BEPS Pillar Two establishes a minimum tax obligation for large groups, broadly those with annual consolidated revenues of over €750M.
It allows a jurisdiction to impose tax on Multinational Enterprises (MNEs) where their effective tax rate in a jurisdiction falls below 15%.
To date, tax calculations are typically done at entity level. There is some interaction between taxes for example where:
- A company calculates double tax relief, or
- Has to consider Controlled Foreign Company adjustments,
- And in some jurisdictions, there are consolidated tax filings
Pillar Two, however, is different in that it asks for tax calculations at different levels within a group:
- Data collection at entity level,
- Effective Tax Rate calculations at each jurisdiction level,
- Calculation of top-up tax at jurisdiction level and then the allocation of that tax based on entity level numbers
- Payment of tax at the level of a group entity depending, on which jurisdiction has legislation in place.
To further complicate matters, tax accounting numbers, essentially, deferred tax numbers, also feed into these Pillar Two tax calculations. What makes complying with the rules even more difficult is that the legislation to enact the rules in each jurisdiction is still evolving, whilst the start date now seems to be fixed in many jurisdictions, for next year or the year after, for example, Tax authorities can introduce similar domestic tax rules – and we have seen some of these published in draft. And whilst there is discussion on the introduction of certain other rules, such as the Undertaxed Profits rule, we are still waiting to see these in draft legislation. Therefore, corporates have to stay up-to-date on the latest draft legislation, and any changes that are introduced.
In addition to the calculations and tax payments, the Pillar Two rules also introduce additional reporting obligations.
What should MNEs be doing now to prepare for the BEPS Pillar Two transition?
There are a number of challenges that MNEs will face in being able to pivot to Pillar Two. By far the biggest challenge, and therefore the top priority for MNEs today is around data collection.
Significant data compilation requirements
It’s likely that you’re going to be faced with significant data compilation, for both local and global calculations. Where is your data? Is the data for each jurisdiction easily accessible? If not, how are you going to make it accessible? You need to start thinking about how you’re going to collect your data across all your different jurisdictions and whether you have any solutions in place that will be useful for you in this data collection. If you haven’t yet started arranging sessions with your local offices, it’s important to do so, so they know what to expect from you and when.
There are additional challenges to consider as well, including:
1. Complex regulatory regime
We always knew that Pillar Two was going to be complex with multiple regulatory regimes involved. It has already been endorsed in some countries, and we know that some several other countries will also be enacting that domestic legislation. You can’t use the excuse that the legislation isn’t in place, so there’s no need to be doing anything yet. There is already enough guidance from the OECD and some draft legislation to be able to start considering impact and potential risk. What financial cost could this have to your business? What is the Pillar Two impact likely to have on your tax numbers. Starting to put together a Pillar Two roadmap, will help you start answering these questions and preparing for these challenges.
2. Rules continue to evolve
The picture is continually evolving; which means it’s important to keep up to date with changes if you are a multinational entity with consolidated revenue of over €750 million.
3. Unaccommodating systems
Having the right systems in place will be important; assess your systems to ensure they are fit for purpose. Some off the shelf systems will be limited in being able to adapt to requirements of Pillar Two. Do you have any systems currently, and are they flexible enough to change with the changing landscape?
What’s required for BEPS Pillar Two Compliance?
As mentioned, the key challenges with BEPS Pillar Two will be data and compliance. Collecting, managing and adjusting the data required to do the necessary calculations will take considerable more resource in what are often already over-stretched tax teams.
With rules evolving, staying up to date on changes as the various domestic requirements are ruled is in itself a key challenge.
The Wolters Kluwer CCH Integrator in-house tax specialist team has identified the following workflow required for BEPS Pillar Two Compliance.
BEPS Pillar Two Compliance Workflow
1. Stay up to date on latest rulings
The rules in each jurisdiction are still evolving; as mentioned, tax teams need to keep abreast of changes as they are announced.
2. Source data
As always there is a need to source the data. How you do this will depend on your group’s tax operating model and systems. Some data is going to be available centrally, a lot of data may need to be collected locally and will need a methodology to ensure that the collected results can be analysed in a consistent manner – so you are comparing like with like across the entities and jurisdictions.
3. Calculations
Once collected, the data needs to be fed into a series of calculations – these calculations will have a common approach, following the OECD Model Rules, but there may be some differences in domestic legislation.
4. Review
The calculation results then need to be reviewed by multiple stakeholders, often the schedules and packs given to stakeholders will need supporting commentary, and need to allow for review points to be dealt with.
5. Tax provisioning and filing
A number of tax returns and disclosures will need to be generated and filed.
Of course, this is easier said than done. For MNEs who are likely to be impacted by BEPS Pillar Two, now is the time to start considering your BEPS Roadmap; including current internal processes and systems to inform your data collection strategy; talking to your advisers on key areas of focus, as well as how you can incorporate technologies to simplify compliance.
The new CCH Integrator BEPS Pillar Two solution uses the above workflow to navigate and automate the ever-evolving global tax landscape.
Our specialist tax teams are speaking with businesses to discuss the implications of the new Pillar Two rules and how our global tax provisioning software can address these.
