Pillar 2 will be another hammer for Bricks and Mortar Consumer businesses in 2025
Chris Danes · Posted on: January 28th 2025 · read
Rethinking the Global Tax Compliance Landscape with a Sledgehammer Approach
In 2025, Pillar 2 will be another hammer for Bricks and Mortar Consumer businesses.
Pillar 2 can be likened to "using a sledgehammer to crack a nut," creating a substantial compliance burden for multinational companies in the consumer sector, yet yielding only limited additional tax revenue. This statement comes in the wake of numerous jurisdictions legislating the OECD’s global minimum tax rules. However, the US and China have yet to introduce the necessary legislation to implement Pillar 2. Furthermore, the new US Administration has actively sought to fight these new rules, so more complexity and uncertainty looms on the horizon!
The core objective of Pillar 2 is to ensure that multinationals with revenues exceeding €750 million pay an effective minimum tax rate of 15% in every jurisdiction where they operate. If a multinational’s profit is taxed below this threshold in any given country, other jurisdictions will have the right to impose a top-up levy to meet the minimum tax rate.
While the additional tax revenue generated by Pillar 2 could be significant, it must be weighed against the considerable compliance obligations it imposes. For most multinational consumer businesses focused on physical operations, the additional taxes will likely be minimal. However, these rules introduce a significant compliance burden for all entities within scope. There is a substantial requirement for internal resources to capture the necessary data, as well as the need to file multiple registrations and tax returns globally. For the most complex multinationals, there are also material costs associated with enhancing financial systems to ensure data capture. Moreover, businesses must invest in software and advisory services to convert this data into the relevant tax filings.
Take, for example, a multinational consumer group operating in 20 countries. Currently, this entity is filing 20 corporate tax returns. However, under Pillar 2, it would need to file an additional 20 qualifying minimum domestic top-up tax returns, leading to further complexity. The variation in how different jurisdictions implement the rules only adds to the complexity. Additionally, the requirement to submit a Global Anti-Base Erosion (GloBE) return to consolidate these complex calculations will compound the challenges.
Initially, multinational corporations focused on understanding the impact of Pillar 2. Now, the conversation is shifting to the daunting compliance burdens that lie ahead.
The global minimum tax has the potential to raise between $155 billion and $192 billion in additional corporate income tax revenue annually, according to an OECD working paper. However, for the consumer sector, we predict that this will likely result in a compliance nightmare with minimal additional taxes being payable.
If you're grappling with concerns or compliance challenges related to the Pillar 2 rules, contact Chris Danes, one of our Pillar 2 specialists, who can discuss how you might navigate this anticipated challenge on the horizon.
Note: Extracts first published in International Tax review. ‘Sledgehammer to crack a nut’: MHA expert on pillar two | International Tax Review
