Finally, CFOs of multinational companies need to understand the potential tax consequences of Pillar 2 for so-called “controlled foreign entities” that are considered permanent establishments in certain countries.
Pillar 2 undertaxation rules (UTPR) will apply from 2025 if a company is located in a country that has not adopted this framework and its effective tax rate is below a minimum of 15%.
“The UTPR upends the international tax consensus by allowing the jurisdiction of a member of a multinational group to tax other members of the group that have not already been taxed by 15 percent, so all disputes arise. is happening,” says Chad Hungerford is a partner at audit and advisory firm Deloitte and a global Pillar 2 leader.

Because so many different jurisdictions are allowed to potentially tax the same entity, in Pillar 2 the OECD considers jurisdictions based on relative number of employees and amount of assets employed. It established “mechanical rules” for allocating taxes among districts. he says.
Especially for medium-sized multinational companies, complex and extensive frameworks require tax consulting, and the sooner the better.
“This system requires that all multinational companies with revenues exceeding €750 million must file returns, question financial auditors and be audited worldwide to protect their position. must be followed,” Hungerford said. “For most companies, it takes a lot of effort and activity to prove the negative. Most multinational companies have no obligations under Pillar 2, but they spend hundreds of thousands of dollars to comply. You're going to spend millions of dollars. That's a tough pill to swallow.”
Possible approaches
140 countries have signed up to the global minimum tax framework. These account for more than 90% of the world's economic activity. The Organization for Economic Co-operation and Development (OECD) estimates that Pillar 2 could raise corporate taxes worldwide by $220 billion a year. Although the United States is not a signatory, the United States applies its own minimum tax rate of 15% to American multinational corporations around the world. President Joe Biden has said he supports implementation of Pillar 2 in the United States and around the world.
As CFOs prepare their companies for compliance, international tax experts suggest the following approaches:
- Compare the worldwide enactment and implementation of Pillar 2 with the global development of corporate multinationals. EMEA is on track and European Union member states are now collecting additional taxes.
- Determine the implications for global structures, financial operating models, and tax strategies, particularly in low-tax or no-tax jurisdictions. Doing business in these jurisdictions can result in significant additional taxes. Evaluate your IP location to mitigate this impact.
- Review transfer pricing practices and amounts paid in intercompany transactions. Transfer pricing represents the price charged by one entity within a company for goods and services to another entity. Small businesses often ignore transfer pricing. However, as your income increases, it can become a significant tax risk.
- Evaluate current data collection methods, models, technologies, and systems given the need to collect and disclose data from over 200 sources per company across multiple countries.
- Consider Pillar 2 in your expansion plans, as the foreign government's current tax incentives may become meaningless if your company seeks to exceed that threshold.
“The biggest mistake CFOs make is thinking Pillar 2 doesn’t apply to them,” says Peterson. He's not alone in this idea.
“The CFO of a $100 million multinational company might not worry about Pillar 2, thinking it's a long way from compliance and will never be able to achieve it,” says L. Christopher Migliaccio, head of advisory services, said: At PKF O'Connor Davis. “Failure to address these issues can result in significant debt. Startups can accelerate very quickly.”
A case in point is Helios, a human capital management platform provider scheduled to launch in September. Helios has 42 employees and offices in Chicago, Dublin, and Shanghai. “A CFO has to have a vision of becoming a billion-dollar company. If not, why try?” says Michael Berkovich, the company's chief financial officer.

In planning Helios' multinational operations, Mr. Berkovic has kept in mind the Pillar 2 permanent establishment, transfer pricing and residency rules of intellectual property. “I have learned to be careful of 'permanent establishments,' whether they move the country forward or not.” [based on] History of litigation regarding the taxation of multinational corporations. We also pay attention to transfer pricing policies and our intellectual property in relation to the purposes of our overseas entities and what we provide to our parent company. I am always considering where to position the corporation that deals with customers. [reviewing] Intercompany withholding tax between different entities. ”
Similar reviews have caught Rose's attention at Kapitas. “When something innovative like Pillar 2 comes along, it impacts every area of the business. You have to re-evaluate all of your corporate hierarchies, the value of your different profit chains around the world, if you have subsidiaries. “There is a need,” he says.
expansion effect
Because the United States has not signed up to Pillar 2, the tax calculations required to comply must be performed by the next largest company in its ownership chain outside the United States after a U.S. multinational. “If the next largest company is in Germany, the tax person for that company calculates the tax rate for Germany and all the other entities, and he combines it all into one consolidated number,” Peterson said. says.
Mr. Migliaccio cited the shift of intellectual property profits as the most obvious example, adding to the emphasis on Pillar 2 of eliminating the shifting of profits from low-tax or tax-free areas to areas that might be considered to generate income. The CFO also said he is working on it. “If a valuable asset, such as an interest in intellectual property, is held in a low-tax or tax-free jurisdiction, payments to access the intellectual property from an affiliate in the taxing jurisdiction are deductible and result in , it deprives these countries of tax revenue,” he explains. “Pillar 2 essentially reverses that deduction by requiring profits to be taxed in low-tax or no-tax jurisdictions.”
At BlackLine, Partin analyzes the whereabouts of IP in public companies. He said intellectual property is located in the US, UK and Netherlands to ensure companies meet or minimize their effective tax rates. “Does it make sense for our business to continue to maintain three locations for him because IP location determines the effective tax rate? Is this the right location?” he says. “Maybe it would make more sense for him to have one sales person for EMEA and the rest of the world, and have regional sales people for North and South America within the United States.”
Finance managers should also consider the company's future global expansion plans. Tax incentives offered to multinational companies to transfer parts of their operations may lose most or all of their value if the company exceeds his 750 million euro threshold . In the past, operating outside of a corporate headquarters could have added 'business complexity', but the tax savings made it worth it. “If part of the structure is driven by taxes, we need to look at it to determine whether it continues to provide significant benefits going forward,” Migliaccio says. “These impacts should be reconsidered, particularly where businesses are at or near the Pillar 2 threshold.”
Mr. Hungerford agrees that future compliance with the new tax regime will influence today's decisions regarding the location of business locations. “Companies typically decide where to locate a new factory or distribution center after evaluating the cost of capital, prevailing wage rates, utilities, culture, and taxes,” he says. “Pillar 2 significantly changes the tax costs of locating in a particular country, potentially leaving the company stuck with a competitive advantage.”

To avoid this fate, Migliaccio advises finance leaders to undertake a comprehensive assessment of transfer pricing policies, starting with identifying intercompany transactions.
“Track where your company's sales are made and products consumed. Does your company have a transfer pricing policy? Are agreements in place for major transactions? If not, transfer pricing “It may be a good time to invest in research to ensure you are using the most appropriate methods,” he says. “Transfer pricing may facilitate tax savings, but tax authorities may contest returns, reducing the benefits of doing business in a particular jurisdiction.”
Capitas CFO Rose recognizes the impact of transfer pricing on the operating structure of global companies. “The way you run your business for tax advantages may no longer make sense,” he says. “If you don’t get the same efficiency in terms of taxes as before, if you have to go through additional procedures, do you really need a distant subsidiary? Do you need this super complex structure to take advantage of? [of] Tax savings that may no longer exist?”
Partin is re-evaluating BlackLine's transfer pricing policies and models to better determine amounts payable in intercompany transactions by jurisdiction. “We are also looking at other indirect taxes, such as whether the flow of royalties from one company to another within a related group could result in additional taxes,” he says.
“It is not uncommon for medium-sized or larger multinational companies to record tens of millions of intercompany transactions in multiple currencies each month,” says a veteran CFO. “We are fortunate to have his AI-enabled solution for processing business-to-business transactions for our clients and are currently implementing it ourselves.”
Other companies aren't so lucky. There is no time like the present to start thinking about your strategy to prepare to comply with the pillars of broader global tax reform.
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