Understanding Pillar Two (“P2”) and its impact on a company’s global effective tax rate cannot not be measured in isolation – in fact it’s all about the interplay.

P2 is designed to ensure that every multinational enterprise (“MNE”) is subject to a minimum effective tax rate of 15% in every jurisdiction in which they operate.  This effective tax rate is determined is each jurisdiction by dividing the jurisdiction’s Covered Taxes by the jurisdictions GloBE Income.

Conceptually, GloBE Income is relatively straightforward and is determined by adjusting the jurisdiction’s Financial Accounting Net Income or Loss (“FANIL”) by a series of specifically defined adjustments designed to ensure comparability between MNEs.

Calculating Covered Taxes is much more complex and is all about the interplay between overlapping and disparate taxation rights and concepts.  In particular, the three primary areas of interplay are between the financial accounting principles, local country jurisdictional taxable income determination, and finally with CFC regimes such as the U.S. GILTI regime.