Understanding Pillar Two and Top-Up Tax: What It Means for Your Business

In an era of global tax reform, Pillar Two and the Top-up Tax are changing the corporate landscape. Developed by the OECD/G20 Inclusive Framework, Pillar Two introduces a global minimum corporate tax.

This new framework is reshaping tax planning, compliance strategies, and financial reporting for multinational businesses. Understanding the scope and implications of Pillar Two is crucial for any company operating across borders.

Let’s explore what this reform means and how businesses should prepare!

What is Pillar Two?

Pillar Two is part of the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative. It ensures that large multinational enterprises (MNEs) pay a minimum level of tax, regardless of where they operate.

Key elements include:

• Global Minimum Tax Rate: A 15% tax rate on profits in each jurisdiction.
• Revenue Threshold: Applies to MNEs with global revenues above €750 million.
• Top-up Tax: Imposed when a firm's income in a jurisdiction is taxed at a rate lower than the 15% minimum.

This tax is calculated using the GloBE (Global Anti-Base Erosion) Rules. It helps to measure effective tax rates (ETR) across jurisdictions.

How the Top-Up Tax Works

The Top-up Tax ensures that profits taxed below the minimum rate are brought up to 15%. Here's how:

1. Qualified Domestic Minimum Top-up Tax (QDMTT): Local tax rates are introduced to bring up the tax level on profits to 15%
2. Income Inclusion Rule (IIR): Parent entities must pay the top-up tax on low-taxed income from subsidiaries.
3. Undertaxed Payment Rule (UTPR): If the parent does not apply IIR, they can apply UTPR.

For example, if a company’s subsidiary in a low-tax country pays only 5% in corporate taxes, the parent may have to pay an additional 10% under Pillar Two.

Implications for Multinational Businesses

The importance of Pillar Two and the Top-up Tax is vast and far-reaching:

1. Increased Tax Compliance Burden

Businesses must track effective tax rates across every jurisdiction. They need systems to calculate, document, and report under the GloBE rules. This involves:

• Enhanced tax reporting infrastructure
• New processes for tax data aggregation
• Cross-functional coordination between tax, finance, and legal teams

2. Impact on Investment Decisions

The new rules may shift how companies structure investments. Countries with lower tax rates might lose some of their appeal.

For instance, a tech firm might reconsider opening a new office in a jurisdiction with a 10% tax rate. Since the parent will face a 5% top-up tax anyway.

3. Pressure on Low-Tax Jurisdictions

Countries known for corporate tax incentives, like Ireland, may need to revise their tax frameworks. Otherwise, businesses operating there may be subject to top-up taxes in their home countries.

This undermines the competitive advantage of low-tax regions.

4. Financial Reporting and Deferred Taxes

Pillar Two affects how businesses account for taxes in financial statements. The potential liability from top-up taxes may need new deferred tax assets or liabilities.

Challenges include:

• Forecasting future tax obligations
• Adjusting effective tax rate disclosures
• Ensuring compliance with IFRS or GAAP requirements

5. Shift in Tax Incentive Strategies

Governments offering tax holidays or R&D credits may need to rethink their incentives. If such benefits lower the ETR below 15%, they could be applicable for a top-up tax elsewhere.

Alternative incentive models, like qualified refundable tax credits, may become more common.

Who Is Most Affected?

Industries most impacted include:

• Tech and digital services: Often locate IP in low-tax jurisdictions
• Pharmaceuticals: Leverage complex supply chains and tax-efficient IP strategies
• Financial services: Operate through international hubs

For now, startups and smaller firms under the €750M threshold are exempt. But as jurisdictions adopt local versions of the rules, more businesses may follow suit.

Preparing for Pillar Two

Here are some proactive steps for businesses:

1. Conduct a readiness assessment: Understand how Pillar Two affects your group structure and jurisdictions.
2. Improve tax data systems: Automate data collection and reporting to support GloBE compliance.
3. Model financial impacts: Forecast top-up tax liabilities and adjust tax provisioning.
4. Engage with local authorities: Check how each country implements the rules. Some may offer safe harbours or transitional relief.
5. Update governance policies: Boards and audit committees need visibility on how tax strategies align with global compliance.

Ready to Navigate Pillar Two with Confidence?

Don’t let global tax reforms catch your business off guard. Partner with 10xM Consulting to understand how Pillar Two and Top-Up Tax impact your operations—and what you can do to stay ahead.

Get expert guidance today and ensure your business remains compliant, competitive, and future-ready. Schedule a Free Consultation with 10xM Now!