For years, companies have been able to reduce their taxes by shifting their profits to countries with lower corporate tax rates. But a new rule aims to close this loophole by introducing higher tax liabilities and increased compliance requirements for large multinational businesses.
What is BEPS 2.0?
Base Erosion and Profit Shifting (BEPS) is an initiative spearheaded by the Organization for Economic Cooperation and Development (OECD) to curb tax avoidance. BEPS 2.0, also known as Pillar 2, introduces a global minimum tax rate of 15% for businesses with annual revenues of over €750m (£625m). The new rule ensures that large multinational companies are taxed at an appropriate rate, regardless of where they operate.
Certain countries provide favourable tax regimes for businesses. For instance, Ireland has historically maintained a corporate tax rate of 12.5%, which has made it a popular destination for tech giants such as Apple, Google and Meta. However, with the country agreeing to adopt the 15% global minimum under BEPS 2.0, this is likely to change its appeal as a low-tax haven.
Under the new framework, companies will find fewer incentives to shift profits to such regions. A recent example of the changing tax environment is the Apple versus EU ruling. In September 2024, the European Court of Justice (ECJ) ordered Apple to pay £11bn in unpaid taxes to Ireland after it ruled the tech firm had benefited from unlawful favourable tax arrangements. This case is a clear signal that regulators are increasingly cracking down on corporate tax avoidance.
The new global minimum tax represents the largest coordinated effort to align on a common international tax system. However, although BEPS 2.0 is a widely agreed-upon framework, it is not legally binding and countries must therefore incorporate these guidelines into their domestic laws. So far, more than 140 countries intend to adopt Pillar 2 and 27 jurisdictions have enacted local versions of the new global minimum tax regime, with more expected to follow suit.
What BEPS 2.0 means for businesses
While it represents a step towards a more equitable tax system, BEPS 2.0 comes with a wave of new reporting and compliance challenges.
Finance leaders will need to track and report their profits and taxes across every country they operate in with greater detail and accuracy. They will also be expected to provide increased levels of transparency when it comes to their financial data. Such visibility is difficult to achieve if existing processes are disjointed.
“These new rules result in a significant new compliance burden,” says Chris Danes, tax partner and head of the global tax solutions team at accountancy and tax advisory firm MHA. “When every cost is under scrutiny and when budget and resources can be limited, this additional burden represents a real challenge for companies that have been endeavouring to do the right thing and remain tax-compliant.”
MHA’s clients are facing “significant” compliance costs as a result of the changes, according to Danes, and must communicate the changes to shareholders.
UK-headquartered businesses in scope will have to report information relating to Pillar 2 to HMRC by 2026.
