I got question from one of our FB friends – What is Pillar 2? To clearly explain Pillar 2 rules besides answering "what?", I should also address "why?", "how?", and "who?"
Pillar 2, also known as the Global Anti-Base Erosion (GloBE) measures, is part of the OECD and Group of 20's Base Erosion and Profit Shifting (BEPS) framework. This framework aims to combat tax avoidance by multinational enterprises (MNEs) through a set of 15 Action Plans. These include Transfer Pricing in Actions 8-10 and Country-by-Country Reporting in Action 13.
Allow me to digress a bit. To understand why BEPS measures are necessary for combatting tax avoidance by MNEs, we should consider the following classic example: A MNE leading electronics brand name after a "Fruit," has its business management headquarters outside the United States (acting as the group's Entrepreneur) in Ireland, a low-tax country. Despite having a large production base with significant economic resources (measured by headcounts) in China. However, most of its profits are registered in Ireland. The various Action Plans of the BEPS framework aims to prevent such global tax planning strategies.
Why Pillar 2? Pillar 2 measures are designed to address the issue at its root by diminishing the incentives for multinational enterprises (MNEs) to relocate profits to jurisdictions with lower tax rates and for countries to engage in tax competition by lowering or exempting income taxes. For example, a Southeast Asian country might attract MNEs by offering tax exemptions or reductions for a certain period, or some countries might exempt taxes on offshore income, or some countries act as tax havens. Once the Pillar 2 is implemented, these measures will be less effective because the mechanisms of Pillar 2 reduce the impact of tax incentives.
How does Pillar 2 work? Under Pillar 2 measures, taxpayers must calculate the Effective Tax Rate (ETR) in each jurisdiction and compare it to the agreed minimum tax rate of 15%. If the ETR is below 15%, the taxpayer must pay a top-up tax to reach the 15% level. For example, if the ETR for all subsidiaries in Thailand is calculated at 12%, the MNE group in Thailand (with one company designated as the representative) must pay an additional 3% tax. In principle, all large MNEs will have an Effective Tax Rate of at least 15%.
Who does Pillar 2 apply to? Does it apply to Thailand? Thailand has enacted legislation related to Pillar 2 in the form of an Emergency Decree on Top-Up Tax, published on December 26, 2024. The decree applies to constituent entities of MNEs located in Thailand, where the ultimate parent entity has total consolidated revenues (converted to Thai Baht) of at least Euro 750 million in at least two of the four preceding fiscal years.
[Contact Person: Mr. Phongnarin Ratarangsikul | Partner]