Navigating Pillar Two global minimum tax rules

Piyanat Suanapai
PwC Thailand Spotlight, insights on business and industry trends in Thailand and beyond.

Hello, I’m Piyanat Suanapai, your podcast host. 

At the start of each new year, companies monitor the economic outlook, technology and investment trends, and new regulations coming into effect. One regulation that’s being looked at very closely is Pillar Two, a global minimum tax rate that applies to multinational enterprises (MNEs) operating in jurisdictions where the regulation is in force.

Pillar Two won’t come into effect in Thailand until later, but Thai MNEs operating in jurisdictions that have started or will start observing Pillar Two will certainly be affected. 

Today, we’re joined by Orawan Phanitpojjamarn, Tax and Legal Partner, PwC Thailand. Orawan will discuss Pillar Two rules, its impact on Thai MNEs or MNEs operating in Thailand, developments in Thailand and what companies can do to prepare for the new rule.

Hello Orawan.

Orawan Phanitpojjamarn
Hello.

Piyanat
First of all, can you explain briefly what the new Pillar Two global minimum tax rules are? What types of businesses are in scope and what will the impact be?

Orawan
The Organisation for Economic Co-Operation and Development (OECD) developed the Pillar Two rules to restrict MNEs from shifting profits to no or low tax jurisdictions. Some MNEs are paying less tax or no tax at all by taking advantage of these tax incentives, including those offered to attract investments. The OECD established Pillar Two to create a uniform global minimum tax, so that MNEs have to pay a minimum effective tax rate (ETR) of 15% in jurisdictions where they operate. If the ETR is below the 15% threshold, then they have to pay a top-up tax to make up the difference. In principle, the parent company pays for the taxes in the jurisdiction its headquarters is in unless certain conditions are met allowing other jurisdictions where they operate to claim the tax.

Pillar Two applies to MNEs with consolidated revenue of EUR750 million. Those with consolidated revenue below this threshold aren’t in scope. Excluded entities include international organisations, government agencies or non-profit organisations.

Piyanat
How much will MNEs operating in Thailand be affected by Pillar Two now that the regulation is in effect in some countries?

Orawan
Currently, MNEs operating in Thailand are aware of the impact, especially listed companies and financial institutions with consolidated revenue exceeding EUR750 million. These MNEs are in scope as they have operations in various jurisdictions that have proposed draft legislation for Pillar Two covering the Income Inclusion Rule (IIR), Undertaxed Payments Rule (UTPR) or Qualified Domestic Minimum Top-Up Tax (QDMTT). Some jurisdictions have finalised their draft and are awaiting enactment early in 2024. So Thai MNEs operating in those jurisdictions must observe Pillar Two even though the rule hasn’t been enacted in Thailand. If there is a top-up tax in the operating jurisdictions that have enacted Pillar Two, then the revenue departments of those jurisdictions are entitled to claim the tax. Otherwise, the jurisdiction where the headquarters is located can claim the tax. In Thailand’s case, we’re not entitled to claim the top-up tax as Pillar Two hasn’t been enacted yet, which is a lost opportunity for the country.

Piyanat
Speaking of Thailand, what are the Revenue Department’s plans for adopting Pillar Two?

Orawan
The Revenue Department in Thailand is in the process of drafting the legislation. Last year, the cabinet approved Pillar Two adoption, so the legislation is expected to be finalised in 2024 and enacted in 2025.

What’s more, the Board of Investment of Thailand (BOI) announced a measure supporting investment to mitigate the impact of Pillar Two. This measure allows MNEs enjoying or eligible for BOI incentives that are, or will be, in scope of the Pillar Two rules to apply for a 10% tax rate covering twice the remaining incentive period up to a ten-year maximum.

Piyanat
Though Thailand hasn’t enacted Pillar Two just yet, the rules are effective in some jurisdictions this year. How will Pillar Two adoption affect tax teams and financial reporting? What adjustments will need to be made?

Orawan
Though Pillar Two hasn’t been adopted as a domestic law in Thailand, MNEs operating in Thailand with headquarters in jurisdictions that have enacted or will enact Pillar Two rules have a lot of necessary arrangements to make.

MNEs affected by Pillar Two should prepare by conducting an impact assessment. The purpose of this is to identify any jurisdictions they operate in where they won’t meet the 15% ETR threshold, resulting in a top-up tax. MNEs need to disclose the impact assessment and expected top-up tax rate incurred during the accounting year. And they must submit tax filings in compliance with Pillar Two.

Since filing tax in compliance with Pillar Two rules differs from filing corporate income tax, MNEs must raise staff awareness and equip teams with the knowledge they need.

Piyanat
Will different company departments need to prepare for Pillar Two as well?

Orawan
They will indeed, because calculating the top-up tax requires information from many departments, including accounting, tax, HR, and IT. So cross-functional collaboration must improve. Say, for example, a business development team is tasked with studying and identifying M&A activities. They’ll need to review new acquisitions carefully to check if they will result in an MNE’s consolidated revenue going over the EUR750 million threshold. If the answer is yes, the MNE will have to observe Pillar Two. Before, these companies may not have been in scope or under Pillar Two jurisdiction at all.

Piyanat
Have any countries adopted Pillar Two rules already or announced they will start adopting them?

Orawan
In Japan some MNEs, such as those with headquarters in the country, have started preparations because Japan plans to enact Pillar Two rules following the IIR effective in April. These MNEs have to prepare for data collection to calculate potential top-up tax they may incur.

Both MNEs operating in Thailand and Thai MNEs operating elsewhere must review whether the jurisdictions they operate in have enacted or will enact Pillar Two rules.

There are several countries, including those in the EU and Japan, that have finalised Pillar Two draft legislation. Recently, Vietnam announced it will follow IIR and QDMTT under Pillar Two as domestic law. As there are Thai MNEs operating in Vietnam, these MNEs must adapt and prepare accordingly.

Piyanat
How can MNEs prepare for Pillar Two? Should they start acting now or wait for the Revenue Department’s guidelines?

Orawan
As I mentioned, MNEs should review whether the jurisdictions they operate in have enacted or will enact Pillar Two rules. Waiting for Thailand to enact the law domestically will be too late since information is needed from jurisdictions already observing Pillar Two.

Thai MNEs need to conduct an impact assessment to identify any countries where they’re paying below the 15% threshold and calculate the top-up tax. Pillar Two’s top-up tax calculation differs from that of ETR as each item has been adjusted to follow Pillar Two rules. MNEs that are covered by Pillar Two must prepare information and data points for top-up tax calculation, assemble a team to do this task, and educate staff on the rules so they can collect necessary information and calculate tax correctly.

Piyanat
Our conversation has helped us understand how Pillar Two global minimum tax not only affects tax, but also company operations. Companies need to monitor Pillar Two developments in Thailand and abroad. Being aware of the enactment timeline and rules adopted will help companies prepare in the right way and prevent potential issues that could arise.

I’d like to thank Orawan for joining us today.

For more information, please visit our website at www.pwc.com/th or follow PwC Thailand social media channels on LinkedIn, X (formerly Twitter), and Facebook for the latest updates.

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That’s it for today, thank you and goodbye.