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What is the OECD Pillar Two framework?
The OECD Pillar Two framework introduces a global minimum corporate tax rate of 15%, designed to combat tax base erosion and profit shifting. This major change impacts multinational enterprises (MNEs) operating across multiple jurisdictions, creating complex compliance challenges.
Understanding how this framework applies to your business is essential to minimising risks and maximising financial opportunities.
When do the new rules take effect in Kenya?
Kenya adopted the OECD Pillar Two framework by introducing the Qualified Domestic Minimum Top-Up Tax (QDMTT), effective January 1, 2025. This tax aligns with global minimum tax rules set by the OECD and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Signed into law on December 11, 2024, this measure ensures Kenya receives its fair share of taxes from multinationals. Further regulatory guidelines will clarify implementation.
Who is impacted by Pillar Two in Kenya?
The OECD Pillar Two framework in Kenya introduces significant tax implications for multinational enterprises (MNEs) operating within the country. It specifically applies to MNEs with annual consolidated revenues of at least €750 million (approximately 95 billion Kenyan shillings) over two of the last four accounting periods, ensuring that large corporations contribute fairly to the tax base in Kenya. These MNEs are required to maintain a minimum effective tax rate (ETR) of 15% on income generated in Kenya. The ETR is calculated at the entity level, ensuring that taxes are assessed on a granular basis to promote compliance and transparency within the jurisdiction.
However, the framework also includes exemptions for specific types of entities, recognising their unique operational structures and societal contributions. These exemptions cover public organisations, pension funds, sovereign wealth funds, non-operating investment holding companies, qualifying investment vehicles, and intergovernmental organisations. Such entities are excluded from the ETR requirements due to their non-commercial or broader public service nature. This framework represents a significant step towards fostering a fairer tax environment while aligning Kenya's tax system with global standards under the OECD's Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
What actions should organisations take now?
If your business is affected, taking proactive steps now can mitigate risk and keep you ahead of the global tax changes under Pillar Two. Here are key actions to consider:
- Conduct a comprehensive review of your financial and tax structures to determine exposure to global minimum tax rules.
- Evaluate the potential impact of Pillar Two on cross-border transactions and intra-group arrangements.
- Ensure your financial and tax reporting systems are robust enough to meet the transparency and compliance standards required.
- Engage with local and international tax professionals to develop mitigation strategies and take advantage of available reliefs or incentives.
- Monitor legislative updates within Kenya to stay informed about government decisions related to the implementation of BEPS Pillar Two within the local tax framework.
Why choose RSM for Pillar Two compliance?
RSM combines global insights with local expertise to provide tailored support for navigating the complexities of the OECD’s Pillar Two framework.
1.
Proactive solutions to minimise financial risks.
2.
Expert guidance on new tax regulations.
3.
Customised strategies to align with your business objectives.
4.
Localised expertise combined with the global network of RSM professionals.
