Pillar Two in the context of cross border merger and acquisition


G-20 countries and the Organizations for Economic Cooperation and Development (OECD) played a very crucial role in international tax reform, with the aim to tackle tax evasion of multinational corporations (MNEs) by shifting the tax base from jurisdictions with higher tax rate to jurisdictions with lower tax rate or no tax (i.e., Base Erosion and Profit Shifting: BEPS) by exploiting gaps and mismatches between different countries' tax systems where investments are located, which may be developing countries providing tax incentives to attract investments from MNEs.

Pillar Two is among notably international tax measures which may impact Thai corporations investing overseas. In a nutshell, Pillar Two consists of the GloBe (Global Anti-Base Erosion) rule focusing on collection of global minimum tax from multinational corporations with a total consolidated revenue over 750 million euros (or approximately 28 billion baht). The Pillar Two aims to ensure that the MNEs pay a global minimum tax of 15%, based on the effective tax rate (ETR), calculated in accordance with Pillar Two requirements of subsidiaries carrying on business in each jurisdiction. In case the ETR in any jurisdiction is lower than 15%, for jurisdictions of which tax systems are not updated to be in conformity with the minimum tax rate under Pillar Two requirements, to bring the effective tax rate of such MNEs up to the minimum tax rate under Pillar Two, a top up tax will be charged in either the jurisdiction of the Ultimate Parent Entity (UPE) or at the subsidiary level of the MNEs. The OECD encouraged member countries to put Pillar Two into effect within 2023. In Thailand, the Cabinet on 6 March 2023 approved in principle the policy to collect the global minimum tax as part of BEPS 2.0 Pillar Two initiative, and currently the legislative process is on-going, and the draft bill is expected to be proposed by 2023 with the aim to be in force by 2025. 

Pillar Two in the context of cross border merger and acquisition

Due to the steady increase in offshore investments by Thai corporations through mergers and acquisitions, it is worthy to bring to investors’ attention key considerations and key tax implications from the Pillar Two in the context of merger and acquisition.

• Careful consideration should be given with respect to holding structure of foreign entities within the target group, to identify any target entities that pay less than 15% ETR under the Pillar Two rule, which may give rise to additional tax cost or tax leakage after the acquisition. Therefore, the ETR of all foreign entities within the target group should be covered in M&A process e.g. the tax due diligence stage, even though such foreign entities may only perform limited function such as investment holding entity (i.e., holding company). 

• Restructuring of foreign entities’ structure prior to or after the merger and acquisition, taking into consideration the tax profile and group structure of the Thai MNEs and the target foreign entities, may be worthy of consideration. This is especially important if any operating or holding entities are in low or no tax jurisdictions (tax heaven countries), due to the fact that such structure may be rendered useless (as tax saving measures) when Pillar Two comes into force.

In addition, treaties benefits may also be denied if such foreign entities do not have economic substance (function as pure holding companies without employee, without decision power, and without management decision carried out in such countries). This would result in adverse tax implications for the MNEs group.

• Tax implications from Pillar Two should also be reflected in financial models prepared to support merger and acquisition transactions, to account for tax profile of target group and the Thai MNEs making the acquisition, as additional tax cost from Pillar Two would impact profitability that would be returned to the investors, which in turn may affect the transaction price. 

• By the time the Pillar Two becomes effective, MNEs should have in place personnel with necessary expertise in relation to Pillar Two, and necessary tools and technologies to cope with Pillar Two requirements, including data collection and Pillar Two’s ETR computation which can be complex and may differ from requirements under domestic laws of the country such target entities are located.

As a final note, even though Pillar Two does not yet come into force in Thailand for the time being, Thai MNEs wishing to invest offshore should understand the Pillar Two concept and requirements, to support merger and acquisition transactions relating to investment structure, expansion of investment, and restructuring, to optimize tax position and to be in line with laws and regulations in relation to Pillar Two which will be in force in the future.

The article is written by Wanna Suteerapornchai, Partner, and contributed by Niorn Yukolthong, Director and Pharatorn Vichiennet, Director – Merger & Acquisition, Deloitte Thailand