
PILLAR 2 and its impact on accounting standards (LUXGAAP):
Recent tax reforms are centered on promoting fairness and equity across different jurisdictions, with a particular focus on multinational companies and their cross-border operations.
The ATAD 1 and 2 Directives aim to curb tax avoidance by ensuring a minimum effective tax rate, while Pillar 2 seeks to guarantee that multinational companies pay at least 15% tax in every jurisdiction where they operate.
DAC 6 introduces automatic information exchange, requiring the reporting of high-risk cross-border arrangements, especially among associated undertakings within the same group.
Although ATAD 3 remains under discussion with no agreement on key aspects, the coherence of these reforms hinges on effective substance and resource allocation.
A. Significant tax reforms: fairness and equity on the different jurisdictions:
Starting with:
- ATAD 1 directive
- ATAD 2 directive
- Pillar 2 – cross border. What’s the purpose? multinational companies pay an effective tax of at least 15% in other jurisdictions where they operate. There are no qualitative provisions on the amount of tax that could be collected in Luxembourg.
- DAC 6: automatic exchange of information tools including all the intermediaries involved in potentially high risk cross border arrangements are required to report such arrangements to the competent tax authorities. Special attention to flows between service providers which are part of the same group with potential risk as being considered as associated undertakings. Impact limited on investment funds especially if there are set up as tax opaque vehicles subject to product law (RAIF, SIF…). Funds could be impacted more on the structure just below the fund.
- ATAD 3: no agreement yet by the member state on the key aspect of the proposal
- Substance matters it about being coherent and allocating the resources where they have to be: Read my article on the following:
The right to tax is fundamental to a country’s sovereignty.
Challenges: Lack of coordination and tax transparency.
Are the imposing additional reporting tools the alternative? The key point here is proportionality to address the huge administrative costs and burdens related to DAC 6 not only for intermediaries but also the taxpayer and the tax authorities.
Lots of uncertainties to the effectiveness of DAC 6 due to its ambiguities on many of the terms included in the directive.
#Beps2013#multinationals pay their fair share of tax: has this worked out?
- Tax transparency: automatic exchange information upon request for tax purposes. 130B€ of additional revenues have been assessed or collected since 2009. Digital and crypto businesses have agreed by 2027 to comply with this exchange of information.
- End of bank secrecy.
Inclusivity (135 countries participating on Beps); Stability (implementation and guidance on provisions); Growth (Global minimum tax), Sustainability on development.
B. PILLAR 2
The OECD’s “Pillar 2” refers to a proposed international tax reform aimed at ensuring a minimum level of global taxation for multinational business groups. This proposal was developed as part of the OECD/G20 BEPS (Base Erosion and Profit Shifting) Project.
More specifically, Pillar 2 aims to establish a “Minimum Taxation Rule” mechanism for multinational companies. The idea is to ensure that companies pay a minimum amount of tax on their profits, regardless of any tax optimization strategies they might use to reduce their taxes.
The main objectives of Pillar 2 are:
Establish a minimum tax payment mechanism on profits of multinational enterprises, to combat base erosion and profit shifting.
Ensuring that corporate profits are subject to a minimum tax rate, even in the absence of profits reported in low-tax jurisdictions.
Reduce harmful tax competition between countries and ensure fair distribution of corporate profits tax globally.
In summary, OECD Pillar 2 represents an attempt at major tax reform to strengthen tax justice and limit aggressive tax optimization strategies by multinational companies.
By using which tool?
IIR: Income inclusion rule : CFC (controlled foreign company); it’s where the ultimate parent entity is resident of the multinational group that should collect and pay the top tax that is due by all the constituents of the group.
UTPR: Undertaxed profit rule: apply in situations where there is no pillar 2 implementation in the country where the ultimate parent entity is resident. This tool is applicable in order to allocate to each participating country in Pillar 2 its fair share of tax i.e., the top up tax that is supposed to be levied on all constituent entities. As there are several ultimate parent entities and so-called intermediaries entities in Luxembourg, ie the case where the parent entity is resident in a non-participating country there is still the application of the IIR in a participating country. In Luxembourg the holding companies of US groups which have an intermediary parent entity in Luxembourg, this means that the application of top up tax if any will be applicable in Luxembourg.
What’s the impact on constitute entities in Luxembourg? No big impact as there is a CIT of around 25% above the minimum 15% tax rate.
The calculation rules for Pillar 2 are the accounting rules that are applicable based on consolidated financial statements of the group. whereas Luxembourg tax rules apply based on specific tax of rules that might be different.
Example 1: a holding company in Luxembourg might have dividends or CGTs that are exempt under Luxembourg rules but not exempt for Pillar 2 and vice versa and thus some difficulties and discrepancies.
What are the burdens for complex holding groups?
There are huge costs related to compliance implementation for reporting obligations under Pillar 2 purposes.
Apart from that aspect there will be no consequences or more taxes to pay for most of the multinational groups in Luxembourg. Only a limited group of companies will be affected by that Pillar 2. For those groups who are using offshore jurisdictions and shifting profits to this offshore jurisdictions there were already some tools designed to tackle this issues such as the reporting on country by country under Beps. This gives a snapshot of the multinational in all the countries and it is a very precise indicator as to how targets, transfer pricing, audits for tax authorities to address those issues.
What’s the impact for the fund industry?
The primary target here are not the funds of Pillar 2. The tax neutrality of funds has been recognized by OECD for a long time and by Pillar 2.
The fund that constitutes the ultimate parent entity of the group is an excluded entity so the funds will remain tax neutral and will not be hit by a top up tax.
However, there are always some exceptions where a fund could be hit by a top up tax in managed account type of situation ie, where you have an asset manager creating a fund for a specific institutional investor and the top up tax may apply to that fund because it will not qualify as so-called investment entity in the absence of unrelated investors.
C. What's the impact under LUX GAAP or LUX GAAP-JV regimes?
- The law of December 22, 2023 implements a major international tax reform in Luxembourg, called the “Pillar 2” law, in accordance with EU Directive 2022/2523.
- This “Pillar 2” law raises questions about its impact on the annex to the annual and consolidated accounts established under the LUX GAAP or LUX GAAP-JV regimes for financial years prior to its entry into force.
- IAS 12 “Income Taxes” was amended by the IASB on May 23, 2023 to incorporate the OECD Pillar 2 model rules, with adoption by the European Commission on November 8, 2023.
- Luxembourg companies have the possibility, or even the obligation in certain cases, to use IFRS-EU for their annual and consolidated accounts, which includes the amendment to IAS 12.
- To ensure fair competition, it is recommended that the information to be provided in the appendices is equivalent or identical, regardless of the accounting framework used (LUX GAAP, LUX GAAP – JV or IFRS – EU).
Sources:
🔗 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.144.01.0001.01.ENG
🔗 Microsoft Word – Q&A CNC 24-031 Impacts of the Pillar 2 law (vf – 20240214).docx
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