Pillar One and Pillar Two – implications for professional service partnerships

27 April 2022


On 14 June the UK Government announced that the UK’s implementation of the Pillar two proposals would first apply for accounting periods beginning on or after 31 December 2023 – later than originally planned.

On 20 December 2021, the OECD released the Pillar Two Global anti-base erosion (GloBE) model rules as part of its two-Pillar solution to address the tax challenges of the digitalisation of the economy. 

The Pillar One rules are intended to ensure that a portion of a group’s revenues are taxed in the jurisdiction where goods or services are used or consumed. The rules will only apply to groups with worldwide revenues in excess of €20 billion, and only the largest professional service firms would, therefore, meet the size threshold. In addition, there would be limited impact of the rules even in the event they were applicable, as profits tend to be chiefly taxed already in the jurisdiction in which the client is based, where the firm undertakes work through a local office/permanent establishment.

The Pillar Two rules are designed to impose a minimum rate of tax on profits of a multinational business in every jurisdiction of operation, so are much more likely to impact professional service firms. While we do not anticipate this creating material additional liabilities for most firms, large firms within scope will need to work through the rules in light of their specific circumstances and, based on current expectations, can certainly expect an increased compliance burden as a consequence. 

The Pillar Two rules are complex, and we have not attempted to cover them in detail here, but instead summarise what we consider are likely to be the main implications for professional service firms. 

Summary of the Pillar Two rules

The Pillar Two rules are designed to ensure that large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate. The OECD released its commentary and illustrative examples to the rules on 14 March. BDO responded to HMRC’s consultation on the UK’s implementation of Pillar 2 which closed on 4 April 2022. With the UK anticipating releasing its draft legislation this year, to be effective from April 2023, it is time for large multinational partnerships to engage with the likely implications of the rules. 


The OECD has adopted model rules, and it now falls to countries adopting them to implement their version within domestic legislation. The UK has stated it intends, to the greatest extent possible, that its rules will mirror the OECD model provisions. The rules will apply to entities that are a members of a multinational group that has annual turnover in its consolidated accounts of at least €750 million, although rules can modify the application in certain cases. A multinational group means any group that has at least one entity or permanent establishment that is located in a different jurisdiction. Generally large international partnerships within the scope of Country-by-Country Reporting can, therefore, expect to be within the scope of Pillar Two. 

We perceive two main implications of the Pillar Two rules for affected large partnerships:

1. Top up taxes

Firms within the scope of the rules will need to calculate their effective tax rate for each jurisdiction in which they operate, and pay a top-up tax for the difference between their effective tax rate and the 15% minimum tax. There are formulaic rules to compute the applicable profits, ‘GloBE income’ and the taxes which can be taken into account when computing the effective tax rate.

Any top-up tax generally falls to be charged in the jurisdiction of the ultimate parent entity of the group, although the expectation is that low tax territories may introduce their own form of minimum tax to ensure that they can benefit from top-up taxes which would otherwise be collected in the jurisdiction of the parent entity. A transparent entity such as a UK Limited Liability Partnership can be the ultimate parent entity (UPE) of a group. Where a UPE is tax transparent, rules provide for it to be located in the jurisdiction where it was created or incorporated. 

The group will then need to calculate the effective tax rate on a jurisdictional basis. The group starts with its results based on its financial accounts at an individual entity level (typically under the GAAP which is applied for the purposes of the consolidated group accounts), and then makes adjustments designed to harmonise the financial accounts with tax rules (for example, to exclude distributions and capital gains). The intention is for adjustments to the financial accounts to be kept to a minimum, though the reality of the rules is that a number of adjustments will need to be made.

Where the business of an entity is carried out through a permanent establishment, the income is that reflected in the separate accounts of the permanent establishment or, if no such accounts are available, then the business must compute the income that would have been reflected in separate accounts if prepared on a standalone basis and in accordance with the accounting standard used by the UPE. Where an entity (which is not the UPE) is tax transparent (e.g. a subsidiary LLP), the income is allocated to its constituent entity owner in accordance with ownership interests passing up the transparent chain until the level of the UPE is reached. Firms will, therefore, need to review the available information regarding subsidiaries and branches, and ensure that suitable records exist in order to permit it to perform calculations at the level of each permanent establishment. 

For the UPE computing its ‘GloBE income’ for the purposes of working out whether top-up tax is due, one possibility is that the income can be reduced by the amount of the GloBE income which is attributable to individual recipients resident in the jurisdiction of the UPE with a holding of less than 5%. For example, if a multinational UK LLP group is owned in equal proportions by 50 UK tax-resident individuals, there would be no relevant GloBE income for Pillar 2 purposes and no top-up tax due.  

A further reduction is possible where the beneficial owner of the income is subject to tax on the full amount of the income at a rate exceeding the 15% minimum rate. In practice therefore, our expectation is that a multinational partnership will have limited GloBE income from which it will need to compute whether top-up taxes are applicable. However, as this is dependent on a firm’s particular structure, it will be necessary for each firm to review the specific rules in light of its specific circumstances. In particular, firms will need to review the position for non-transparent constituent entities such as corporate subsidiaries or entities such as UK LLPs (which might not be treated as transparent when operating in certain territories), as top-up taxes could be applicable for those operating in low-tax jurisdictions.     

2. Filing requirements

The UPE will be required to file a ‘GloBE information return’ in a standard format in the country in which it is located. This is intended to provide a tax administration with the information it needs to evaluate the correctness of a constituent entity’s tax liability under the Pillar Two rules. The anticipation is that, similar to the approach used for Country-by-Country Reporting, the information will be provided in a standardised form, and there will be provision for returns to be exchanged between tax administrations.

The return will need to be filed within 15 months of the end of the applicable period, although a longer timeframe of 18 months will be permitted for the first filing to give businesses time to prepare. The constituent entities within the group are usually not required to file their own return in their country of jurisdiction where its UPE has filed a GloBE return in its jurisdiction of residence/incorporation. It will, however, be required to provide notification within its territory of the UPE which is making the filing and the jurisdiction in which it is located. 

Managing the impacts

As most UK-headquartered professional service firms do not generate low taxed profits due to the jurisdictions in which they operate and the profile of their partners, it is not anticipated that any material tax will fall to be due under Pillar Two. However, to prove this, there will be increased filing obligations - subject to how the UK implements its domestic version of the rules.

The government is consulting on safe harbour exemptions for business in jurisdictions where there is a very low risk that top-up taxes will be applicable, or using simplified approaches based on data within a multinational group’s Country-by-country report. It will remain to be seen whether these options might remove the compliance obligation for professional service firms within Pillar Two, or whether this becomes a regular compliance obligation which a business will need to actively monitor and manage. 

BDO can help you assess your firm’s exposure to the rules and assist with modelling the likely impact on your business. For help and advice on this or any other international tax issue, please contact Louise Cupples, Neil Williams, or your usual BDO contact.