Pillar Two update: More filing challenges

Welcome to Cross Border Tax Talks, where we discuss the latest trends in international taxation, from U.S. tax to the OECD's latest developments on Pillar 2. I'm Doug McConey, PWC's International Tax Services Global Leader. PWC's Pillar 2 engine, powered by Beacon, is a game changer for Pillar 2 compliance, provision, and modeling calculations.

Built on a graph system utilizing over 20 years of international tax technology, this cloud-based centralized rules engine is developed by a team of Pillar 2 tax experts from around the globe. PWC's Pillar 2 engine is currently available as a service and is also available to license. On this week's episode of Cross-Border Tax Talks, we're back in PWC's Policy on Demand studio in Washington, D.C., where I'm excited to welcome Phil Ramstetter back to the podcast.

Phil is a Chicago-based international tax partner at PwC and former tax policy consultant at Business at the OECD or BIC. Phil, welcome back to the podcast. Thanks for having me, Doug. All right, Phil. Well, we got a lot to cover on Pillar 2, but we're in the middle of the Major League Baseball World Series.

Neither your Cincinnati Reds or my Cardinals are playing for the non-U.S. listeners that are confused who might be in the playoffs. And in fact, your Cincinnati Reds went from playoff bound in 2025 to last place in the National League Central, just behind. I mean, just behind my St. Louis Cardinals. So what were the highlights, Phil, of your 2025 MLB campaign for the Reds?

So to not many is the is the gist. So it was a very disappointing season, I would say. So came in with higher hopes. We got kind of higher production out of a couple of guys. So Sal Stewart, a rookie, which I get back to. Chase Burns, one of our pitchers, performed great, but we still underperformed what we did last year.

So say Sal Stewart, hopeful, NL, rookie of the year coming out, but um he was the highlight. Besides that, there wasn't much. Yeah, highlights or highlights.

Sal Stewart was impressed to watch. I think over 100 RBIs, 30 home runs, great baseball card statistics, as they say, for a rookie. The guy who's, I think, competing with him for rookie of the year is JJ Weatherholt from the Cardinals. And I I will say for the record, here on the cross-border tax talks, I think Sal deserves it.

JJ had a great campaign. I think he deserves the gold glove.

We'll update the listeners next time.

I'm sure they cannot wait. Yeah. All right. Okay, so let's dive into pillar two, but I want to maybe remind, help you remind folks. Talk about your role at BAC and what role BIAC plays in working with the OECD to develop tax policy. Because I want to reflect a little bit on their role with Pillar Two as we dive into some of these topics.

Yep.

Thanks, Doug. So the OECD generally has like the permanent account of member states of the countries that are there, but they also have two other members that kind of consult with the OECD secretariat, including TUAC, so the Trade Union Association and BAC, which is effectively the Business Association.

It's changed a bit as to how we deal with tax versus some of the other subject matter specialties. Generally, the way that BEAC is reacting is they are providing comments on rules as they come out. To some degree, the BEG, the business advisory group, will consult on certain elements before they actually make their way out as full rules.

So I would say that's the best avenue that BAC has to actually influence what the OECD puts out with respect to rules. Unfortunately, with how tax works versus some of the other specialties that the OECD, the BAC does the best they can, but are kind of generally more reactive as to how things come out versus being proactive and really influencing the day-to-day and/or the rules that come out from the OECD and the inclusive framework.

Yeah, and I I think, Phil, that BAC represents, as you mentioned, businesses and their ability to be able to influence policy decisions. Of course, I'm a tax guy, I think about as the tax stuff. But one of the issues that I feel like that we're seeing as we get administrative guidance that comes out and we'll unpack some of these is, and we saw this even with the simplified safe harbor, which was the hot, which was the topic of a prior podcast, is that it really feels to me that we need more taxpayer influence and participation as part of this process.

There's still a massive disconnect, I think, between what some of the governments and some of the secretariat folks think taxpayers have at their fingertips versus what they actually have in the real world. So a lot of these they think they have the capacity, you're a big multinational, you can pull data point X, Y, Z together.

The actual practical of that of getting the data from 40 different ERPs, whatever it may be that the company's dealing with, those are the kind of issues that they're trying to tease out. There's also like the technical angle of some of the rules, but a lot of it is really just kind of the educational process around there isn't like a magic button we can press to kind of get this data point.

It's going to require significant hours, significant technology kind of enhancements to actually get at that information. So I think explaining those points as to this isn't just readily available. What is your goal? What do you want from this? And is there a more workable practical solution for what you're looking for versus kind of everything under the sun, which I know we'll get into the GIR in a little bit.

To some degree, the GIR has that flavor of just every data point under the sun.

Yeah, I think the OECD has a challenging task, first of all, as they're trying to get administrative guidance, they've got to go through the entire inclusive framework. And I can't imagine the bureaucracy and process.

I say, yeah, you understand just within PWC, within the network firms, and it is of course, and then exponentially with all of these different tax policymakers and governments.

I understand they have an unenviable challenge. But um I do think that it's critically important that businesses play a role from to your point on data from a practical perspective, making sure that issues aren't missed. And we're going to highlight some of these issues that we've identified. We've highlighted them in the past, just some of the practical issues on compliance, but really important for BEC as well as just whether it's a notice and comment period, other opportunities for taxpayers to provide comments, I think could significantly improve the overall process.

Completely agree. All right. Um, so Phil, we've seen a significant amount of OECD activity on Pillar 2 this calendar year. Before we get into some of those technical details, what are the latest developments we've seen in 2026 from the OECD? Um, it really has the overall direction of Pillar 2 fundamentally changed.

So I think we really start with the side-by-side safe harbor.

Yeah, so to bring it from January till now, so the side-by-side came out on January 5th. It had several elements. I think we focused on this podcast and elsewhere on kind of one element of that Amin guidance package, so the side-by-side safe harbor itself, but it also provided for the UPE safe harbor, the simplified ETR safe harbor, the SESH, which you kind of mentioned not being overly simplified or kind of easy to deal with, but then also provided guidance around qualified tax incentives, as well as extended the CBCR transitional safe harbor for an additional year.

So I feel like the side-by-side element of that gets the most limelight, but also be focused on a lot of those other aspects. After that, we got some additional guidance in May. So we got a, I'll call it a very specific guidance package with respect to the application of the UTPR safe harbor for 52 to 53 week year filers.

It's really just an issue of where their when their year starts at a certain date and ends at a certain date, they were going to effectively be exposed to not getting the side-by-side safe harbor and not getting the UTPR safe harbor. So it effectively gave them that stopgap year to get the UTPR safe harbor for a year.

We also got a new consolidated commentary in the spring. Um, after the consolidated commentary, we've gotten effectively, I'll call it not as sexy, not admin guidance, we got a new GIR, new GIR XML scale. The OECD continues to update the qualified regime. So more QDMTTs and IIRs are added to the call it central record that the OECD maintained.

Um and then more recently, we got an admin guidance package in September that covers explicitly conditional taxes as well as the local financial accounting standard when there may be fiscal year misalignments with local constituent entities compared to the consolidated group.

And we'll unpack uh each of those here here in a bit. I I'll also add that while that's what we've seen from the OECD, we've seen dozens of countries now. I think we're at 56, 57 that have now implemented the Pillar 2 rules as as we sit here in the end of October 2026. And then obviously there's only a small number of those jurisdictions that have this ambulatory approach so that they're constantly having to update their legislation, and then obviously we're waiting for side-by-side to get enacted.

It's a very, I would say it's a very busy time for side-by-side enactment because a lot of the countries effectively pass tax law as a part of the annual either budget bill or finance bill that comes out. And generally that process starts in the fall and is legislated and effectively enacted by the end of the calendar year.

So you'll see several jurisdictions that are effectively in flight right now. By the end of this year.

And then we know that the UK has already publicly said that they are not going to be doing that until next year, but it will be retroactive effect back to 2026. Okay, so before we we dive into some of the guidance that you mentioned, I wanted to start, Phil, with the 2025 compliance cycle, which for calendar year filers will be due at the end of March in 2027.

So five, five, I chuck five months away, and that's not a lot of time. Okay. And um we're gonna dedicate a whole separate podcast to this. That the team's actually working on an article, but we we wanted to highlight something that I think is really, really important for policymakers and taxpayers, if they do listen to this, to understand.

So we've been testing GIR reporting and the validations for 2025, and we've come across a specific UTPR validation rule that causes at least a couple of issues that I wanted to highlight. There's actually a whole multitude of issues, um, but it's really how the top-up tax works for allocation under the UTPR, and then the UTPR allocation itself.

So let's start with the top-up tax that is needed for allocation under the UTPR, and what's the challenge that we have found as we're building the compliance mechanism?

So one of the challenges there is that the amount of tax that you're gonna collect under Pillar 2 is generally based upon the model rules, but ultimately it's based upon how local countries have taken those model rules and enacted them locally.

Exactly.

So the easiest way to kind of distill this down is let's say you have top-up tax of $300 under the model rules, and we have three countries that are gonna collect it. The UK, France, and Germany are the three. And let's just assume, and we'll get into some of the ratio stuff here in a second, but assume all of them have the same amount of assets and people so they each get a third of the amount to be allocated.

The problem is that that $300 may be different when you look at how the UK rules work, the German rules work, and the French rules work. So, not to pick on the French, I did live in Paris for a year, so I loved my time there. So I mean no offense. But the French rules effectively took, for purposes of the percentages used for the substance-based income exclusion or the SBIE, there was effectively a table that started at 10% for payroll, 8% for eligible tangible assets, and goes down over time.

That table started in 2023. So the year before actually Pillar 2 was in effect. So most countries for the first year of Pillar 2 and 24 took year two for 2024 rates, which was 9.8 and effectively 7.8 for the percentages. France and a few other EU countries, because there's a bit of uncertainty as to how the EU directive was written, actually took 10 and 8 for the first year.

So they're like a year behind these cascading percentages. So back to my example of $300 of top-up tax. For France, if there's a substance-based income exclusion number that's bigger because their percentage is higher, maybe that number is only $270. Yep. So when you go through the mechanics, France is still getting a third, but France is only gonna collect $90, not $100.

When you actually put that at and report it on the GIR, you only report that $90. And one of the validation issues we're running into is that in that example of $300 of UTPR top-up tax amount, if you do $100 to the UK, $100 to Germany, $90 to France, you're gonna have $10 that's uncollected. And within the validations, they're gonna say, this doesn't validate because not all 300 of that amount of UTPR top-up was collected.

So this is like one kind of general example, but there's several iterations of these kind of validation errors of where when you're running the local, which is what you need to do to actually provide the tax amount that's being collected, versus the model rules that may have a kind of static number, you kind of run into all these issues.

I didn't know you were going to do an example, but that was outstanding. Well played. Um let's move to the UTPR allocation.

I think I got the math right too.

I think you nailed it, dude. You nailed it. All right. So the UTPR allocation. What's the challenge with how these UTPR allocation rules specifically as it really relates to people and assets? And in your example, you you had all three of them being the same.

Yeah. So the other issue is the way that the allocation works is it effectively is 50% based upon your number of employees and 50% based upon your assets. And the way the the math, or the, if you're one of our British colleagues, the maths operates is it's effectively 50% times back to my example, the UK over the UK, France, and Germany.

50% times effectively I can't even remember which one I said first, Germany over France, UK, Germany. But within that math, if there's a zero, which this is more aggravated when you only have maybe one country that has the UTPR, if you don't have any employees in that country, it ends up being zero over zero times 50%.

The other formula is 50% times effectively one over one to oversimplify, only 50% of the UTPR would be collected. This seemed to be, when we were first going through this like a year and a half ago, I was like, this has got to be super uncommon. It's not common, but it is happening in the wild a lot more than we have.

I'm particularly in the financial services industry. Yeah. I mean, it's because they just have an entity, they don't have any people, or they don't have any tangible, whatever, whatever it may be. Yeah, we're running into this quite a bit. So the issue that we've been trying to work through is we're following the rule, which is a clear kind of math formula.

And to quote one of our former partners, the maths doesn't maths when you actually work through it, because effectively the ratio just doesn't work the way it should. So you'd run into the same validation rule issue there, where effectively not 100% of the UTPR top-up tax amount is calculated. Um, it's also another just issue we've run into where the way they framed up the rules is that generally you do your GIR based upon the respective taxing rights, which for 24 got complicated in certain instances where you had kind of multiple IIRs applying, but was relatively limited because wherever you had a QDMTT, you're kind of focused on those rules for the QDMTT.

If you had a single holding company for our US-based multinationals, single holding company, you were worried about those IIR rules. For the UTPR, it is all 30 plus countries that have a UTPR, so you have to assess what all those rules are. To plug the pillar two engine again that Doug did at the start, we've actually kind of mapped in within the subgraphs how those calculations work.

Um, but it's just an issue that we're running into with respect to how the taxing rates work and what we should be doing based upon the reporting because we ultimately need to follow what local countries actually have enacted versus what is on the kind of model rules and commentary that we have.

Yeah, validations were one of the biggest challenges that we had for the 2024 cycle, and there were a number of jurisdictions that end up having to turn them off because there were just a number of issues with that. And um, this is even going to be more complicated now that we have the UTPR and really important to identify these issues and the the GIR process that and the OECD has to understand that these local laws are different.

Because um, so for example, Phil, the OECD continues to update the central record of qualified legislations, um, right? And and I think your example, France is is is on that list, right? In the UK, I think we've identified dozens of different differences between the model rules and the commentary. None I would argue are material.

They've thought through some of the important issues, frankly, and I think have given the number of the number of the number.

They have an impact on the numbers, which when you're dealing in absolutes with the validations, it causes an issue.

And so each of these countries implements this through their own domestic laws, and we are seeing meaningful inconsistencies between these jurisdictions. Um, so how should multinationals manage situations where local legislation and subsequent OECD guidance don't perfectly align? And then I can talk about how we're thinking about it at PWC.

I think our guiding principle of how we've been kind of advising taxpayers and clients is they have to follow the law, right?

So at the end of the day, the model rule of the UK rules say this. Yeah.

We need to report top-up tax of X because the UK rules say this. When we run into issues within the OECD schema for the GIR, we've tried to be as proactive as we can, kind of reaching out. We went through this kind of last spring leading up to the June 30 filing deadline. I suspect we are gonna have the same issues, probably more of them, yeah, come March of 27 in kind of year two filings.

Because part of the problem is the expectation was all right, we've already done a year. The second year has got to be a lot easier, but to your point, we had it just over 30. In year one, now we have over 50 for year two. 57, we were going to be able to do that. So we have these other called 20 some odd countries that have rules that are applicable for the first time in 25.

We're gonna run into a lot of, I don't know for sure, most likely run into a lot of the same issues that we ran into in 24 with these countries effectively opening up their portals, releasing whatever validations they may have. Just knowing even what forms, right?

Because there's no standardization on forms still, so we're waiting to see those forms. And we have those existing 36, 37 countries that implemented 24 that are now applying the UTPR, and we're already seeing some separate forms that are needed for the UTPR. I mean, it's I've mentioned this many times on the podcast.

It's it's really unfortunate that we don't have standardized forms for each of these countries, and that the only standardized form, if you want to call it that, is the GIR, which doesn't even really impact. That's not where you even disclose your tax lib.

Yeah, it's really just an information reporting form, right?

So okay, um, so let's move to some of the guidance that has recently come out in September of 2026. The OECD released guidance addressing explicitly conditional taxes and mismatched fiscal periods under the QDMTT safe armor. Let's start with the explicitly conditional taxes. What problems, Phil, was the OECD trying to solve and what should companies understand about this particular rule?

Yeah. So this rule effectively applies if you have a tax that is applied, either just a regular cover tax, I think corporate income tax, or a domestic minimum top-up tax that is applied on a conditional basis, it can be defined as an explicitly conditional tax. And what they basically say is if it's an explicitly conditional tax, it is not a QDMTT or DMTT, and it is not a cover tax.

So effectively, whatever that cash outlay was to the government just isn't a good tax liability for purposes of pillar two. What was meant by this was to some degree, I think it was defensive in light of the side-by-side. They didn't want countries out there only applying tax when pillar two was effectively being applied and not applying the tax when pillar two was not being applied because of the side-by-side.

At least that's the intent you get from the kind of words that they gave us. The way that they defined the conditional tax is they effectively have it on both an inclusionary or exclusionary basis of effectively it only applies if you otherwise were going to be subject to a UTPR or IR. Okay. So if it only applies when you're subject to an IRU or UTPR, that can be explicitly conditional.

If it doesn't apply because you're effectively subject to the side-by-side, it could also be explicitly conditional. And the general idea is effectively that just falls out, as I was saying, as a cover tax. The issue with this generally, I could probably go on all day actually as to the issues with this.

But one of them is effectively taxpayers are left kind of footing the bill for this for a policy choice that was made by a local government. So if a local government chooses to effectively apply, so that let's say they had $100 of income, they pay $15 to country X, that $15 paid to country X is an explicitly conditional tax, and now they have to pay another 15% to country Y or some odd countries under the UTPR.

So I think the issue is to some degree, these are policy choices that were made by the governments, and to some degree the taxpayers are going to be left with dealing with the double taxation that comes out as a result.

So how does it impact because there are a number of countries that have already enacted conditional taxes? I think there was something in there for sort of when the when they actually come in into play.

Yeah, so there's certain countries. I I won't list them so as to not call them out, but there's certain countries that effectively made the first year, so 2024, the QDMTT. Conditional and whether it would apply. So it only applied if you were effectively going to be subject to pillar two. So if you had a constituent entity in country X, but they were under an IAR for 24, effectively the QDMTT applied.

If they were not under an IAR in 24, it was delayed a year and would not apply until 2025. For those countries, the OECD effectively provided a kind of one-timer to say if it was only conditional in 24, this is really only effective as of Jan 125 forward. So those would still be good QDMTTs. Okay.

All right. And then what about the mismatched fiscal period?

Oh sorry, one more of my soapbox comments on the explicitly conditional.

I love soapbox comments.

The other side of this that that that frustrates me a bit is on several occasions over the last four years, um, folks at the OECD Secretariat, as well as several of the kind of government folks from the member states in the inclusive framework said, we don't care where you pay 15%. We just want you to pay 15%.

One of the issues I think some of us have from a policy perspective with respect to this explicitly conditional taxes is they're kind of backtracking on that comment of, well, okay. We don't like if you paid this kind of 15%. We only want a certain kind of 15%. So that's one of the issues from like a broader kind of policy perspective that we've had issues with.

Yeah, because based on your, you've given a lot of examples on this podcast, but that example of 30% tax is significant is double 15, in fact, in your own. Exactly.

Exactly.

All right. Um, so let's move on to the side-by-side agreement. We got, I'm not going to go into some of the details of the XML, but um with the side-by-side.

Fiscal year and alignment stuff.

Oh, yeah, sorry. The mismatched fiscal year project, sorry.

Yeah, so on that on that one, it's kind of there's there's two elements of the guidance. One is for a more kind of basic um kind of continuity in the rules. Um, and then the second is uh is a change to the rules, but it's probably worth just kind of level setting on what they were trying to get at in the first place.

So in July of 23, we got admin guidance that basically allowed local countries when they have a QDMTT to choose whether they want their QDMTT to be applied based upon the group financials. So if you're a US parented group based upon the US GAAP financials, or if they wanted to provide it effectively on the local gap.

So an example that would be Ireland. So Ireland effectively has the local financial accounting standard where you would apply the QDMTT based upon your Irish stat accounts versus the group US GAAP accounts. One of the initial requirements within that guidance was that effectively the fiscal year end or the fiscal year, sorry, of those constituent entities in Ireland, for my example, aligns with the group year.

So if you have a calendar year, your constituent entity should have the same Jan 1 to December 31 year end for all those constituent entities, or if you're June 30, same thing that you would go July 1 to June 30 for the fiscal year. One of the issues that that raised was very common business transactions.

So the acquisition of an entity, a disposal of an entity, a liquidation of an entity, a formation of an entity. If those are done at some point during the year, so on June 30th, in the middle of the calendar year, we only have six-month accounts. So the issue was always well, if we bought a company on July 1, does that mean we're out of the local financial accounting standard?

It was an issue where most companies had kind of built their compliance process, everything they they were doing, assuming that they were going to be based upon the local. Actually, the Irish government put out affirmative guidance before we got this admin guide admin guidance package in in September, providing for, well, if the year still aligns for the period that was that it was effectively a part of the group.

So if you only bought it on June 30th, if you report June 30th to December 31st, it is effectively the year included within the group year that you stayed in the local financial accounting standard. The first part of this admin guidance package effectively reiterates what the Irish government have said.

So effectively that would not kick you out of the local financial accounting standard. And one of the issues is that is like it's both from a practical side that a lot of the companies wanted this of just like they know what the base is going to be for purposes of the top up. The other side of it, from it from an OECD perspective, is I think they didn't want taxpayers to be able to hop back and forth between the two.

So the idea was that if you're in local, you're in local, um, unless there's some of these other differences that would kick you out of local. The other aspect of the guidance, which they say is not a clarification, unlike the former, is more of a change, is they effectively allow you to have a required QDMTT fiscal year.

And this would effectively override the rule that if let's say your group is a calendar year, but your local entities all end on June 30th, if all of your entities end on June 30th and the June 30th accounts are effectively included within that fiscal year, you can still use effectively those mismatched years.

So you'll you'll use your fiscal year accounts, even though they're different, and effectively include those entities' financials for whatever year ends in the respective UPE group year. So the thought is that will require legislative change. We haven't seen anybody actually make the move yet to apply it on that basis, but it would be an additional change where effectively you're kind of not to say you're comparing apples and joint apples and oranges, but you would have kind of straddle years where you'd have some data coming in that actually straddles two different group years.

Yeah, I mean, this just brings to mind like the complexities of the system. This as a US advisor or US like this doesn't really surprise me, right? We see regulations about this, but I do wonder for our non-U.S. colleagues, like some of this minutiae and detail. Well, this is important, right? And and frankly, it does beg the question that if there was more taxpayer involvement when we had some of these rules come out initially, could some of this been flagged and we didn't have to go back and have additional administrative guidance.

Well, like I I I kind of understand the difficult position that the OECD and some of these um players are in because they want to provide the ability to use the local. And it makes a lot of sense of why you'd want to use the local. Like Ireland wants to look at accounts that they're used to looking at.

They don't want to look at US gap accounts, Japanese gap accounts, whatever it may be for the parent. So the kind of underlying premise makes sense, but the kind of practical aspects of just saying you can use these accounts versus these accounts raise a whole host of like differences and issues that kind of pop out as a result.

Yeah, it's just a nature of the system. Yep. All right. So let's move on to side-by-side or the so-called side-by-side agreement. Obviously, a huge development, particularly for US headquartered multinationals. Um, can you remind listeners, Phil, how the side-by-side safe harbor works and then also the UPE safe harbor?

Because we've received some questions from that and really how they differ and what relief actually is provided for US companies at this point.

So I would say they operate similar, albeit the side-by-side is broader in its application. So if you have effectively a qualifying CBC or sorry, side-by-side regime, you get the qualified or sorry, the side-by-side safe harbor. Meaning that for that jurisdiction, if your UPE, so the parent of the multinational group, is located in that jurisdiction, it effectively turns off the application of IIR and UTPR in the system.

So all that would remain from a pillar two perspective is QDMTTs. There's a bunch of requirements, but I think the most important one is effectively your name being added to the central record, and the United States has been added to the OECD central record as a qualifying side-by-side regime. So the general expectation is as countries enact it, the US will qualify for the side-by-side.

The UPE safe harbor is a bit different because it effectively only turns off taxing rights with respect to the UPE jurisdiction. So there's certain other countries that we know, Colombia, India, some others that have been kind of pushing for their kind of listing within the UPC. And we haven't seen them lifted.

We haven't seen anybody added to the central record yet. So the general idea is no, once those names are added, it turns off taxation rights with respect to that country. So it's not as broad in that it doesn't turn off effectively IIR, UTPR full stop like the side-by-side does, but would provide effectively limited relief for that UPE jurisdiction.

So with this side-by-side agreement, we're moving from the theoretical to now actually actual filing. So the OECD has recently provided us an updated GIR. All of the, by the way, I'll mention we haven't even gone through the 2025 compliance cycle. Now we're going to talk about the 2026 compliance cycle, which is why I want to start with 25, but we're going to do some crystal ball gazing here for our 2026 compliance cycle.

So the OECD recently provided an updated GIR, a new XML schema, guidance on central filing and information exchange. How prepared, Phil, are companies and really taxing authorities? And where do we start to look at seeing some big challenges for the first post-side-by-side filing cycle, which will be March of 2028?

It's hard to say for sure. I would say there's still a significant gap that needs to be filled. Because one of the biggest things is that as we were saying, the new GIR was released, the new XML was released. That was solely with respect to 2026 filings. So this effectively we have the same XML for 24-25, this new XML for 2026, meaning that whatever system is being used currently to generate the GIR XML schema will need to be updated for that new schema.

I know we're working through that for the Pillar 2 engine currently for effectively the 2026 reporting year, but I think it's it's easier said than done to actually kind of build that out as to all the data points and where they need to slot within that XML schema.

I'm going to say that slightly differently. So we we have almost 60 countries that were that are going that have had to build to the rules for 24 or 25 or some combination thereof. After they have time to actually figure out all of their validations, their XML schema, information exchange, which still is a big question for me given how different the XMLs were in the various jurisdictions.

We still haven't even seen how that is going to play out. We now have 60 or 58, 57 countries, wherever we are, that will now have to update and create a new GIR and new XML schema with validations for the 2026 compliance cycle for 2028.

Yeah, so part of the difficulty of this is that whenever we're dealing with taxpayers or clients kind of working through some of these issues, we all get a little confused, or at least I get turned around a little bit, because at any given time you're dealing with three different years at the same time.

So as we're dealing with, let's say it's February of 2027, we're going to be dealing with kind of closing out the books for the 26 accounts. We're going to be dealing with the 25 compliance, and we're going to be getting ready for Q1 of the 27 rules. And it's just when you're dealing with kind of this cascading implementation of the rules, it's certain countries are in this year, certain other countries get out of the next year.

Just kind of managing all of that as well as kind of how these changes come online has been quite difficult, I would say, even for a firm like ours, where we have significant resources that actually cover all these items.

The big piece I want to remind, particularly for our U.S. taxpayer listeners, is like spend some time with this latest XML schema and some of the information. I think that many U.S. taxpayers may be really surprised at the volume and level of data that they still need, because they still have to file the globe information return.

Even if you're subject to sign by side, you have to elect into it. And there are still a whole lot of information, particularly with jurisdictions that have the QDMTTs, that need to be included as part of the GIR.

Exactly. And once you we start running through the CBCR transitional safe harbor, and more and more countries are going to be subject to the full rules, and you have to fill out section three of the GIR, the return explodes. Like the GIR section three for country X can be anywhere between 10 and 100 pages.

So as you start adding like year one, we only had three countries that weren't in the safe harbor. Year two, we have five countries. Year three, we have eight. Whatever that number ends up getting, at some point we're gonna have 50 countries or whatever that number ends up being, all being outside of the CBCR safe harbor, subject to the full rules, subject to QDMTTs.

So even if you're a US parented group, you're still gonna have to fill out section three for all those places. So I think the kind of word just out to the market is that this isn't going away. There's gonna be even more compliance to do than probably what you had to work through for the 24 or 500.

Exactly. And I think that's the big message. Is I mean, it's certainly US multinationals are gonna be excited that the IR and the UTPR are turned off, that they don't have to do that math. But I think this idea that, oh, the compliance requirements are going away is not the case, both with GIR plus all the GIR notifications that needed to be filed, all the QD, any of the QDMTT various filings.

I mean, it just depends on the jurisdiction. So still a really large compliance exercise, even for U.S. multinationals, to the extent they operate in any of the jurisdictions that have implemented these rules. All right. So we've talked about the recent guidance. The OECD still has work underway on additional simplification measures, they claim, integrity measures, discriminatory taxes, industry-specific issues.

I'm simplifying, there's a whole bunch. Um, Phil, any thoughts on what additional guidance taxpayers should be watching for, whether it's before year end? I think there maybe have been some public comments from the OECD Secretariat. And then what do we expect into 2027? The integrity measures is something we've been talking about on this podcast for years at this point.

So the two, like I think your list was good, there's quite a few that fall in each of those buckets, but the two that I think are top of mind is one, we know they've been working on what they call the related benefits guidance, which is generally kind of what countries can do in tandem with their QDMTT.

So if I have a QDMTT that's topping up to 15%, if I provide tax credits or other incentives at the same time, what are the guardrails for what I can provide? We know there's kind of a a lot of political action in kind of what that document will say. There was a mention within the explicitly conditional taxes guidance that that is being worked on and will be released before the end of the calendar year.

Um the expectation is it will be released by the end of the calendar year, but uh is expected to be um enacted or um applicable for years beginning after that date, so effectively for 27 on. So that's one that we're watching closely because I think there's several countries that have been either kind of moving forward with the hope and expectation that their incentives are good, others that have been sitting on the sidelines to some degree of we want to effectively put together incentives that we know are gonna be compliant.

So that's one area of action. The other one is the integrity measure integrity measures that you had mentioned. Um for this one, I think the other aspect that we're trying to navigate from a US kind of parented group perspective is we're still gonna care about all these rules with respect to how the QDMTT is apply.

Oh, sure. And the hope is that these rules come out in a more targeted fashion as to what they're trying to accomplish. Um, one of the issues that we've run in with the anti-arbitrage guidance that came that came out for the transitional CBCR safe harbor is that it is pretty broad as to how in the kind of feedback that we've given or um others have provided to the OECD and others is that, well, it's only temporary.

You kind of fall out of the safe harbor. If you do the full calc, you're still not going to pay tax. Here in the full rules, if they come up with kind of broad-reaching rules that impact kind of common business transactions, you can see taxpayers ended up end up paying pillar two tax in situations that we would generally view as like not being aggressive, not planning.

It's just kind of the common way that the business operates.

Yeah, my one ask for any of those policymakers that are listening to this, whether they're members of the inclusive framework or the secretariat, is please make these rules prospective from a compliance perspective. And what do I mean by that? Is like we know that there are a number of jurisdictions, whether I'm talking about any of these rules, not just entirely, just all of these rules.

We have a number of jurisdictions that have an ambulatory approach. So if they put out administrative guidance that isn't specifically prospective, it means those rules need to apply. And then we have to then build that into the compliance processes, which is just very, very challenging. And particularly given that we're less than five months away from the 2025 compliance cycle.

Not sure when any of these packages are going to come out, but I really think it's important that the OECD kind of understands and takes into account the practical ramifications of applying these rules, any new rules, whatever they are, retroactively, uh, because it it just makes it very challenging for those of us that are building the systems to be able to comply with those with those rules.

Yeah. It's really difficult to comply when there's like a moving target for what we're trying to configure.

That's I feel like we've been shooting at moving targets for for quite quite a bit of time.

Yeah.

Um, all right. So, Phil, kind of here in conclusion, stepping back from the technical rules, um, where are we with all this pillar two? Are we moving towards a simpler, more sustainable global minimum tax system? Have we created two parallel systems now that will become increasingly difficult to administer?

Kind of, I think we've already we've covered a number of these issues, but maybe if you want to kind of bring us to a conclusion here.

Okay, so I'll say one positive and then more negative. Um, the one positive is when we got the updated GIR for effectively 26 forward, the fact that they put the side-by-side safe harbor on section one versus section two, I think was helpful. It'll be to some degree less reporting that US multinationals will have to do as a result of the side-by-side safe harbor.

The other side of the coin, though, is back to my earlier comment of QDMTTs aren't going away. US taxpayers need to comply with this QDMTTs is not going away. As the CBCR safe harbor expires, and as you're in the full rules, we have seen minimal benefit to actually using the simplified ETR safe harbor.

So the expectation, I think, is that most taxpayers are just gonna jump into the full rules. And I think some may have been a bit, I don't want to say lucky, but they just have very simple structures where they're paying tax everywhere. The thought is the CBCR safe harbor was great for them for the interim, but once that expires, I'm concerned that some taxpayers are kind of losing sight of where things are gonna be in a few years because I think it's going to be even more complicated than what it's been for 24 and 25 in the future.

And I don't think many are considering that because they think the side by side is gonna relieve a lot of the pressure on the system. And the kind of practical answer is it is not. You're still gonna have to do a lot of compliance and reporting for all these curses.

And I'm gonna respond to my own question because I guess it is my podcast. The um what all taxpayers need, and I mean the US arguably, US multinationals got some simplification, but there is a real need for simplification. And I'm not talking about just the simplified safe harbor. Uh I'm talking about from an overall process.

I mean, if we look back at the 2024 compliance cycle, I think we were at almost 300 different tax returns that were due that were had been by the 37 different countries. I mean, now listen, how you define a tax return and registration, but there were over a couple hundred forms as I would define forms, information that was needed to be able to deliver to tax entities.

Multiple countries. So if you had, I'm not going to pick on any countries, but if you had 12 entities in this country, you had 12 different filings that were needed, and it was a lot of the time 12 multiplied by two or three.

Exactly. And that's how we ended up with the number of forms that that that were that were filed. And now, as we're heading into the next compliance cycle, where we had, as we mentioned, another 25 countries, how many other dozens of forms? And so there has to be a way um to simplify this overall process.

I mean, my concern is that once these countries build their own forms and processes, validation portals, everything, that are they going to want to then move to more standardized. I feel like maybe we missed the boat on the standardization, but there really feels like there needs to be some form of simplification.

Um, I mean, not just for taxpayers, but but for the taxing authorities as well, based on a lot of conversations that we had, and I articulated on the podcast with Pat, not a lot of them even understood exactly what they had implemented or how to try to fix some of the technology issues they had associated with those forms.

And so we really do need to step back at some point and think about how do we simplify this process.

Especially when, like the way these forms should go for the most part, is it's like a risk assessment tool of like if you're operating in five countries and all of them are super high taxed, a lot of this data you're providing is not overly helpful to any of those countries either, right? So the idea is that if you're able to reduce that compliance obligation for the taxpayer, really get what you really need, it'll make it easier on both the taxpayers to comply as well as the governments to actually sift through all the information to identify where there's actually kind of money for them at the end of it.

One simple low-hanging fruit that I will mention is how about making the transitional safe harbor with the country by country report permanent? It kind of goes against your points on the integrity measures, which I understand, but they could figure out.

I think that would be welcomed.

I think that would be welcome news for taxpayers, taxpayers and those assisting taxpayers. All right, Phil, well, we covered a lot of ground there. Thanks for uh coming on, and I'm sure we'll get a lot more guidance, and when we do, we'll bring you back on the cross-border tax. That's great.

Hopefully the Reds play better next year, and we'll get on and I'll actually have something positive to talk about.

I feel the same way with the Cardinals. We'll see who ends up in last place.

Yeah, luckily Pat Brown, who the listeners know well, is also a Reds fan, so you'll get it from him in case we're good.

All right. So thanks for tuning in to this week's episode of Cross Border Tax Talks. Thank you, Phil Ramstutter, PWC International Tax Partner, and Pillar 2 subject matter specialist. I'm Doug McConey, PWC's International Tax Services Global Leader. Stay tuned for another exciting edition of the Cross Border Tax Talks Podcast.

This podcast is brought to you by PWC, all rights reserved. PWC refers to the U.S. member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PWC network. Each member firm is a separate legal entity. Please see www.pwc.com slash structure for further details. This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

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