0 Pillar Two compliance?

Japan and South Korea are the first two Asia-Pacific jurisdictions to pass laws on the Global Anti-Base Erosion (GloBE) Model Rules (Pillar Two rules). Australia and New Zealand also announced that they will adopt legislation to implement Pillar Two rules to be effective in 2024. Elsewhere, Singapore, Hong Kong and Thailand plan to introduce Pillar Two rules in 2025, while Malaysia, Indonesia and Vietnam are expected to announce their implementation timelines soon.

As momentum builds toward a common international tax architecture, jurisdictions that offer tax incentives to attract foreign investment will need to consider the potential impact of Pillar Two and the related top-up tax mechanism.

Speaking at the EY Asean Tax Forum 2023 in May, Jillian Lim, Executive Vice President from the Singapore Economic Development Board, acknowledged that the implications of Pillar Two will add to various key developments impacting businesses. She said the Singapore government will focus on ensuring that the nation remains an important hub for trade, capital, talent and innovation in Asia. “Singapore will continually invest at the ecosystem-level to bolster her competitive edge as well as support project-level investments to grow capacity and capabilities within the country,” she added.

Under Pillar Two, MNEs must file a GloBE Information Return (GIR) within 15 months after the end of the accounting period. This is extended to 18 months in the first year of their transition to Pillar Two rules.

The staggered implementation across jurisdictions also means MNEs need to get up to speed on the complexity and nuances in the timing and interaction of various rules, including the Income Inclusion Rule, Undertaxed Payments Rule and Qualifying Domestic Minimum Top-Up Tax. MNEs must consider the impact of Pillar Two even if their home jurisdiction has yet to implement those rules.

Safe harbor rules provide temporary relief

The transitional Country-by-Country Reporting (CbCR) safe harbor rules mitigate some of the administrative difficulties in complying with Pillar Two during the initial years of implementation. Melvin Song, Head of Group Tax at CapitaLand Investment Limited, said during the EY Asean Tax Forum 2023 that the safe harbor rules allow MNEs to “gradually ease into the years when full Pillar Two detailed calculations become mandatory”. This buys more time for MNEs to develop a deeper technical understanding of Pillar Two rules and more importantly, provides sufficient time to develop proper processes, technologies and a data strategy to obtain the data points needed for Pillar Two compliance. 

While safe harbor rules allow MNEs to leverage established CbCR data-gathering processes, actual Pillar Two compliance is profoundly more complex. As many as 200 data points are required to file the GIR and compute the jurisdictional effective tax rate, far surpassing what is required for CbCR.

To meet the heavier compliance and reporting demands of Pillar Two, it has become more critical than ever for MNEs to embark on a journey of digitization and tax automation. Doing this task manually and then trying to reconcile the information with the returns that have been submitted will be extremely challenging.