Portugal has transposed the EU’s Pillar Two Directive (Council Directive (EU) 2022/2523 of 15 December 2022) on ensuring a global minimum tax level for multinational enterprise (MNE) and large-scale domestic groups. Effective from November 9 2024, Law 41/2024 (in Portuguese) applies to entities with annual consolidated revenue equal to or greater than €750 million.
Following the Global Anti-Base Erosion Model Rules, the global minimum tax regime (regime do imposto mínimo global, or RIMG) introduces a global minimum effective tax rate (ETR) of 15%, aiming to reduce tax competition and profit shifting to low-tax jurisdictions.
The RIMG comprises three key rules:
The income inclusion rule (IIR), requiring a group’s ultimate or intermediate parent entity to calculate and pay a top-up tax on profits of its constituent entities located in a jurisdiction with an aggregate ETR below 15%;
The undertaxed profits rule (UTPR), ensuring that an MNE group’s constituent entities pay any remaining top-up tax not collected under the IIR; and
The qualified domestic minimum top-up tax (QDMTT), applying to profits of constituent entities in Portugal if the group’s ETR in Portugal falls below 15%.
The IIR and the QDMTT apply to fiscal years starting on or after January 1 2024, and the UTPR from January 1 2025 (except for constituent entities located in Portugal of an MNE group whose ultimate parent entity is located in an EU member state that has opted not to apply the IIR and the UTPR for six consecutive fiscal years from December 31 2023, pursuant to the Pillar Two Directive).
The RIMG rules introduce significant changes to the tax landscape and will require companies to adjust their tax reporting and compliance processes to meet the new standards.
The main challenges of pillar two under the new RIMG
The RIMG poses significant challenges for MNEs in understanding and adapting to the new rules, as well as ensuring compliance.
A key challenge that constituent entities will face under pillar two is tax computation, both in terms of calculating ETRs on a jurisdictional basis to verify RIMG compliance and assess the applicability of the IIR, the UTPR, or the QDMTT and in terms of calculating any required top-up tax according to the relevant rule. This requires in-depth knowledge of international tax concepts and a comprehensive view of the group taxation, including ETRs across jurisdictions.
Therefore, constituent entities will need to ensure precise tax liability calculations aligned with the new standards.
Portuguese constituent entities will also face new compliance obligations under the RIMG, including filing a top-up tax information return with all the information needed to determine the ETR for each jurisdiction and the top-up tax for each constituent entity.
This will require developing systematic approaches to accurately collect, process, and report large amounts of data, imposing a substantial administrative burden.
The fast-paced technological development of the Portuguese tax authority (PTA) adds to these challenges. The PTA increasingly resorts to technology to analyse data and enforce tax legislation, while exchanges of information with tax authorities in other jurisdictions are becoming more agile.
This requires constituent entities to adapt swiftly and effectively to the new pillar two reality, ensuring strict compliance with tax and reporting obligations, to avoid being unprepared for sophisticated tax audits and control actions, where the PTA may use advanced technology to analyse the constituent entities' documentation, cross-reference extensive data, and accurately identify compliance failures.
How can businesses overcome the challenges of the RIMG?
The answer certainly lies in cutting-edge technological solutions.
Digital transformation has fundamentally reshaped business models, with a clear impact on the global economy. Simultaneously, tax authorities worldwide are adopting these technologies. For constituent entities, technology will be a game changer, enabling them to calculate tax and meet compliance obligations more effectively. Generative AI (GenAI) is particularly suited to supporting these efforts.
GenAI, with its machine learning and natural language processing capabilities, enhances the extraction, organisation, and analysis of large data sets from multiple jurisdictions. This includes processing financial reports, tax returns, income statements, and other relevant documents. GenAI tools can automate data extraction and standardise information from different tax and accounting systems, ensuring consistency across jurisdictions. By applying advanced algorithms, GenAI can also detect patterns and anomalies within data, such as tax avoidance risks or inconsistencies, flagging them for further review.
In the context of pillar two compliance, where data accuracy is paramount, GenAI can verify data integrity through automated error checking and cross-jurisdictional consistency. With its natural language understanding, it can interpret complex tax-related terminology and identify recent changes in jurisdictional tax rules that may impact calculations.
Furthermore, GenAI supports the calculation of the ETR of MNEs and their constituent entities by handling complex tax rules and processing data in real time. In fact, it can adjust calculations as tax rates, laws, or relevant financial data change across jurisdictions, ensuring accuracy.
GenAI also facilitates global minimum tax compliance by identifying jurisdictions where ETRs fall below the threshold, performing top-up tax calculations and modelling scenarios to illustrate how tax rate changes or other financial variables may impact obligations.
GenAI is highly suited to facilitating pillar two compliance by automating intricate data analysis, improving the accuracy of tax rate calculations, and ensuring timely filing and reporting. By leveraging GenAI in data extraction, validation, scenario modelling, and automation, MNEs and their constituent entities can streamline tax compliance processes, minimise the risk of errors, and meet obligations in an evolving, multi-jurisdictional tax landscape.
In a nutshell, while technology greatly assists Portuguese constituent entities in complying with pillar two requirements, companies should also prioritise understanding the complex new rules, preparing thoroughly for tax audits, and, ultimately, preventing disputes with the PTA.
