Introduction
The OECD’s Pillar Two Global Minimum Tax is transforming international tax frameworks in requiring multinational enterprises (MNEs) with revenues exceeding €750 million to comply with a 15% minimum effective tax rate from 1 January 2024 in many countries worldwide. In the Isle of Man this has been introduced from 1 January 2025. This change is particularly significant for jurisdictions with lower corporate tax rates, as companies operating in these areas may face increased tax liabilities. Governments worldwide are adjusting their tax policies to align with the new framework, and businesses should proactively assess their structures to ensure compliance and mitigate financial risks.
What is Pillar Two?
Pillar Two is part of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, aiming to prevent tax avoidance by ensuring large corporations pay a minimum global tax rate. This initiative seeks to create a more equitable international tax system by addressing profit shifting and tax base erosion practices that enable companies to significantly lower their global tax liabilities.
Sign up for expert insights, industry trends, and key updates—delivered straight to you.
Key Aspects of Pillar Two
The core principle is that in-scope MNE groups must pay at least a 15% tax rate on their profits in every jurisdiction where they operate.
The rules apply to MNE groups with annual revenue of €750 million or more in the consolidated financial statements of the Ultimate Parent Entity (UPE) in at least two of the preceding four years.
Pillar Two operates on a jurisdictional basis. The tax is calculated separately for each jurisdiction where an MNE has operations.
The ETR is calculated by dividing taxes paid by the net GloBE adjusted income in each jurisdiction. If the ETR is below 15%, a “top‑up tax” is applied.
There are certain transitional and permanent jurisdictional exemptions available for businesses that meet certain criteria, either by virtue of size or substance or existing tax rates above the thresholds.
If a jurisdiction's ETR is below 15%, a top‑up tax is payable to bring the tax rate up to the minimum level. This top‑up tax is collected through two main mechanisms:
- Income Inclusion Rule (IIR) is imposed on the parent entity in respect of the low‑taxed profits of its subsidiaries. The Isle of Man has implemented an IIR by way of a Multinational Top‑up Tax (MTUT).
- Undertaxed Profits Rule (UTPR) is designed to apply in situations where the IIR does not. The Isle of Man has not implemented the UTPR.
Designed to allow jurisdictions to "take the tax" on its low‑taxed profits, preventing other jurisdictions from collecting the tax via the IIR or UTPR. The Isle of Man has implemented this via the 15% Domestic Top‑up Tax (DTUT).
Compliance Requirements
Annual Filings
Increased regulatory filings and disclosures to tax authorities in multiple jurisdictions.
ETR Computation
Companies need to calculate and document their global ETR for transparency.
Top‑Up Tax Calculations
Firms operating in low‑tax jurisdictions must determine and report additional top‑up tax liabilities.
How Grant Thornton can help
If your consolidated group revenue exceeds €750 million, we can help you navigate the complexities of Pillar Two.
Pillar Two Assessment
- Identify whether the group or Isle of Man entities are within the scope of Pillar Two.
- Identify the relevant tax authorities for filing Pillar Two returns.
- Assess the effective tax rate across jurisdictions.
- Carry out a Safe Harbour review of subsidiary jurisdictions.
- Identify any additional tax liabilities due under the global minimum tax framework.
- Calculate potential top‑up tax obligations and determine where they must be paid.
- Outline the reporting obligations.
- Establish key filing deadlines and documentation requirements.
- Provide a tailored strategy for ongoing compliance and risk management.
Ongoing Compliance and Reporting
Ensuring long‑term compliance with Pillar Two regulations requires continuous monitoring and adaptation to evolving rules. We provide ongoing support to help businesses stay ahead, including:
Keeping you updated on changes to international tax laws and reporting standards.
Assessing compliance status and identifying potential risks
Assisting you in understanding what data is required to satisfy compliance obligations.
We offer a fully outsourced Pillar Two reporting function, which includes:Data Gathering: Collecting and validating financial and tax information across all relevant jurisdictions.
- Pillar Two Calculations: Performing the necessary computations to determine ETR and any top‑up tax liabilities.
- Return Preparation and Filing: Preparing Pillar Two tax returns and ensuring timely submission to the appropriate tax authorities.
Managing tax authority inquiries, responding to compliance requests, and assisting with potential disputes.
Cessation
We understand that the implementation of Pillar Two may lead some groups to reconsider their group structures. In the event that an Isle of Man entity which falls within the scope of Pillar Two intends to cease trading, our dedicated Restructuring team is able to assist with the formal procedures required to wind up operations. Please contact Ian Richardson or Joe Coyle for more information.
To learn more about our services, contact our team.
