Pillar Two in year 2 & what's different from year 1

For many multinational enterprise (MNE) groups, the first year of Pillar Two compliance (typically the year ended 31 December 2024) was largely a transition exercise. While most MNE groups spent considerable time understanding the rules, establishing governance processes, and assessing the availability of the Transitional CbCR Safe Harbour (TCSH), the practical compliance burden was often less onerous than initially anticipated.

Year 2 is different.

For groups with a 31 December 2025 year end, the first substantive Pillar Two returns will generally be due by 31 March 2027, being 15 months after year end. Accordingly, MNE groups should already be considering their year 2 compliance strategy and data requirements.

The 'no charging mechanism' position no longer applies

One of the unique features of the first year of Pillar Two compliance was that many jurisdictions were not yet subject to any qualifying charging mechanism, being the Income Inclusion Rule (IIR), Domestic Minimum Tax (DMT) or Undertaxed Profits Rule (UTPR).

As a result, for the year ended 31 December 2024, some jurisdictions could effectively be excluded from substantive Pillar Two consideration because no jurisdiction had a charging mechanism to impose top-up tax in relation to those jurisdictions.

For the fiscal year ended 31 December 2025, this position changes significantly.

From fiscal years beginning on or after 1 January 2025, Australia's UTPR commences. At the same time, many jurisdictions that did not previously apply an IIR or DMT have now introduced one or both charging mechanisms.

Consequently, jurisdictions that attracted limited Pillar Two attention during year 1 may now require a more detailed assessment. Finance teams should avoid assuming that conclusions reached during the 2024 compliance cycle remain valid for 2025.

More jurisdictions will require safe harbour analysis

For many groups, the 2024 exercise focused only on (a limited number of) jurisdictions where a charging mechanism existed and therefore where a potential top-up tax exposure could arise.

For 2025, safe harbour analysis may need to be performed for jurisdictions that did not require assessment in the prior year because no charging mechanism applied.

Where a jurisdiction satisfies one of the Transitional CbCR Safe Harbour tests, no full Pillar Two calculation will generally be required for that jurisdiction.

However, where none of the available safe harbour tests are satisfied, the MNE group may be required to undertake full GloBE calculations for that jurisdiction.

Accordingly, even where the underlying business has not changed materially, the number of jurisdictions requiring analysis may increase significantly from year 1 to year 2.

The transitional CbCR safe harbour 'once-out, always-out' rule becomes more relevant

As groups move into their second year of compliance, greater attention should be given to the operation of the TCSH rules.

Broadly, where a jurisdiction ceases to qualify for the TCSH for one year, that jurisdiction is unable to subsequently re-enter the safe harbour regime in a later year.

This 'once-out, always-out' concept means that safe harbour assessments should be undertaken carefully and supported with appropriate documentation.

The year 2 assessment therefore should not simply be viewed as a rollover of the year 1 position.

Jurisdictions not assessed in 2024 should not automatically lose access to TCSH

A practical issue likely to arise for many MNE groups concerns jurisdictions that were not required to be analysed in 2024 because no charging mechanism applied.

In our view, the fact that a jurisdiction was not required to consider the TCSH in 2024 should not, by itself, prevent that jurisdiction from relying on the TCSH when a charging mechanism first becomes applicable in 2025.

This situation should be distinguished from a jurisdiction that was assessed in 2024 and failed the TCSH requirements.

In other words, the fact that the TCSH was not relevant to a particular jurisdiction in year 1 should not necessarily preclude that jurisdiction from accessing the TCSH in year 2 when a charging mechanism becomes applicable.

Given the potential compliance savings that can arise from the TCSH, this distinction may be important for many MNE groups.

Group restructures may create additional Pillar Two compliance obligations

MNE groups that undertake restructures during the year should carefully consider the Pillar Two implications, even where the restructure appears relatively straightforward.

In particular, changes involving the identity of the Ultimate Parent Entity (UPE), the insertion of a new holding company, mergers, demergers, acquisitions, disposals, or changes to ownership chains can give rise to additional Pillar Two compliance requirements. In some cases, a single accounting period may involve multiple reporting obligations, separate filing positions, or different safe harbour assessments before and after the restructure.

Importantly, transactions that may appear routine from a legal or commercial perspective can have consequences for Pillar Two group composition, filing obligations, and the application of safe harbours. Accordingly, MNE groups should consider reviewing any restructuring activity undertaken during the year to determine whether it affects their Pillar Two compliance position, reporting obligations or filing approach. Early identification of these issues can help avoid unexpected compliance obligations and reduce the risk of errors when lodgement deadlines approach.

Governance & readiness remain critical

While many MNE groups may continue to benefit from the TCSH for the year ended 31 December 2025, this relief is temporary. Accordingly, organisations should use the transitional period to prepare for the point at which full GloBE calculations are required.

In our experience, groups that use the transitional years to enhance data collection processes, identify information gaps, and establish governance frameworks will be significantly better positioned when safe harbours cease to be available.

Management should therefore consider:

• whether the group currently captures all data that may be required to perform full GloBE calculations in future years
• whether roles and responsibilities between tax, finance, and accounting teams remain appropriate
• whether assumptions adopted during year 1 remain valid
• whether local advisors are required in newly implementing jurisdictions
• whether documentation supporting safe harbour positions is being maintained
• whether reporting to senior management and audit committees remains fit for purpose.

Revenue authorities around the world are increasingly focused on Pillar Two implementation, and MNE groups should expect greater scrutiny as the first substantive returns begin to be lodged. MNE groups that invest in preparing for full calculations during the transition period are likely to experience a more efficient and lower-risk compliance process when the TCSH is no longer available.

Don't forget the tax provision process

For many MNE groups, Pillar Two was initially viewed as a future compliance exercise.

As year 2 approaches, Pillar Two considerations are becoming increasingly relevant to the annual tax reporting cycle. Finance teams should consider whether any Pillar Two developments may affect tax accounting positions, disclosures, governance processes, and audit discussions.

Early engagement between tax teams, finance teams, and auditors will generally result in a more efficient compliance process.

Looking ahead

The year ended 31 December 2024 was largely about understanding the new rules and determining whether transitional relief was available.

The year ended 31 December 2025 represents the next phase of the regime.
The commencement of Australia's UTPR, the broader rollout of IIR and DMT regimes globally, and the need to assess additional jurisdictions under the Transitional CbCR Safe Harbour rules mean that many MNE groups will find year 2 materially different from year 1.

For MNE groups with a 31 December 2025 year end, the Pillar Two lodgement deadline is 31 March 2027. While this may appear some time away, experience suggests that MNE groups that commence planning early are better positioned to manage data collection, governance requirements, and filing obligations efficiently.

How SW can help

SW's Pillar Two specialists can assist with:

• transitional CbCR Safe Harbour assessments
• review of year 1 positions and implications for year 2
• jurisdictional charging mechanism analysis
• governance frameworks and documentation for Pillar Two
• preparation and review of GloBE calculations
• lodgement obligations for Australian Pillar Two.

If you would like to discuss the implications of year 2 Pillar Two compliance for your group, please contact your usual SW advisor.

Contributors

Antony Cheung | Associate Director, Tax

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