Pillar 2 minimum tax

In simple words, Pillar 2 is a set of rules developed by OECD imposing on large multinational enterprises (MNEs) groups and large-scale domestic groups an obligation to pay a top-up tax, so that the group's effective tax rate is not lower than 15% in a given country.

It is expected that in the coming months more than 140 countries around the world are going to implement the Pillar 2 minimum tax, which shall enter into force from 2024 or 2025.

The European Union via directive also implemented the principles of Pillar 2.

Poland as a member of the Community is also working on transposition of Pillar 2 in the coming year. It is estimated that there are approximately 8,000 companies operating on the Polish market that may be subject to this minimum tax.

To whom the tax applies?

The new regulations will apply to international and domestic capital groups with a total annual revenues of at least EUR 750 million in at least two of the four tax years immediately preceding the tax year in question. Provided that the entry into force of the new regulations would take place in the incoming calendar year, the results for 2020, 2021, 2022 and 2023 will be crucial (if the tax year of a given group corresponds to the calendar year).

The top-up tax will be the difference between the minimum rate of 15% and the effective tax rate (ETR) calculated for that jurisdiction.

Tax collection mechanisms

Should it occurs that the ETR in any jurisdiction is lower than w 15%, depending on the circumstance, one of the following mechanisms will apply, as applicable:

Under this mechanism, the top-up tax is paid in the country of the ultimate parent entity (UPE) or the country of the intermediate parent entity.

The directive stipulates that the IIR mechanism will come into effect on December 31, 2023, and the UTPR a year later.

The principle of undertaxed payments applies when the jurisdiction of the ultimate parent entity or the intermediate parent entity has not implemented minimum tax provisions. Thus, it is an additional method to the principle of income inclusion rules (IIR). According to the UTPR, the top-ip tax must be paid in the country of residence of the relevant subsidiary.

The directive stipulates that the IIR mechanism will come into effect on December 31, 2023, and the UTPR a year later.

New duties and challenges

Apart from the potential additional burden of having to pay the top-up tax, the new rules will also require companies to collect a large volume of data and might result in a significant compliance burden. The groups subject to the minimum tax will need to track changes in values that affect the calculation of the minimum tax.

The magnitude of the challenge is demonstrated in respect to the return (Globe Information Return), consulted by the OECD, the fulfillment of which requires the collection of more than 240 data points relating to various aspects of the group's activities. Groups whose effective tax rate may be lower than 15%, for example due to applied tax reliefs or preferential tax rates (e.g. IP BOX), should analyse in advance the impact of the minimum tax on their level of taxation and consider possible action strategies (e.g. Pillar 2 rules provide wide range of choices for taxpayers). On April 25, 2024, a draft Act implementing into the Polish legal system the provisions of the EU Directive on Pillar 2 was published. The deadline for adoption of the draft Act by the Council of Ministers was planned for Q3 2024. The law is generally intended to come into effect from January 1, 2025. Transitional provisions provide for the optional possibility of retroactive application of the provisions of the law from January 1, 2024. In addition, the Ministry of Finance announced the launch of public consultations on the draft Act, which will last until 17 May.

Difficulties in testing whether a given group would be subject to the above provisions may lie in calculating the ETR for each jurisdiction. The rules for calculating the effective tax rate contain many exceptions and require the allocation of qualified income to each entity in the group. However, as these rules differ from the Polish corporate income tax rules, we will have to deal with the need to prepare a separate, completely new calculation for Pillar 2 purposes.

Individual countries may decide to adopt a qualified minimum domestic top-up tax (QDMTT). In this case, the country of location of a given company has priority when collecting it. Poland announced the introduction of such a tax starting from January 1, 2025

In practice, the new rules will apply to most companies that are members of multinational capital groups.

Groups subject to the minimum tax will need to understand, assess and analyse the impact of Pillar 2 on their whole organisation. This includes, but is not limited to, evaluating additional data and reporting requirements and compliance policies, reviewing the existing technology ecosystem, and establishing processes and controls. Groups will also need to prepare and train staff and manage stakeholder expectations accordingly.

Note

The deadline for submitting the tax return is, as a rule, 15 months starting from the last day of the reporting tax year. In the first year, this period is 18 months.

Individual countries implementing the Pillar 2 rules (including Poland) will have to lay down rules on penalties applicable in the event of a failure to comply with the national provisions implementing the Pillar 2 rules, including the rules for reporting and paying the relevant part of the tax.

How can we help?

To support our clients, PwC has made available two free tools for companies that will be subject to the global minimum tax.

The first one is "Pilar Two Country Tracker", which enables monitoring the progress on the implementation of the minimum tax in different jurisdictions.

Pillar Two Country Tracker

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The second one is "Pillar Two Data Input Catalog", which helps to determine whether the company has all the data necessary for the purposes of determining the minimum tax.

Pillar Two Data Input Catalog

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Video materials

See Michael Stępień's conversation with Agata Oktawiec who explains what the Pillar 2 minimum tax will mean for companies.

Watch Agata Oktawiec's conversation with Michal Stępień on calculating income for Pillar 2 purposes and find out why this can be challenging for companies.

miniatura pillar II 3

Watch the conversation between Michał Stępień and Anna Wójtowicz and check what accounting challenges are associated with the implementation of the Pillar 2 tax.

PwC Studio

Companies from big capital groups will pay an qualified domestic minimum top-up tax

The published draft of acts implementing Directive 2022/2523 into the Polish legal system introduces qualifying domestic minimum income tax in Poland. It will apply to entities from groups subject to the global minimum tax.