As the world becomes increasingly interconnected and businesses operate on a global scale, international tax rules continue to come under scrutiny. To address the challenges posed by digitalization and profit shifting, the Organization for Economic Cooperation and Development (OECD) developed the Pillar 2 global tax rules as part of its Base Erosion and Profit Shifting (BEPS) project.

This article explores the valuation implications associated with Pillar 2, shedding light on how these rules can impact businesses and their valuation methodologies.¹

Understanding Pillar 2

Pillar 2 aims to address the remaining BEPS issues that were not covered by Pillar 1, which focuses on taxing the digital economy. In particular, the Pillar 2 rules target multinational enterprises (MNEs) and their profit allocation methodologies, ensuring a minimum level of taxation and preventing the erosion of a country’s tax base. Pillar 2 introduces two key mechanisms: the Anti Global Base Erosion (GloBE) proposal and the Undertaxed Payments rule.

GloBE Proposal

The GloBE proposal introduces the concept of a global minimum tax rate applicable to all MNEs.² It requires countries to implement rules to ensure that MNEs pay a minimum level of tax, regardless of where they operate. This minimum tax rate acts as a backstop, preventing profit shifting to low-tax jurisdictions. The introduction of this proposal has significant implications for valuations.

Implications on Valuation

1. Tax Planning Considerations

With the implementation of Pillar 2’s global minimum tax rate, historical tax planning strategies require careful re-evaluation, including detailed calculations of local country taxes and accounting reporting. International tax professionals must assess the impact on MNEs’ overall cash tax liabilities and the effectiveness of existing structures. Valuation models can assist in analyzing different scenarios and estimating the potential tax liabilities under various tax planning strategies. By leveraging valuations, tax professionals can optimize tax planning, minimize risks, and ensure compliance with the new rules.

2. Impacts on Intellectual Property (IP) Valuation

Pillar 2’s focus on preventing profit shifting associated with intellectual property has significant implications for IP valuation. Valuation and tax professionals must carefully consider the economic substance, risks, and contributions associated with IP assets. Robust valuations will help ensure the appropriate allocation of profits related to IP and align with the arm’s-length principle. Accurate IP valuations will provide tax professionals with a solid foundation for complying with the new rules and help mitigate transfer pricing risks.

3. Impact on International Mergers and Acquisitions (M&A)

M&A transactions involving cross-border entities require thorough consideration of Pillar 2’s implications.³ International tax professionals must evaluate the potential impact on tax liabilities, future profitability, and post-merger integration. Valuations play a vital role in assessing the opportunities and risks associated with the target’s tax positions, transfer pricing policies, and adherence to the global minimum tax rate, particularly in circumstances where the potential M&A event will cause the buyer and/or the target to cross the global annual revenue threshold of €750 million. Through robust due diligence, tax professionals can identify potential tax exposures, develop tax-efficient structures, and make informed decisions during the M&A process.

4. Transfer Pricing and Valuation

Pillar 2’s focus on preventing profit shifting to low-tax jurisdictions has significant implications for transfer pricing and valuations. Tax authorities are likely to closely scrutinize intercompany transactions to ensure they align with the arm’s-length principle. Valuations used in transfer pricing analysis must be robust, defensible, and supported by reliable data and comparable transactions. Valuation professionals play a crucial role in helping companies establish and document the economic substance of transactions, providing a solid foundation for transfer pricing compliance.

5. Regulatory Compliance and Reporting

Pillar 2’s implementation necessitates enhanced transparency and reporting for regulatory compliance. Tax professionals must ensure that valuations align with financial statements, tax filings, and the global minimum tax rate. Independent valuations will be crucial to substantiate the fairness of intra-group transactions, especially in light of increased scrutiny by tax authorities. Accurate valuations supported by comprehensive documentation will enable tax professionals to confidently navigate the regulatory landscape and demonstrate compliance with the new rules. This need is particularly driven by the added complexity to financial statement reporting for income taxes.

Maintain a Solid Foundation for Financial and Tax Reporting

The valuation implications associated with Pillar 2 global tax rules are significant, and it is crucial for businesses to stay updated on the evolving regulatory landscape and seek expert advice. It is also essential for MNEs to take a proactive approach, as businesses must be prepared to adapt their valuation methodologies, transfer pricing policies, and tax planning strategies to comply with the global minimum tax rate.

As Pillar 2 continues to evolve and be implemented by different countries, businesses should monitor any updates or changes in the regulatory landscape. Staying informed about new guidelines, reporting requirements, and case studies related to Pillar 2 will enable companies to make informed decisions and adjust their valuation and regulatory reporting practices accordingly. By taking a proactive and well-informed approach, businesses can ensure compliance, optimize tax strategies, mitigate risks, and maintain a solid foundation for their financial and tax reporting requirements.

1. See the OECD Pillar 2 Model Rules issued in December 2021, “The Pillar Two Model Rules in a Nutshell” and Overview of the Key Operating Provisions of the GloBE Rules” and “Global Anti-Base Erosion Model Rules (Pillar Two) Frequently Asked Questions.”
2. The minimum tax rate is 15% and applies to MNEs with annual revenue of €750 million or more.
3. Chapter 6 of Pillar 2 includes special rules for the transfer of assets, including acquisitions and dispositions, as well as joint ventures.