OECD/G20 BEPS Pillar Two: Detailed Proposals and Practical Application

The digitalisation and globalisation of business have exposed gaps in international tax rules, enabling some multinational enterprises (MNEs) to shift profits to low-tax jurisdictions. To address these challenges, the OECD/G20 Inclusive Framework on BEPS introduced the Global Anti-Base Erosion (GloBE) Model Rules under Pillar Two. These rules aim to ensure large MNEs pay a minimum level of tax (15%) in every jurisdiction where they operate.

Why It Matters

Prior to the introduction of Pillar 2, large corporations could reduce their tax bill by booking profits in low-tax jurisdictions, even if business was economically being conducted in other jurisdictions. Pillar 2 aims to bridge that gap. Over 135 countries have agreed to these rules, making tax avoidance harder and ensuring companies pay a fair share wherever they operate.

Detailed Proposals of Pillar Two

1. Scope and Applicability

Who is covered?

MNE Groups with annual revenues of EUR 750 million or more, as reported in the consolidated financial statements of the Ultimate Parent Entity (UPE) in at least two of the four preceding fiscal years. The excluded entities are Governmental entities, international organizations, non-profits, pension funds, certain investment funds and real estate investment vehicles.

2. Charging Provisions

Top-Up Tax Mechanism:

If the effective tax rate (ETR) in a jurisdiction is below 15%, a top-up tax is calculated and allocated among the constituent entities of the MNE Group.

Income Inclusion Rule (IIR):

Parent entities must pay their share of the top-up tax for low-taxed constituent entities.

Undertaxed Payments Rule (UTPR):

Residual top-up tax is allocated to jurisdictions where the MNE operates, based on the number of employees and tangible assets.

3. Computation of GloBE Income and Taxes

GloBE Income Calculation

Adjust the financial accounting net income for specific items (e.g., excluded dividends, equity gains/losses, certain tax credits).

Covered Taxes

Includes income taxes, taxes on distributed profits, and taxes imposed in lieu of corporate income tax. Adjustments are made for timing differences and post-filing changes.

4. Effective Tax Rate and Top-Up Tax

Jurisdictional Calculation:

Aggregate the income and taxes of all constituent entities in each jurisdiction to determine the ETR.

Substance-Based Income Exclusion:

MNEs may elect to reduce profits subject to top-up tax based on eligible payroll costs and tangible assets.

De Minimis Exclusion:

Jurisdictions with average revenue below EUR 10 million and average income below EUR 1 million may be excluded from top-up tax.

7. Administration and Compliance

Filing Obligations:

MNE Groups must file standardized GloBE Information Returns in each jurisdiction where the rules are implemented.

Safe Harbours:

Jurisdictions may be eligible for safe harbour provisions, reducing compliance burdens when ETRs are demonstrably above the minimum.

8. Transitional Rules

Transition Relief:

Special rules for MNE Groups first coming within the scope of the GloBE Rules, including transitional rates for substance-based income exclusions and filing deadlines.

Initial Phase Exclusion:

MNE Groups in the early phase of international activity may be temporarily exempt from UTPR top-up tax.

Major Compliance Challenges

• Data Collection: Companies need granular financial and tax data for every jurisdiction.
• Complex Calculations: Effective tax rate under Pillar 2 uses adjusted accounting figures, not just local tax returns.
• Technology & Systems: Many businesses must upgrade systems to handle new reporting requirements.
• Coordination Across Borders: Different countries may adopt rules at different times, creating mismatches.
• Risk of Double Taxation: Incorrect application of IIR and UTPR can lead to disputes.

Key Takeaways for Multinational Enterprises

• Strategic Impact: MNEs must reassess global tax strategies, considering the new minimum tax standards and compliance requirements.
• Transparency: Increased reporting and standardized returns will require robust data management.
• Substance Matters: Payroll and tangible assets can reduce exposure to top-up tax, incentivizing real economic activity in each jurisdiction.
• Transition Planning: Transitional rules provide relief for newly in-scope groups and those in the initial phase of international expansion.

Concluding remarks

The OECD/G20 BEPS Pillar Two Model represents a significant shift in the international tax landscape. Its objective is to create a more level playing field by ensuring that large multinational enterprises pay a minimum level of tax in each jurisdiction where they operate.

While the policy intent is clear, compliance with Pillar Two is increasingly complex. Organisations are required to rely on robust systems, accurate and consistent data, and careful planning to manage their obligations effectively and avoid potential penalties, disputes, and unintended tax exposures.

Multinational groups should therefore prepare for enhanced compliance requirements, greater transparency, and potential strategic realignments to meet the new global minimum tax standards.

At Forvis Mazars, we support clients throughout the Pillar Two planning and implementation journey, both in the Mauritian context and internationally. Our assistance includes conducting a high‑level impact assessment, evaluating whether top‑up taxes may arise across the group, performing detailed gap analyses, and supporting the implementation of the full Model Rules where applicable, particularly in cases where safe harbour provisions are not met.