Pillar Two - what do general counsels and legal teams need to know?

  • June 22, 2023

Pillar Two is a significant political agreement that was reached among the members of the OECD's Inclusive Framework to change the taxation of large Multinational Enterprise Groups (“MNEs”). 137 countries have agreed to enact this agreement and many countries are already in the process of adopting the Pillar Two regime into their domestic legislation.

What do general counsels and legal teams need to know?

Pillar Two’s global adoption is a complex area and requires international finance and tax specialists to come together to help navigate the challenges it presents. The vast majority of lawyers are not required to have an in-depth understanding of the new regime. There are however a few key takeaways:

  • Pillar Two establishes a 15% global minimum tax regime enforced through a set of top-up tax rules so that if a country where operations take place levies taxes below this minimum, then the country where the corporate headquarters are located (or another group company) can collect additional taxes to reach the minimum rate.
  • It could apply as soon as 2024 to both public and privately held multinational groups with consolidated revenue over €750m.
  • Implementing jurisdictions could be on a different timetable depending on when local laws are being enacted in such jurisdiction.

What can general counsels and legal teams do to prepare?

The complexity and uncertainty of the new regime compounds the existing global compliance and regulatory challenges for MNEs, as this new calculation requires taxpayers to establish an entirely new set of books to do the calculations. Whilst a lot of work is being undertaken globally to form a data strategy and on operational readiness, there are many ways in which legal teams can support and work alongside other teams to facilitate the implementation of these rules.

If you are within a legal team of an MNE that doesn’t fall within the remit of the new framework, then no preparation is needed. If you are based in an MNE that may be impacted, there are a few things you can consider to help prepare for the changes ahead:

  • Obtain a high level understanding of the proposed strategy and timeline for your organisation. If the organisation’s current data model, systems and technology cannot support the requirements introduced, understand what the plan is to ensure compliance.
  • Verify the list of entities (including their legal form, jurisdiction, shareholding and functional currency) and permanent establishments within the organisation. This will be the initial data point required for the tax and finance teams to begin their analysis.
  • Discuss with your internal stakeholders any pressure points from an operational or structural perspective, in order to remove barriers to reporting.
  • Assist with stakeholder communications by identifying from a corporate governance perspective which stakeholders are likely to be impacted and the level of information they will require.

What other impact will Pillar Two have on legal counsels?

Pillar Two might impact your day to day work as a legal team in many ways, here are a few practical examples:

  • The main input that is expected from the legal teams as part of the implementation of these rules is to be able to provide key details around the legal entities and branches (and maintain such lists as the group structure evolves). Ensuring the legal entity management systems are up to date (in particular those that the tax and finance teams have access to) will become even more crucial.
  • If the group is considering a merger or acquisition, would such acquisition trigger the Pillar Two rules due to the growth in revenue of the group? This might have an impact on the timeline for the acquisition if additional analysis and due diligence will need to be conducted in this area. Such considerations will be particularly important for MNEs with more complex shareholding structures, privately held or PE backed.
  • Joint ventures have very complex rules in relation to Pillar Two therefore the relevant joint venture agreements, whether existing or new, will need to address the payment of any potential top-up tax by either party as a result of the new regime.
  • Pillar Two might also have an impact on legal documents needed for mergers and acquisitions. Sale and purchase agreement negotiations and banking documents, for example, will need to be adjusted to clarify who bears the Pillar Two tax and where that cash comes from.
  • If there are a number of entities in the group that could potentially be eliminated, discuss with your tax team whether such elimination would simplify their analysis for Pillar Two. The cost of running legal entities is already significant in most countries but the requirement to conform with such rules will just add to this cost. This might be the case especially in instances where the accounts of certain entities are prepared on a consolidated basis but will now need to be looked at on an entity by entity basis as a result of these rules.
  • Will there be any other operational or structural changes to the group to facilitate the reporting? If such, support from the legal team on the legal implementation of such changes will be crucial.
  • A lot of tax teams will be building Pillar Two in their technology planning. It may be worth considering at this stage whether such technology also be utilized by the legal teams as part of or in conjunction with their entity management systems.

PwC professionals globally can help provide additional explanation and help MNEs navigate the complexity and relevancy of the rules. Our global International Business Reorganisation lawyers can help you bridge the gap between tax and legal when it comes to the implementation of Pillar Two and are here to support you.

Please refer to PwC’s Pillar Two Readiness site for more information.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.