Pillar 2: What have we learnt from the first compliance cycle?

For the past two years, most Pillar 2 discussions have focused on understanding the rules – Which groups are in scope? What information is required? Will any top-up tax arise?

Some assumed that tax authorities would take a relatively light touch approach, while businesses worked through the challenges of implementing a new global reporting regime. However, HMRC has started issuing penalty notices to groups that have not yet met their UK Pillar 2 obligations.

While this is still a new regime, Pillar 2 has clearly moved beyond implementation and into active compliance and enforcement. HMRC is increasingly adopting a governance-led approach to tax administration, placing responsibility on taxpayers to understand their obligations, maintain appropriate systems and controls and meet filing requirements.

HMRC’s issuing of filing notices and penalties, even during the early stages of the regime, reinforces the expectation that in-scope groups have robust governance processes and are proactively managing their Pillar 2 obligations.

S&W have been supporting large multinational and UK-only groups through their first Pillar 2 compliance cycle and while the legislation is complex, many of the challenges have had little to do with the calculations.

Instead, the recurring themes have been data, governance, ownership and process.

As a brief reminder, for UK purposes, groups within the scope of Pillar 2 are generally required to submit:

• A Global Anti-Base Erosion Rules (GloBE) Information Return (GIR) or Overseas Return Notification (ORN)

• A UK Pillar 2 self-assessment return

Generally, the first in scope accounting period will begin on or after 31 December 2023. The filing deadline is 18 months after the accounting period end, reducing to 15 months for subsequent periods. For many groups with a 31 December 2024 year end, the first filing deadline was 30 June 2026.

HMRC implemented a transitional approach under which specific late filing penalties were not charged for qualifying submissions made before 1 August 2026. That concession has now passed, with normal compliance expectations now the focus.

As groups prepare for the next round of filing deadlines, here are the biggest lessons we have learnt from the first compliance cycle.

Most groups recognised that Pillar 2 would require technical tax analysis, but the greater challenge was often obtaining, reconciling and validating the underlying data.

Compliance depends on accurate legal entity and ownership information, permanent establishment and jurisdictional reporting data as well as tax and accounting information required for transitional safe harbour assessments and GloBE calculations.

Existing CbCR processes provide a foundation, but they are not a complete Pillar 2 solution. The first compliance cycle exposed issues including whether the CbCR was a qualifying CbCR for Pillar 2 purposes, inconsistent entity names, missing identification numbers, inaccurate jurisdictional mapping, incomplete permanent establishment information and reconciliation differences between datasets.

For many organisations, resolving these took longer than the calculations. Groups that invested early in good data governance, validated their CbCR filings and reviewed data collection processes generally had a much smoother filing experience. UK-only groups faced the additional challenge of creating qualifying CbCR data for the first time.

The transitional safe harbours significantly reduced the compliance burden for many groups.

However, one of the biggest lessons from the first filing cycle is how frequently initial expectations changed once final data became available.

Movements in deferred tax balances, one-off accounting adjustments, revised profit figures and changes in tax expense can all affect transitional safe harbour outcomes.

Jurisdictions that initially appeared low risk often required much more detailed analysis once year-end information had been finalised.

The lesson is to perform transitional safe harbour assessments early but revisit them when final information is available.

Importantly, Pillar 2 should form part of the year-end tax provisioning process rather than being treated as a separate exercise after the accounts have been finalised. Understanding potential transitional safe harbour failures, key effective tax rate drivers and data gaps at the provision stage can significantly reduce surprises later in the compliance cycle.

Pillar 2 requires input from tax, finance, group reporting, legal teams, overseas finance functions and external advisers. Where responsibilities were clearly defined, projects generally progressed smoothly. Where ownership was unclear, delays quickly ensued.

This was particularly evident in large and decentralised groups where tax, finance and reporting responsibilities were spread across jurisdictions and business units. Obtaining consistent, timely information can prove challenging.

Like many large-scale compliance obligations, governance frequently proved more important than technical capability.

The GIR is only one part of the compliance landscape

Many early discussions focused almost exclusively on the GIR. However, groups also need to consider:

• UK Pillar 2 self-assessment returns

• Overseas return notifications

• Local registration and filing obligations in overseas territories

• Designated filing entity requirements and

• Evolving exchange-of-information arrangements between jurisdictions

As more jurisdictions implement the rules, compliance requirements continue to diverge as filing methods, deadlines, registration requirements and notification obligations are not consistent.

Central filing arrangements and the exchange-of-information framework require groups to ensure appropriate data-sharing agreements are in place and notifications are made correctly.

Businesses should also be mindful that the current compliance burden may not be representative of the long-term position. The transitional safe harbours begin to fall away from 2028 onwards and many groups may find that jurisdictions which currently require limited analysis will eventually require full GloBE calculations. Planning for that transition now may avoid a significant increase in future compliance costs.

With HMRC enforcing compliance obligations, this is a good time for groups to assess their readiness for future filing periods.

We recommend that groups:

• Validate their legal entity populations and identification numbers

• Review data collection processes before the year-end

• Reassess transitional safe harbour positions using current financial information and incorporate Pillar 2 considerations into the tax accounting and provisioning cycle

• Identify jurisdictions likely to require full calculations and understand the key drivers affecting effective tax rates

• Map local filing and notification obligations

• Establish internal reporting timetables well before statutory deadlines

• Ensure ownership and governance responsibilities are clearly agreed

• Consider how compliance requirements may evolve as transitional safe harbours expire

The first round of Pillar 2 compliance has shown that the greatest risks do not always arise from the technical aspects of the legislation. More often, they arise from collecting data, coordinating stakeholders and delivering a complex global compliance process to a fixed deadline.

The emergence of HMRC penalty notices should serve as a reminder that Pillar 2 is no longer a future issue or an implementation project – it is now a live compliance obligation.

Organisations that invest now in robust data, governance and planning are likely to find future filing cycles significantly less painful than those treating Pillar 2 as a year-end exercise.

Here at S&W we can support you with the process. If you have any questions or there is anything you would like to discuss, please get in touch with your usual S&W contact or one of the contacts listed.