In this article, 2024 will be a year of global tax reform as jurisdictions start implementing BEPS Pillar Two requirements. Here's what you need to do to prepare.
In 2024, tax is entering its BEPS Pillar Two era. Global tax reform is coming, and it marks a changing of the guard that will usher in an urgency for process transformation for large corporations to understand their tax position, provisioning, and corporate performance. To stand up in the face of the new tax regime, we recommend that CFOs take a proactive approach to international tax requirements.
Here are five ways the office of the CFO should proactively prepare their tax processes in 2024.
2024 BEPS Pillar Two Priorities
A quick recap: Pillar Two enforces a global minimum tax of 15% to large companies with a consolidated revenue over €750M / $868M that operates in low-tax jurisdictions. This directive has been promoted by OECD with the agreement of over 140 countries.
In 2024, impacted corporations need to prepare their data and processes for meeting BEPS Pillar Two requirements:
BEPS CbCR (Country by Country Reporting) tied to Pillar Two Safe Harbors.
CbCR is part of the BEPS OECD’s action plan. It aims to give tax authorities visibility into an entity’s transfer pricing activities. Impacted companies will have to produce two types of reports: private and public CbCR, which aim to provide visibility into high-level disclosure over a five-year period.
Income inclusion rule (IIR)
IIR ensures a parent company pays the 15% global minimum tax in all operating jurisdictions. The jurisdiction where an entity is headquartered imposes a top-up tax to collect any deficit between the global minimum tax rate and the Effective Tax Rate (ETR) in the various countries in which the entity group operates.
Qualified domestic minimum top up tax (QDMTT)
QDMTT is a jurisdictionally determined domestic top-up tax that offsets the global minimum tax liability under Pillar Two. It allows jurisdictions to collect top-up tax from subsidiaries ahead of IIR or Under Tax Payment Rules (UTPR.) The CFO office will have to calculate, plan for, and remit QDMTT according to their result.
Undertaxed profit rules (UTPR)
UTPR is applied after the IIR. It serves as its backstop. IIR allocates the top-up tax (TT) within the group structure and considers ownership percentages. UTPR is a bottom-up rule. If a parent entity does not apply IIR, then the group needs to apply the UTPR.
5 Ways to Proactively Prepare for Global Tax Reform
Preparation is everything when it comes to coping with requirements as complex and wide-reaching as BEPS Pillar Two. Here’s what you should prioritize in the new year in order to get ahead.
1. Connect the necessary data sources to understand corporate global tax position
Research from Deloitte found that complying with new tax law changes was both the highest priority and biggest challenge of tax departments in 2024. This is unsurprising given 1. the profound impact and complexities BEPS Pillar Two will add to regional and global tax processes and 2. because fragmented systems landscapes at regional and group levels will make collecting, normalizing, and calculating tax and tax-related data extremely onerous for tax and finance teams across the organization.
In order to meet the BEPS Pillar Two agenda items, entities will have to overhaul their tax data management and consolidation processes. Existing tax data sources likely only have part of the required data points for compliance. The remaining data will be in consolidation systems and outside the finance-tax sphere. ERPs won’t have the granularity needed to calculate deferred tax liabilities that do not reverse in five years or meet the new ways of classifying tax credits that impact effective tax rates.
In addition to regional ERPs, teams will have to collect data coming from tax, finance, and corporate information.
Here is a summary of the tax data impacted companies should look to their close process:
- Permanent Establishment (PE)
- Controlled Foreign Corporations (CFC)
- Entity attributes that might not be in part of BEPS Pillar Two but come from consolidation, such as joint ventures.
2. Adjust tax processes to accommodate CbCR
CbCR is a cornerstone for BEPS Pillar Two. Without it, companies can’t run safe harbor tests or determine if they’re exempt or alleviated from top-up taxes.
In addition to tax data, CbCR ropes in information from finance, operations, and even HR. Determining like top-line metrics, like Corporate Income Tax, Transfer Pricing, and Employees on Full Time Equivalency Basis, requires jurisdictional data beyond the walls of the tax department. CbCR reporting is further complicated by M&A, spin-offs, and restructuring initiatives, which may result in inconsistent approaches to reporting.
Here’s how companies should adjust tax processes for CbCR:
- Anticipate CbCR calculations timeline to run Pillar Two Safe Harbor Tests. Usually, CBCR is produced at the end of the year but BEPS Pilar Two will require organizations produce CbCR earlier. Creating a timeline is the most important action you can take.
- Produce the two types of reporting requested: Public vs private CbCR.
3. Extend the onus of tax requirements beyond the tax department
Tax reform won’t hit the tax department alone. Finance and IT departments are also heavily impacted by BEPS Pillar Two and new tax regulations. And as we just fleshed out with CbCR, HR departments should be involved in the conversation too.
IT, the CFO’s Pillar Two partner, will have to deal with data management, technology implementation, and change management at the group and regional levels, coordinating systems, and ensuring the appropriate data is collected, normalized, and rolled up.
Finance is intimately involved in the orchestration calculations and provisioning. Tax will be present on balance sheet and in close and consolidation processes. And finance will have to advise tax on determining material data, assessing controls, and supporting changes to the close process at the interim and year-end level. Finance will also have to advise tax teams on how BEPS Pillar Two data will be impacted by accounting standards, like GAAP, IFRS and local GAAPs, and how they’re applied at the entity, jurisdictional, and consolidated levels.
HR will need to advise on providing concrete employees numbers, how to report independent contractors, and mapping out the global workforce.
Here are the steps scoped entities should take to foster cross-functional collaboration between departments:
- Define a guided process where all key Pillar Two company stakeholders can enter data
- Establish controls to validate that data is accurate and comes from reliable sources
- Produce reports that can be easily auditable and traceable