Pillar 2 Algorithm

Introduction

Context

Welcome to the OpenSource Pillar 2 Algorithm wiki page! This platform serves as a comprehensive resource for understanding and implementing a pioneering open-source algorithm specifically designed to perform Pillar 2 computations and prepare the GloBE Information Return.

BEPS Pillar 2 represents a significant step in global tax reform, introducing the concept of a Global Minimum Tax to prevent aggressive tax planning and profit shifting by multinational enterprises. Given the intricate nature of international taxation, coupled with the unique structures of individual corporations, computing the tax liabilities under the Global Minimum Tax framework is inherently complex. The scope of the regulation and the various election options available to entities further complicate the computations, requiring in-depth analysis and consideration.

Objectives

Recognizing this complexity, Algonomia has developed a sophisticated algorithm to address these challenges. By opting to release it as open-source, Algonomia aims to foster collaboration among tax specialists, economists, and administrations. This approach not only ensures the refinement and enhancement of the algorithm but also promotes transparency, demonstrating a commitment to a fair and unified international tax landscape.

Feature Overview

The algorithm will present the following features:

• Scope and Groupe perimeter analysis, to determine the different sub-groups in each jurisdictions for the safe-harbour rules, elections and ETR computations,
• Safe Harbour computation and analysis, to identify the sub-perimeters requiring less detailed data collection and resulting in simpler computations,
• GloBE Income and Adjusted covered tax computation
• Election treatments
• Post-filing and additional Top-Up Tax computation
• Effective Tax Rate and Top-Up Tax computation for LTCE's
• Charging provisions and Paying entity identifications (UPE, POPEs, IPEs)
• UTPR computation

General logic of the algorithm

The Pillar 2 computations and insuing data structure are excessively complicated. Therefore, next to the unskipable computational steps, most of the steps have been treated by following the "Russian doll" principle, allowing multinational corporations that choses to use our algorithm to move forward with the level of detailed data they are able to provide.

It is also our plan to continue to refine the computational steps that may not be perfectly documented progressively with the publishing of additional guidance as well as the feedback of the community.

Development Program

The Pillar 2 Algorithm presented in this is an ongoing work and its documentation on this wiki is also a work in progress. It is by no means complete and definitive, and changes will occur in the upcoming weeks and months.

Both GitHub and MediaWiki are amazing tools to manage collaborative work and track the progress and modifications that happen with time.

The detailed to-do list is presented Pillar 2 Algorithm Development Program.

Data structure

Algonomia API Framework

The Transfer Pricing Algorithm uses Algonomia API Framework to receive input data and send output data for the computations. In the following sections, it is assumed that data has been transferred to the Transfer Pricing Algorithm using this framework.

Input

The input data follows the usual division required by the Algonomia API Framework : Data, Rules, Other.

Data

The Data structure for the Pillar 2 computation being too massive to be referred too in the present article a dedicated page has been created, Pillar 2 Data Structure.

Rules

In the context of the Pillar 2 computation as all data points need to be collected or retrieved within the Main process, and as changing them amounts to changing part of the compliance data, it has been chosen to not divide the data between Data and Rules, even for Tax rates.

Serie of files

A serie of structured files corresponds to the selection of a sequence of structured files whose data and rules can be processed in a coordinated manner in the dashboard or the calculations of the algorithm.

The selected structured files must form a sequence where their temporal referencing perimeters follow each other in a disjointed and adjacent manner (e.g., a succession of months, quarters, years).

Impact of series on Post-filing computations

The Pillar 2 computations allows and sometimes requires to perform the recalculation of the Top-Up Tax liability of the previous fiscal years to generate the Additional Top-Up Tax. This will only be possible under the following conditions.

1. Structured files exists for the fiscal years prior to the one under computation. They must be present in an interrupted sequence of 5 fiscal years starting with N-5.
2. Input data leading to the application of the recalculation are present,

Impact on rules

None.

Computational steps

Macro-step 1 - Scope and Perimeter analysis

Purpose

The purpose of the Scope and Perimeter analysis is to construct the GloBE perimeter by identifiying all the Constituent Entities and fixing their legal characteristic, thus allowing further treatment. It also allows to define the different sub-groups and sub-perimeters (JVs, MOMNEs, Investment entities...) in each jurisdiction that will be the basis of the next computational steps.

General Logic

In order to perform the Perimeter analysis a serie of computations on the shareholding graph needs to be perform. This will allow to finalize the direct and indirect ownership interests as well as the controlling interest necessary to draw the limits of the different sub-perimeters. Moreover a series of graph transversal will be necessary to qualify certain entities as member of Joint Ventures, Excluded Entities and or Investment entities.

Data Input

The Data input for Macro-step 1 consists in :

• The list of all potential entities and their characteristics;
• The list of all direct shareholdings and their characteristics or the ownership and controlling interest links

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 1 consists in :

• The final characterization of each Constituent Entity and out of group entity with regard to GloBE rules, ready for input in the GIR;
• The final ownership and controlling interest matrices for use in Macro-step 3.'s re-allocations and various elections, as well as the Charging Mechanisms of Macro-step 5
• The final list of JVs and Minority-Owned sub-groups in each Jurisdictions as well as groups of Investment entities

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 1, to review the detailed computational steps.

Macro-step 2 - Safe Harbour Analysis

Purpose

The purpose of the Safe Harbour Analysis is to identify the Jurisdictions and Juridicition sub-perimeters that fall under Safe Harbour Provision and thus allow for an immediate nullification of the Top-Up Tax in the correspond Jurisidiction or Jurisdiction sub-perimeter, without having to provide the detailed information and or data required for the full Pillar 2 computation.

General Logic

In order to perform the Safe Harbour Analysis, the set of elections made by the Filing Constituent Entity will be combined by the set of financial data provided to test the various Safe harbour mechanisms and assess whether any of them are applicable to the Juridiction or Juridiction/sub-perimeter under study. If several are applicable the algorithm will select preferably the provision of the transitional safe harbour requesting the simplest set of data, to allow for the continuation of the use of the Transitional Safe harbour rules, in the upcoming years.

Data Input

The Data input for Macro-step 2 consists in :

• The list of Jurisdictions and Jurisdiction sub-perimeter derived from the Macro-step 1;
• The list of financial data aggregated at the right segmentation level for the relevant Safe Harbour;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 2 consists in :

• The final list of Jurisdictions and Jurisdictions sub-perimeters falling under Safe-Harbour provisions and therefore with Top-Up Tax equal to 0;
• The final list of Jurisdictions and Jurisdictions sub-perimeters for which a detailed Pillar 2 and Top-Up Tax will need to be performed.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 2, to review the detailed computational steps.

Macro-step 3 - General Financial data treatments

Purpose

The purpose of the General Financial data treatments is to form the different GloBE financial values and allocate them according to the re-allocation rules, if the financial accounts do not have this level of detail. It also aims at managing the various computations required to construct the Globe Income (or Loss) and Adjusted Covered Tax and the pertinent detailed based on the available data.

General Logic

In order to generate the various values, the algorithms will allow to always provide the simplest data input possible, by sticking as much as possible to the format of the GloBE Information Return or to go deeper into the detail, and gather the data at a coherent segmentation level allowing to construct and maintain the corresponding values and aggregate.

The list of available data input format may evolve and get finer with the feedback of the community.

Data Input

The Data input for Macro-step consists in :

• The list of data input as requested by the GloBE Information Return to perform the computation ;
• The list of finer data input allowing to construct the data requested by the Pillar 2 computation.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step consists in :

• The different GloBE values necessary for the Effective Tax Rate computations ;
• The different GloBE Post-filing adjustment that may require recalculations in Macro-step 5;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 3, to review the detailed computational steps.

Macro-step 4 - Specific election treatments

Purpose

The purpose of the Specific election treatments is to run the computations linked to the different elections at the different level of segmentation (Jurisdiction, Constituent Entity...).

General Logic

In order to perform the election treatments, the Macro-step treats every single elections independently and ensures the validity of the data already collected or generates the corresponding adjustments.

Data Input

The Data input for Macro-step 4 consists in :

• The list elections made at the right level of segmentation;
• The list data-sets required for each elections;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 4 consists in :

• The list of adjustments corresponding to the various elections ;
• The error controls of the adjustments, if the adjustments were already present ;
• The GloBE Information Return data for the relevant elections

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 4, to review the detailed computational steps.

Macro-step 5 - ETR and Top-Up Tax computations

Purpose

The purpose of the ETR and Top-Up Tax computations is to compute the Top-Up Tax in each Jurisdictions and Jurisdiction sub-perimeters after the computation of the various Additional Top-Up Taxes and the Substance-Based Income Exclusion.

General Logic

In order to perform the computation, the recalculations are first performed and then the Jurisdictional Top-Up Tax is computed after taking into account the impact of the SBIE, Additional Top-Up Taxes and Qualified Domestic Top-Up Tax. It is then reallocated to the various Constituent Entity according to their positive GloBE Income.

Data Input

The Data input for Macro-step 5 consists in :

• The list of Jurisdictions and Jurisdiction sub-perimeters;
• The list of all the GloBE aggregates ;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 5 consists in :

• The Top-Up Tax for each Low Tax Constituent Entity ;
• The data required by the GIR to document the computation;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 5, to review the detailed computational steps.

Macro-step 6 - Charging Mechanisms

Purpose

The purpose of the Charging Mechanisms is to identify the amount of Top-Up Tax attributed to the parent entities of the Low Tax Constituent Entities according to the Income Inclusion Rule.

General Logic

In order to perform the computation, the different IPEs and POPEs and their Income Inclusion Ratios in their various subsidiaries are first computed. After this initial step, the exception to the IIR are identified along the shareholding chains, before computing the Allocable shares of Top-Up Tax of each Parent Entity still subject to the IIR in their LTCE subsiaries.

Data Input

The Data input for Macro-step consists in :

• The list of Top-Up Tax computed in Macro-step 5 for each LTCE's ;
• The Matrices of Indirect Ownership interests as well as Controlling Interest;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 5 consists in :

• The list of IPEs and POPEs subject to the IIR ;
• The amounts of Top-Up Tax due by these Parent entities;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 6, to review the detailed computational steps.

Macro-step 7 - UTPR computation

Purpose

The purpose of the UTPR computation is to identify the amount of Top-Up Tax not taken into account by the Income Inclusion Rule, and reallocate it across the UTPR Jurisdiction according to the allocation key.

General Logic

In order to perform the UTPR computation, the total amount of Top-Up Tax is compared with the amount of Top-Up Tax effectively allocated for payment through the IIR, and the difference is used as a base before reallocation using the formulary apportionment key across all UTPR Jurisdictions.

Data Input

The Data input for Macro-step 7 consists in :

• The list of Top-Up Tax amounts from the Macro-step 5 ;
• The list of allocated Top-Up Tax amounts according to the IIR;
• The input data for the formulary apportionment;
• The share of UTPR effectively charged in the previous years;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step consists in :

• The UTPR amounts affected to each Jurisdictions ;
• The GloBE Information Return output data

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

See detailed Step-by-step computation for Macro-step 7, to review the detailed computational steps.