Pillar Two and BEPS: What In-House Tax Teams Need to Know

The international tax landscape has undergone a profound change in recent years, driven by the OECD’s work on base erosion and profit shifting (BEPS) and culminating in the Pillar Two global minimum tax. For in-house tax teams in groups with international operations, these developments are among the most significant to affect the role in a generation, introducing a global minimum tax that overlays the existing tax system and imposing new compliance and reporting obligations of real complexity. Understanding the framework, assessing whether and how it affects the group, and managing the resulting obligations is now a central concern for the tax function in internationally-operating groups. This is a demanding and evolving area, and a tax team that understands it can manage the group’s position; one that does not risks both non-compliance and unexpected tax cost.

This guide is written for in-house tax professionals who need a working understanding of Pillar Two and the broader BEPS agenda. It covers what BEPS and Pillar Two are and why they came about, the core mechanics of the global minimum tax at a conceptual level, who is affected, the practical implications for in-house tax teams, and how to approach the obligations. It is an orientation to a complex and evolving area rather than a detailed technical manual, and given the pace of development and the complexity, the OECD guidance and the implementing legislation, together with specialist advice, are the essential references. The aim is the working understanding an in-house tax team needs to grasp the framework and assess its implications, recognising that the detail is intricate and changing.

What BEPS and Pillar Two Are

BEPS — base erosion and profit shifting — refers to the strategies by which multinational groups could shift profits to low-tax jurisdictions and erode the tax base of higher-tax jurisdictions, exploiting gaps and mismatches in the international tax rules. The OECD’s BEPS project, undertaken with the support of many countries, aimed to address these strategies through a coordinated international response, producing a series of measures to close the gaps, improve transparency, and align taxation more closely with genuine economic activity. The BEPS agenda has reshaped international tax over recent years, introducing measures from country-by-country reporting to rules on hybrid mismatches and interest deductibility, and changing the environment in which internationally-operating groups manage their tax.

Pillar Two is the most significant recent development to emerge from this agenda: a global minimum tax designed to ensure that large multinational groups pay a minimum effective rate of tax on their profits in each jurisdiction in which they operate, regardless of where the profits are booked. The logic is to remove the incentive to shift profits to low-tax jurisdictions by ensuring that profits are taxed at the minimum rate somewhere — if a jurisdiction taxes them below the minimum, a top-up tax brings the effective rate up to the minimum. This represents a fundamental change, overlaying a global minimum on the existing patchwork of national tax systems, and it is the development that in-house tax teams in large international groups most need to understand and prepare for. Understanding that Pillar Two introduces a global minimum effective tax rate, with a top-up mechanism where the rate falls below the minimum, is the foundation of grasping the framework.

The Core Mechanics at a Conceptual Level

The mechanics of Pillar Two are genuinely complex, but the core concepts can be grasped at a conceptual level. The framework calculates, for each jurisdiction in which the group operates, the effective tax rate on the group’s profits there — broadly, the tax paid relative to the profit, computed according to the framework’s specific rules. Where this effective rate falls below the agreed global minimum, a top-up tax is applied to bring the effective rate on those profits up to the minimum. The top-up tax can be collected through different mechanisms within the framework, and the rules determine which jurisdiction has the right to collect it, but the essential effect is that profits taxed below the minimum rate in any jurisdiction attract additional tax to reach the minimum.

The detailed application is intricate. The effective rate calculation follows specific rules for determining the relevant profit and the relevant tax, which differ from the ordinary accounting or tax measures and require their own computation. The framework includes various adjustments, exclusions and safe harbours that affect the calculation and may relieve groups from the full computation in certain circumstances. And the mechanisms for collecting the top-up tax, and the rules for which jurisdiction collects it, add further complexity. The in-house tax team does not need to master every detail to understand the framework — that level of detail typically requires specialist support — but should grasp the core mechanic: the jurisdiction-by-jurisdiction effective rate calculation, the top-up where the rate falls below the minimum, and the resulting additional tax and obligations. Understanding the concept provides the foundation for engaging with the detail, which given its complexity is an area where specialist advice and the official guidance are essential.

Who Is Affected

A crucial early question for any group is whether Pillar Two affects it at all, because the framework is targeted at large multinational groups and many businesses fall outside its scope. The framework applies to multinational groups above a significant revenue threshold, so smaller groups and purely domestic businesses are generally outside its scope. An in-house tax team should establish whether the group meets the threshold and falls within the framework, because this determines whether the obligations apply at all — a group below the threshold need not grapple with the full complexity, while one within scope faces significant obligations. Establishing the group’s status is the necessary first step.

For groups within scope, the framework’s effect depends on the group’s circumstances — its operations, the jurisdictions it operates in, the effective tax rates it faces in each, and the various adjustments and safe harbours that may apply. A group operating entirely in jurisdictions where its effective rate comfortably exceeds the minimum may face the compliance and reporting obligations without significant additional tax, while a group with operations in lower-taxed jurisdictions may face genuine top-up tax. Assessing the group’s specific exposure — whether it falls in scope, and if so, what the framework means for its tax cost and its obligations — is an early and important task for the in-house tax team, because it determines the significance of Pillar Two for the group and the effort the team must devote to it. This assessment, given the complexity, typically requires specialist input, but the in-house team must understand enough to scope the issue and engage with the assessment.

The Practical Implications for In-House Tax Teams

For groups within scope, Pillar Two has significant practical implications that the in-house tax team must manage. The most immediate is the compliance and reporting burden: the framework imposes new obligations to compute the effective rates, determine any top-up tax, and report under the framework, which are complex and demanding, requiring data and computation beyond what the group’s existing tax processes may provide. Gathering the data the framework requires — which is extensive and granular — and performing the computations is a substantial undertaking, often requiring new processes and systems and the support of specialist advisers and software.

Beyond compliance, the in-house tax team must understand and manage the group’s exposure to top-up tax, which may affect the group’s overall tax cost and which interacts with the group’s structure and its tax planning. The framework also has implications for the group’s tax strategy, because it changes the incentives that previously drove some international tax planning, rendering certain strategies less effective and requiring the group’s approach to be reconsidered in light of the new minimum. And it has implications for the group’s financial reporting, because the tax effects must be reflected in the accounts. The in-house tax team must therefore manage Pillar Two across several dimensions — the compliance and reporting, the exposure and cost, the strategy, the financial reporting — which makes it a significant and ongoing concern for the tax function in an affected group. Managing these implications well requires understanding the framework, establishing the processes and data, securing the specialist support, and integrating Pillar Two into the group’s tax management, which is a substantial addition to the in-house tax role.

How to Approach the Obligations

Given the complexity and the evolving nature of Pillar Two, the in-house tax team should approach it deliberately and with appropriate support. The first step is to establish whether the group is in scope and, if so, to assess its exposure, which scopes the issue and determines the effort required. For a group in scope, the team should then build the understanding, the data, the processes and the support needed to meet the obligations — understanding the framework’s requirements, establishing the data gathering and computation, and securing the specialist advice and tools that the complexity warrants. This is not an area where an in-house team can reasonably expect to manage the full complexity unaided; the prudent approach combines the in-house team’s knowledge of the group with specialist external support for the technical detail.

The team should also stay current with the framework’s development, because Pillar Two is evolving — the rules are being refined, guidance is being issued, and the implementing legislation in the various jurisdictions is developing — so the obligations and their application are not static. Working from the current guidance and legislation, and maintaining the specialist support to interpret the developments, is essential in an area changing as rapidly as this. The in-house tax team that approaches Pillar Two this way — scoping the issue, building the capability and support, staying current with the development — manages the obligations as well as the complexity allows; one that underestimates the framework or fails to engage with it risks both non-compliance and unexpected cost. Pillar Two and the broader BEPS agenda represent a genuine and lasting change to international tax, and the in-house tax team in an affected group must understand and manage them as a central part of the role, drawing on the official OECD guidance, the implementing legislation, and specialist advice as the essential references in this intricate and developing area. The broader corporation tax compliance context is covered in our guide on corporation tax compliance.

Pillar Two and the Wider Tax Strategy

Beyond the immediate compliance, Pillar Two has implications for a group’s wider tax strategy that the in-house tax team should understand and reflect. The framework changes the incentives that previously shaped some international tax arrangements: where the benefit of locating profits in a low-tax jurisdiction was the lower tax, the global minimum reduces or removes that benefit by topping the tax up to the minimum regardless. This renders certain tax planning strategies less effective, and a group whose structure or arrangements were shaped by considerations the framework now neutralises may find that the rationale for them has weakened. The in-house tax team should consider whether the group’s existing arrangements still make sense in light of Pillar Two, and whether the framework changes the calculus of future decisions.

This does not mean wholesale restructuring — the framework’s interaction with a group’s specific circumstances is complex, and changes should be considered carefully with specialist input — but it does mean that Pillar Two should inform the group’s tax strategy going forward, because planning that ignores the global minimum may pursue benefits the framework neutralises. The in-house tax team that understands how Pillar Two changes the strategic landscape can ensure the group’s tax strategy reflects the new reality, rather than continuing with an approach the framework has undermined. This strategic dimension — understanding how the global minimum changes the incentives and adjusting the group’s approach accordingly — is part of managing Pillar Two beyond the immediate compliance, and it is an area where the in-house team’s understanding of the group, combined with specialist advice on the framework, allows the group to navigate the new landscape sensibly. The framework is not just a compliance obligation but a change to the strategic environment of international tax, and managing it well means reflecting that in the group’s approach.