The Revenue Commissioners of Ireland (‘Revenue’) recently issued two Tax and Duty Manuals (‘TDMs’) which provide detailed guidance relating to the application of the BEPS Pillar Two rules and an overview of the administration process. The TDMs issued are Part 04a-01-01 (‘Administration TDM’) and Part 04a-01-02 (‘Detailed TDM’). While much of the information confirms our understanding of the rules, it is worth highlighting some of the key points from the guidance.

1.   Snapshot – What you need to know

The previous guidance provided a correlation table showing the Irish legislation referenced to the EU Directive and Model Rules together with some notes.  This is retained in Appendix 1 of the new Detailed TDM but the body of the guidance provides detail on the key principles of the Pillar Two rules including some useful examples. A separate TDM, the Administration TDM, provides a useful overview of the registration and filing requirements which all in scope Irish entities will need to be aware of and build into their existing compliance process.

2. Administration of Pillar Two

2.1 Registration with Revenue

Section 3 of the Administration TDM deals with the obligation of an Irish entity to register with Revenue within 12 months from the end of the first fiscal year (‘FY’) in which the entity is subject to each of QDTT, IIR and / or UTPR (‘GloBE tax’) respectively. For example, an entity with a 31 December year-end that will be liable to the IIR and QDTT for 2024, must register for these taxes by 31 December 2025. If that entity becomes liable to UTPR in 2025, it will need to register for UTPR by 31 December 2026.

Where either the registration information changes, or an entity is no longer in scope of Pillar Two taxes, the entity would be required to notify Revenue within 12 months from the end of the FY in which such an event has occurred. In relation to the latter, the relevant registration must be ceased. Re-registration is required where the entity subsequently comes in scope of Pillar Two again. (But note that merely having a Nil top-up tax liability does not mean that the entity has fallen out of scope.)

Registration forms are not yet available and expected date of release is as yet unconfirmed.

2.2 Top-up Tax Information Return and Elections

Section 4 of the Administration TDM describes the obligation of an Irish entity to prepare and deliver a Top-up Tax  information return to Revenue by the specified return date (18 months from the end of the entity’s first year within the scope of Pillar Two and 15 months from the end of its FY thereafter) unless either (i) an entity in Ireland or in a jurisdiction that has a qualifying competent authority agreement in effect with Ireland files the return and (ii) a Notification of filer is received by Revenue by the specified return date.

The Administration TDM reiterates that the Top-up Tax information return must include all elections that have been made by the specified return date. The Administration TDM at section 19 includes a list of five year, annual and other elections.  It is worth noting that where a five-year or annual election is made it remains in effect for subsequent FYs, unless the filing constituent (‘CE’) entity withdraws the election (which is only possible in the return for a year after the initial five-year period). In addition, the filing CE cannot make another election of the same type in the four FYs immediately following the FY in which the election was withdrawn. The Top-up Tax information return has yet to be amended to provide for such withdrawal.

2.3 IIR, QDTT and UTPR returns

Sections 5 to 13 of the Administration TDM outline the compliance obligations and process for GloBE tax. In this regard, the IIR, QDTT and UTPR returns (‘GloBE returns’) are required to be delivered to Revenue by the specified return date (as detailed above, 18 months from the end of the entity’s first year within the scope of Pillar Two and 15 months from the end of its FY thereafter).  It is possible that all such returns will be contained on a single form/online filing process, but the Administration TDM does not give any indications on this.

Where an entity is subject to QDTT in 2024 and becomes subject to UTPR in 2025, it will not get a filing extension to 18 months for 2025 as the entity was already subject to QDTT in 2024.

Elections are available to allow entities to form groups with respect to UTPR and QDTT taxes and appoint one entity (UTPR / QDTT group filer) to deliver the relevant GloBE return and associated payment to Revenue. The UTPR / QDTT group filer would be charged with the UTPR / QDTT of all the members within the group and be required to make the payment to Revenue before the specified return date. Payments made by the UTPR / QDTT members to the group filer in respect of, but not exceeding, the amount the relevant member would have been liable for will be treated as follows:

• Shall not be taken into account in calculating the profits or losses of either company for corporation tax purposes.
• Shall not be regarded as a distribution or a charge on income for any of the purposes.

It is worth noting that where an entity withdraws from a QDTT or UTPR group, the group is no longer considered to exist. The Administration TDM does note that this is not the case where the QDTT group member ceases to be a member of the Multinational Enterprise (‘MNE’) group or large-scale domestic group, but the other QDTT group members remain.

Section 3 of the Administration TDM confirms that where an entity is subject to GloBE taxes for a FY, but no liability arises, the entity is required to file a ‘Nil’ GloBE return. The Administration TDM also confirms that GloBE tax is due and payable on the specified return date and all payments must be made through the Revenue Online Services (‘ROS’) portal.

The current self-assessment system will be applicable to the GloBE returns and as part of the system, the “Expression of Doubt” process would be available to an entity.

2.4 Transitional simplified jurisdictional reporting

The Administration TDM summarises the instances where a filing CE may elect to apply the transitional simplified jurisdictional reporting for FYs beginning on or before 31 December 2028 and ending on or before 30 June 2030. The election may be made where –

1. All QDTT members of the group form part of a QDTT group and the relevant return has been filed before the specified return date, or
2. There is only one member within the group that is a qualifying entity for QDTT purposes, or
3. Members of the group are located in a jurisdiction other than Ireland (‘other jurisdiction members’), and
   1. There is no IIR or UTPR top-up tax for the other jurisdiction members under the Taxes Consolidation Act 1997 (‘TCA’) or, if there is, the top-up tax is not allocated on a CE-by-CE basis, and
   2. Under the tax laws of all jurisdictions where a qualified QDTT, UTPR or IIR may arise for the FY, the filing CE may elect to apply the simplified jurisdictional framework in respect of the other jurisdiction members.

Where the election is made by the filing CE, the Top-up Tax information return for the FY can be completed in accordance with the simplified jurisdictional reporting framework. This allows the filing CE to report GloBE information on a jurisdictional level for the defined period. This transitional period provide time for the MNE groups to develop accounting systems and/or processes that will facilitate information collection and reporting on a CE-by-CE basis for GloBE purposes.

2.5 Currency conversion

Section 111AAAA TCA provides for rules on the foreign exchange impacts that may arise in making GloBE calculations. Section 16 of the Administration TDM provides examples of how to approach currency conversions in certain scenarios:

• Where an exchange rate is required to determine if any materiality or other threshold denominated in Euro is satisfied, the average daily exchange rate for the month of December in the immediately preceding FY must be used to convert the amount to Euro.
• Where the financial accounting net income or loss (‘FANIL’) of a qualifying entity is determined according to a local accounting standard, then if:
  • All qualifying entities prepare financial statements in Euro functional currency, all calculations pertinent to the QDTT should be made using Euro.
  • If the above is not the case, then the filing CE may elect that all relevant calculations are made using either:
    • The presentation currency of the consolidated financial statements of the UPE (using the currency conversion rules under the local accounting standard); or
    • Euro (using the currency conversion rules under the local accounting standard).

• Where the FANIL is not calculated in accordance with a local accounting standard, all calculations relevant to the QDTT should be made using the presentation currency of the UPE and using the currency translation rules under that financial accounting standard.
• Where a qualifying entity is not a member of a group, all QDTT calculations should be made using the financial statements presentation currency.

All payments to the Revenue must be paid in Euro.

2.6 Penalties and surcharges

The Administration TDM reiterates the various penalties applicable where an entity fails to meet its obligations under the Irish Pillar Two rules, with the most noteworthy being:

• A penalty of €10,000 for failure to register, to update registration, or de-register by the required deadline.
• A surcharge for late filing of a GloBE return set at 5% of the final GloBE tax liability (subject to a cap of €50,000) where the GloBE return is submitted up to 2 months late, and 10% (subject to a cap of €200,000) where the GloBE return is submitted after 2 months.
• A penalty of €10,000 for failure to keep records relating to GloBE tax filings/liabilities.
• A monthly penalty of €10,000 for the late filing of a Top-up Tax information return or notification of filer, subject to a cap of 48 months (€480,000).
• Interest on late payment of GloBE taxes will be levied at a rate of 0.0219% per day for each day the amount is outstanding up to a maximum of 8% per annum.

The existing tax geared penalty regime will apply to under-declarations of GloBE taxes.

In line with the TCA, the Administration TDM notes that transitional penalty relief may be available where it relates to a FY beginning on or before 31 December 2026 and ending on or before 30 June 2028, where the CE has taken reasonable care to ensure the correct application of the rules. Reasonable care may be demonstrated where the entity has in good faith, put in place the appropriate systems needed to understand and comply with the rules. The Administration TDM provides some examples of reasonable care (not an exhaustive list):

• A mistake of fact which is reasonable in the circumstances.
• Errors that can be reasonably attributable to unfamiliarity of the rules in the initial years of implementation.
• The requirements of the rules are unclear, and the entity’s actions are based on a reasonable interpretation of the rules.

3. Application of Pillar Two

As mentioned above, the Detailed TDM contains detailed information on the interpretation of the BEPS Pillar Two regime. Much of what is included is not new, having been already covered in OECD guidance. Below we have highlighted what we consider to be some of the more interesting takeaways from the Detailed TDM.

3.1 Intra Group Finance Arrangements

Section 111P TCA provides that any expense related to an intra-group financing arrangement shall not be taken into consideration in the calculation of qualifying income/loss of an entity located in a low-tax jurisdiction where it is reasonable to assume that over the duration of the arrangement there will not be a commensurate increase in the taxable income of the high tax counterparty. Section 7.2 of the Detailed TDM provides examples of where a commensurate increase in the taxable income of the high tax counterparty would occur:

• Where a lender has expenses and is taxed on a net basis, i.e., interest expense from third party borrowings and interest income from intra-group lending;
• Where a lender may claim group relief for losses incurred by another group member; or
• Where a lender has losses carried forward being used to shelter the interest income.

3.2 Adjusted Covered Taxes

Section 8.1 of the Detailed TDM on adjusted covered taxes confirms that a payment for group relief made from one group company to another that is accounted for as a current tax expense in the paying entity will be considered a covered tax for the purposes of the rules. Note that as you would expect, two entities cannot include the same corporation tax charge as covered tax. This was not directly dealt with in the legislation itself.

3.3 Total deferred tax adjustment amount

Section 111X TCA provides that where a deferred tax asset is attributable to a qualifying loss in a CE, this loss can be recalculated at a 15% rate where the applicable tax rate is less than the 15% rate. Where this recalculation exercise is undertaken, Section 8.5 of the Detailed TDM stipulates that the taxpaying entity should:

• Assess and document the impact of the book to tax adjustments in respect of the accounting loss as outlined in Part 4A TCA, where reasonably practicable.
• In doing this the taxpayer should make all best efforts to review the relevant financial information for the FY in which the loss arose and make relevant adjustments to calculate the qualifying loss in respect of the FY.

The Detailed TDM does not provide any further comment on how to determine if a deferred tax asset is attributable to a qualifying loss.

The Detailed TDM also notes that taxpayers should prepare a supporting deferred tax schedule or balance sheet that has linking documents to support the adjustments from the underlying financial data as evidence of the total deferred tax adjustments for a given year.

3.4 Transfer of assets and liabilities

Section 111AN TCA sets out the rules around the recognition or non-recognition of gains or losses on the disposal of assets and liabilities, as well as the rules for determining carrying value of assets and liabilities in the context of an ordinary acquisition/disposal and a Pillar Two reorganisation which requires that the disposer is not subject to tax on the gain or loss.

In Section 10.3 of the Detailed TDM, Revenue give their view that relieving provisions of Irish legislation which result in “no gain/no loss” for the disposing entity, for example Section 617 TCA, satisfy the Pillar Two reorganisation condition that the disposing CE’s gain or loss on the disposal of the assets and liabilities is “not subject to tax”.

4. Conclusion

There are a number of issues with the OECD for further consideration and these may be the subject of future OECD and/or local guidance. Of particular interest to entities operating in Ireland is the request for confirmation that the local accounting standard should apply for QDTT purposes where some entities in the group have a different FY to the UPE as a result of acquisition, incorporation, merger, liquidations etc. which does not result in mismatch between local and UPE financial statements.

EY will be monitoring developments and working with the relevant authorities in relation to the ongoing evolution of Pillar Two.