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The Impact of Pillar 2 on Group HR/Payroll Companies

A typical arrangement would be for the HR/payroll function to provide the relevant services for the group and receive arms-length consideration via an intercompany recharge or other such arrangement. This would then be reflected in the financial accounts of the relevant entities as a management recharge cost or income.  The centralized HR/payroll function could be siloed and carried out via a separate company or could be part of the activity of another group entity. 
 
In many cases, tax administrations would accept payroll costs incurred by a centralized HR/payroll entity being recharged to group members on a reasonable basis such as by reference to the number of employees in each company. For financial accounting purposes, inter-company recharges are reflected on a gross basis (ie the income and costs are separately shown in the accounts rather than being netted off).
 
The standard Pillar Two GloBE rules would firstly need to be considered in relation to the entity providing the HR/payroll services ie is the company a low-taxed entity for the purposes of the GloBE rules?
 
Payroll companies are not prime candidates for tax incentives, at least in relation to taxes that are covered taxes for the purposes of the Pillar Two Rules (eg corporate income tax).
 
They may benefit from other payroll tax benefits in certain jurisdictions (eg Belgiums partial exemption from wage withholding tax), however this would not impact on the Pillar Two effective tax rate as they would not be covered taxes for Pillar Two purposes.
 
Therefore, the key driver in many cases will be the corporate income tax rate in the jurisdiction where the company is located. 
 
One of the key issues to consider for HR/payroll companies will be the substance-based income exclusion and how the centralized function will impact on the payroll-carve out for group entities. 
 
Substance-Based Income Exclusion
 

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Picture of Lee Hadnum

Lee Hadnum

Lee is a qualified Chartered Accountant and Chartered Tax Adviser. A former Senior Tax Analyst at Bloomberg Tax, Lee began his career in Ernst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience. Lee's books have been recommended by The Times, The Guardian and The Telegraph.

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