The Pillar Two model rules under Global Anti-Base Erosion Regulation have been crafted to ensure that large multinationals pay a minimum level of tax. They apply to companies that are members of a multinational group and have had annual sales of ₹750 million or more in the ultimate parent entity’s consolidated financial statements for at least two of the four fiscal years before the tested year.
This evaluation is crucial as countries such as Germany, France, Sweden and Italy have already enacted the final Pillar Two legislation, while others like Korea, Japan and Australia are set to implement the Global Anti-Base Erosion (GloBE) rules in 2024.
According to tax experts, this regulation will have an impact on more than 140 Indian companies. The cash tax impact would vary depending on the volume of operations in low-tax countries. These are countries with an effective tax rate of less than 15%.
Nonetheless, Pillar Two compliance requirements will remain challenging. “The rules will necessitate an Indian multinational entity to collate and analyse voluminous global data, sourced both from within and outside the ERP system,” said Sanjay Tolia, partner, Price Waterhouse & Co. LLP.
Companies with overseas presence in regions where Pillar 2 has been implemented will have to adhere to the regulations. However, the OECD has implemented a three-year transitional safe harbour provision for companies operating in countries with immaterial revenue and high effective tax rates.
Tax experts say although there are certain tests under safe harbour that could eliminate many of the jurisdictions, countries not covered by safe harbour are required to do detailed analysis.
PwC’s Tolia said that Indian multinationals are in the process of evaluating the conditions for eligibility for such a safe harbour and identifying countries where such conditions are met or not met based on the latest available data.
For the countries where safe harbour is not met, Indian multinationals would need to put processes in place for quarterly tax provisioning and annual computation for FY25. “Even if a single jurisdiction implements GloBE Rules, then the MNE group must follow them irrespective of whether the ultimate parent entity jurisdiction has implemented such rules or not,” said Naveen Aggarwal, partner, tax, at KPMG.
He said there are about 480 data points covering all areas of the GloBE Rules that are to be put in the GloBE return, of which many are not readily available. For example, the software platform does not provide adjustments for forex transactions, the impact of cross-border related party transactions, features of jurisdiction blending, determination of excluded dividends, excluded capital gains, or other such information. “It’s a complex analysis that requires technology tools because the company has to draw data from across the organisation,” said Aggarwal.