Anti-base erosion profit shifting (BEPS) measures
Pillar Two
What are the Pillar Two rules?
The Minimum Tax Directive provides for a European Union (EU) wide implementation of Pillar Two of the Organisation for Economic Co-operation and Development's (OECD's) Two Pillar solution. The Pillar Two rules include an Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR). The Pillar Two rules provide that income of large groups is taxed at a minimum effective tax rate of 15% on a jurisdictional basis. The legislation in Part 4A TCA 1997 provides for three taxes:
- IIR top-up tax
- UTPR top-up tax
- and
- domestic top-up tax.
What is the IIR top-up tax?
The IIR top-up tax rule is the primary taxing rule. It requires an ultimate parent entity of a group to determine whether the entities in its group had an effective tax rate of 15%. This is calculated on a jurisdictional basis for each jurisdiction in which those entities are located.
If the effective tax rate is below the minimum rate, the parent entity will pay an additional amount of tax. The objective is to increase the overall level of taxation in respect of that jurisdiction to bring the effective tax rate to 15%.
There are special rules for intermediate parent entities and partially-owned parent entities and certain exclusions.
The IIR top-up tax comes into effect for fiscal years commencing on, or after, 31 December 2023.
What is the UTPR top-up tax?
The UTPR top-up tax rule is a secondary taxing rule designed to operate as a backstop to the IIR top-up tax. It ensures that top-up tax is allocated to group entities in implementing jurisdictions. The tax may apply if a group does not have a parent company in a jurisdiction that has implemented Pillar Two.
The UTPR comes into effect for fiscal years commencing on, or after, 31 December 2024. There are certain limited circumstances where it may apply on, or after, 31 December 2023.
What is the domestic top-up tax?
A domestic top-up tax allows allows jurisdictions to collect any top-up tax due from domestic entities before the application of IIR or UTPR top-up tax. It is creditable against any IIR or UTPR top-up tax liability. The IIR or UTPR top-up tax may not apply in respect of domestic entities where the domestic top-up tax is granted Safe Harbour status by the OECD.
Ireland has introduced a domestic top-up tax which will comes into effect for fiscal years commencing on, or after, 31 December 2023.
What entities are within the scope of the legislation?
The rules apply to Multi National Enterprises groups or large-scale domestic groups. These rules apply where the revenue of the group exceeds €750m in two of the previous four fiscal years. For the purpose of the domestic top-up tax, Part 4A extends the rules to standalone entities that meet the revenue threshold. Certain entities, referred to as excluded entities, are outside the scope of the rules.
Administrative requirements
Work is ongoing on producing Revenue guidance which will deal with administrative requirements. This will be updated in due course.
Note
Part 4A of the Taxes Consolidation Act 1997 transposes Council Regulation (EU) 2022/2523 of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union.