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Key ways BEPS 2.0 Pillar Two may impact US multinational entities’ M&A transactions

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As Pillar Two rules come online, US MNEs considering M&A transactions will want to keep their tax department connected.

In brief
  • Acquisitions (or de-mergers) may bring your company in scope.
  • A tax basis step-up may be worth less than expected.
  • Post-acquisition integration may be more challenging.

As more jurisdictions implement the Organisation for Economic Co-operation and Development (OECD)/G20 project on addressing the tax challenges of the digitization of the economy (BEPS 2.0) Pillar Two proposal, US multinational entities (MNEs) are paying closer attention. In fact, 90% of respondents to our 2023 Tax and Finance Operations survey say that they expect “moderate to significant” changes to their business operations from Pillar Two implementation. As a result, many have begun to analyze the potential Pillar Two impacts on their effective tax rate (ETR), operations and overall approach to tax data management.

What has received less focus, however, is how Pillar Two and its global anti-base erosion model (GloBE) rules may affect US MNEs’ M&A transactions.

Overview of Pillar Two’s GloBE rules


Pillar Two’s GloBE rules provide for a coordinated system of taxation that imposes a “top-up tax” on certain large MNEs’ profits arising in a jurisdiction whenever the “GloBE ETR”¹ in that jurisdiction is below 15%. The top-up tax is calculated on a jurisdiction-by-jurisdiction basis. The MNE must pay the top-up tax to the appropriate jurisdiction via one of three charging provisions:

  1. A qualified domestic minimum top-up tax (QDMTT), which generally computes profits and calculates any top-up tax in essentially the same way as the GloBE model rules. The QDMTT is imposed on the entity in the low-taxed jurisdiction. 
  2. An income inclusion rule (IIR), which imposes a top-up tax on a parent entity with respect to a low-taxed foreign subsidiary.
  3. An undertaxed profits rule (UTPR), which imposes a top-up tax by denying deductions or other adjustments if the low-taxed income of an entity in the MNE group is not subject to a top-up tax under an IIR. The top-up tax is imposed on an entity in the UTPR jurisdiction.

A treaty-based subject to tax rule (STTR) allows source jurisdictions to impose additional tax on certain related party payments that are subject to tax below a minimum nominal tax rate.


Generally, there are two reasons that a US MNE might care about Pillar Two. The first is that it may have subsidiaries located in a jurisdiction where the GloBE ETR is less than the minimum rate of 15%. If it does, then top-up tax may be imposed on the income of those entities, beginning as early as 2024. The second reason is that a US MNE may enjoy certain US tax benefits that drive its GloBE ETR in the US below 15%. In this case, one or more of the US MNE group’s foreign subsidiaries may impose a top-up tax on the MNE’s US income under a UTPR. Although many jurisdictions have adopted, or announced their intention to adopt, a UTPR effective beginning in 2025, the OECD has provided a transitional UTPR safe harbor applicable to ultimate parent entities (UPEs), which will allow a US UPE to avoid the application of the UTPR to its US-source income until 2027.


As the Pillar Two rules are slated to take effect soon, US MNEs need to be working GloBE considerations into their M&A projections and procedures now. To help with this process, outlined below are several key ways that these transactions may be impacted.


Issues to consider


Acquisitions (or de-mergers) may bring your company in scope


The GloBE rules generally apply to MNEs and their constituent entities that have €750 million or more in annual gross revenues as reflected in the consolidated financial statements of the UPE. To determine applicability, the rules look at the four fiscal years preceding the fiscal year being tested – if the MNE meets the threshold in two of those preceding four years, it is in scope.


In M&A transactions, a group or entity that is not in scope under the general rule could easily find itself in scope after a merger. This is because, when a merger takes place, the GloBE rules require adding together the consolidated revenues of the merging entities or groups in each of the four pre-merger “lookback” years; if the combined consolidated revenues exceed the threshold in two of those four years, the MNE group will be treated as having met the threshold and will be subject to the GloBE rules.


It's not only mergers, however, that can trigger the GloBE rules. If a de-merger occurs and an entity spins from the group, the GloBE rules require looking at the first year of the de-merger to see whether either the entity or the remaining consolidated group meets the revenue threshold on its own. The rules also require looking again at the next four years to see whether the threshold is met by either the entity or the consolidated group on its own in two of those four years.


The rules can also be triggered if an entity leaves an MNE group and becomes part of another MNE group; in that scenario, the entity is treated as being part of both groups for the entire fiscal year in which the transfer took place, which can impact the threshold calculations for both MNE groups.


In any of the above scenarios, US MNEs that have not taken action to review the relevant historical data and model out the applicable rules may discover that an unexpected tax obligation has resulted from the transaction.

A tax basis step-up may be worth less than expected

Often, buyers are willing to pay a premium to structure an M&A transaction so that the tax bases of the assets of the acquired business assets are stepped up to their fair market values. The GloBE rules, however, can reduce the benefit of an asset basis step-up by effectively denying amortization deductions for long-lived intangible assets, such as goodwill, that are amortizable for tax purposes but not for financial accounting purposes. This can depress the buyer’s GloBE ETR in the relevant jurisdictions below the minimum rate of 15%, triggering top-up tax.

These rules are complex, and companies should consult with professionals in both their tax and accounting departments when considering transactions with these elements.

Post-acquisition integration may be more challenging

The GloBE rules can also come into play when assets or liabilities are transferred between members of the same group as part of post-acquisition integration. For example, suppose a US MNE acquires all the stock of a foreign target located in a jurisdiction that has adopted Pillar Two. Following the acquisition, the foreign target’s low-tax subsidiary sells IP to the US MNE’s IP holding company. Because a stock acquisition generally does not deliver an asset basis step-up to the acquirer for GloBE purposes (even if the parties elect to treat the transaction as an asset acquisition for US tax purposes), the internal IP sale may result in gain for GloBE purposes, and thus top-up tax.

Existing due diligence, modeling and documentation processes may not be sufficient

Complying with the GloBE rules will require many interdependent calculations, making navigating these rules in the context of an M&A transaction a complex exercise. Before these rules take effect, US MNEs will want to examine their current processes for modeling these transactions and conducting due diligence. They will also likely need to update their documentation process to reflect the information needed to reduce the risk of post-acquisition surprises. Questions to consider include:

Next steps for BEPS 2.0 Pillar Two

BEPS 2.0 Pillar Two is on an accelerated implementation path globally. Several jurisdictions have already enacted Pillar Two rules into law, with variance in approach and effective dates. Many others have put forth implementing legislation, many with proposed effective dates as early as 2024.

Thus far, the US Congress has not acted to bring the US tax system into alignment with Pillar Two. As such, when analyzing M&A transactions involving a US entity, US MNEs will need to navigate the GloBE rules and the US international tax regime simultaneously.

US MNEs with operations in jurisdictions where Pillar Two is being implemented, and those that may be involved in M&A transactions in which a party to the transaction is in such a jurisdiction, will want to keep their tax department connected through all stages of M&A planning. They should also consult with their advisors about any potential future M&A transactions and conduct scenario forecasting that includes Pillar Two GloBE rules.

To learn more about this topic, listen to the Ernst & Young LLP webcast archive and consult with your EY advisor.


US MNEs considering M&A transactions should consult with their advisors and conduct scenario forecasting that includes Pillar Two GloBE rules.

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