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.

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.

Step 1.5. - Definition of the MNE Group

• Case 1 : Using Controlling interests and consolidation method

UPE identification : entity with

• consolidation "full"
• no parent entity with
  • controlling interest in it
  • and consolidation method
    • full/proportional/equity
    • or not consolidated for reasons in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale"

Entity is part of the MNE Group if :

• UPE has Controlling interest in the entity
• and consolidation method
  • full/proportional/equity
  • or not consolidated for reasons in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale"

Step 1.9. - Specific CE treatments

Investment entity identification