Understanding Pillar Two: Implications of the Finance (No. 2) Act 2023 on Corporate Taxation in Ireland

The Rules came into effect for accounting periods commencing on or after 31 December 2023 (based on the ultimate parent entity’s accounting year-end).

Who does this legislation impact?

While the 12.5% corporation tax rate will remain the norm for most Irish companies, the 15% effective corporation tax rate will impact Multinational Enterprises (MNEs) with Irish constituent entities whose annual consolidated worldwide turnover exceeds €750m (pro-rated for periods of less than 12 months). Domestic groups which meet this turnover will also be within the scope of the rules. Exclusions are available for governmental/intragovernmental organisations and their agencies, non-profit organisations, pension funds, regulated investment funds and certain entities substantially owned by excluded entities.

Key concepts

Tax base

An important point to note is that Pillar Two uses its own tax base, calculated according to financial accounting rules and subject to certain adjustments.

The first step for companies within the scope of Pillar Two will be the calculation of the Effective Tax Rate (ETR) under the financial accounting rules permitted by the legislation. Data to prepare the Irish statutory financial statements must be used if certain conditions are met. Otherwise, the data used to prepare the MNE consolidated financial statements must be used. Adjustments to the accounting profits will be required for book-to-Pillar Two differences.

Domestic Top-Up Tax – QDTT

This is the domestic top-up mechanism. The Qualified Domestic Top-Up Tax (QDTT) will enable Ireland to preserve its primary right to tax. It will be based on the calculation of the ETR on the tax base detailed above.

IIR

The Income Inclusion Rule (IIR) is a primary rule. It could apply to Irish entities with direct or indirect foreign subsidiaries if no QDTT was applied in the jurisdictions where the subsidiaries are resident. The Ultimate Parent Entity (UPE) computes the top-up tax for each jurisdiction in which it has subsidiaries. If the UPE is located in a jurisdiction which does not have IIR in its jurisdiction, then the next intermediate parent entity will apply the IIR.

UTPR

The Under-Taxed Profits Rule (UTPR) is a backstop rule. It could apply to Irish entities if no QDTT and no IIR are in place in the jurisdiction where another subsidiary, another sister company or a parent company in the group are situated. This rule will not come into operation until 2025.

Transitional measures and safe harbours

The new legislation provides for a number of temporary and permanent safe harbours.

The transitional CbCR Safe Harbour provides for a temporary exemption applicable for the first three years if at least one of three tests is met:

• De Minimis test.
• Effective Tax Rate test.
• Routine profit test (Profit less substance base income exclusion).

The Irish legislation provides for a QDTT safe harbour. This will allow an MNE group to recognise that Pillar Two top-up taxes have been accounted for in respect of entities resident in Ireland. As a result, no IIR and UTPR should arise in Ireland where foreign entities have been subject to QDTT in another jurisdiction. This should simplify the application of Pillar Two.

Examples of scenarios applicable

1. A constituent entity is located in Ireland

A constituent entity is an entity that is a member of an MNE group or a large-scale domestic group, or a permanent establishment of an entity that is a member of an MNE group.

Where any Irish constituent entity has an effective rate of below 15%, Ireland will impose a top-up tax to bring the effective rate to 15%.

Where two or more constituent entities of the same MNE are located in Ireland, they may elect to be treated as a group for the purposes of the rules.

2. The ultimate parent entity is located in Ireland

An ultimate parent entity is a constituent entity which owns, directly or indirectly, a controlling interest in another entity that is not controlled, directly or indirectly, by another entity or is the head office of an entity with one or more permanent establishments which is not part of a group.

Where the ultimate parent has an effective tax rate of below 15%, Ireland will impose a top-up tax to bringing the effective rate to 15%.

Where any of the constituent entities has an effective rate of below 15% and a top-up tax will not be imposed locally, Ireland will impose a top-up tax on the ultimate parent to bringing the effective rate to 15%.

3. An intermediary parent entity is located in Ireland

An intermediate parent entity is a constituent entity that owns, directly or indirectly, an interest in another constituent entity in the same MNE group or large-scale domestic group but is not an ultimate parent entity.

Where the intermediate parent entity has an effective tax rate of below 15%, Ireland will impose a top-up tax to bringing the effective rate to 15%.

Where any of the intermediate parent entity’s investee constituent entities has an effective rate of below 15% and a top-up tax will not be imposed locally or by the ultimate parent entity, Ireland will impose a top-up tax on the intermediate parent entity bringing the effective rate to 15%.

Reporting deadlines with Revenue

1. Registration of status: 12 months after the last day of the accounting period in which the group is first in scope.
2. Filing of the top-up tax information return: 15 months after the end of the fiscal year. This is extended to 18 months for transitional years, such as the first year in scope. Must file either:
   1. GloBE information return, or
   2. Notification of filer, if not the designated entity for the jurisdiction.
   3. Filing of the GloBE return (Top-up tax return and self-assessment): 15 months after the end of the fiscal year. This is extended to 18 months for transitional years, such as the first year in scope. Must file the following returns.
   4. Payment of additional tax due, (incl. QDTT, IIR or UTPR): 15 months after the end of the fiscal year. This is extended to 18 months for transitional years, such as the first year in scope. For an accounting year ending 31 December 2024, the first filing and payment will be due in June 2026.

For example, a company with a 31 December 2024 year-end, will have the following deadlines for the first year in scope:

• 31 December 2025 - Register its status with Revenue.
• June 2026 – Filing of top-up tax information return, filing of GloBE return and payment of any top-up tax due.

What to do next?

If you are a member of a MNE or a Large-Scale Domestic Group and fall within the scope of Pillar Two, you should consider the following:

1. What are your additional reporting requirements?
2. Who is your UPE of the group and are they based in a jurisdiction that has adopted Pillar Two?
3. Are you able to avail of any of the safe harbours or exclusions?
4. What impact will the legislation have on the group financial reporting requirement?
5. Do you have appropriate systems in place to deal with Pillar Two?

If you require assistance or wish to discuss any of the above information, please feel free to contact us. 

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:

 March 2024