In this article, we'll explore five ways CFOs can lead the change toward BEPS Pillar Two while minimizing disruption.
The item moving to the top of the CFO's strategic agenda is BEPS Pillar Two. Over 142 countries have agreed to the OECD's minimum global tax directive, and many will start enforcing it as soon as 2024.
Between now and enforcement, CFOs have a lot on their plate. We've covered the who, what, where, and materials impacts of BEPS Pillar Two in the first blog Global Minimum Taxation 101: Exploring the ins, outs, and material impacts of BEPS Pillar Two.
In this post, we'll explore five ways CFOs can lead the change toward BEPS Pillar Two while minimizing disruption.
1. Understand Pillar Two data requirements
BEPS Pillar Two introduces new calculations and data requirements that will impact the data management processes of MNEs. The most significant changes include:
- Collecting 250 new data sets per jurisdiction
- Embedding new ETR & UTPR calculations in the financial consolidation process between legal and constituent entities
- Monitoring and determining eligibility for temporary and permanent safe harbors.
Where to begin: Assess your data landscape
This onslaught of complexity means CFOs and their teams will be faced with the mighty task of changing their systems in order to welcome tax data into the orbit of finance.
While managing this change is inevitable, many companies are hesitant to change their systems before national plans for BEPS Pillar Two have been solidified since different nations will take different approaches.
One thing companies can confidently do now is run an impact data assessment. We recommend you start by identifying data sets already mapped in your organization. Then, determine which data sets still need to be collected and harmonized. When the regulation comes to life, there won't be enough time to map, collect, and harmonize the data sets needed to run the calculations on time. An impact assessment upfront will keep you ahead of the curve.
2. Determine how the financial close and consolidation will be impacted by BEPS Pillar Two
BEPS Pillar Two requires global calculations that will change financial close and consolidation processes. Local, in-country organizations must collect information and send it up to be consolidated at the group level. While it's vital to have the ability to normalize data at a group level, it's still important to understand national differences because regulations at the national level are bound to have unique nuances.
Where to begin: Connect tax with consolidation and close
With BEPS Pillar Two, tax is moving onto the balance sheet. You can no longer calculate your international corporate tax as a separate process six months after the financial close. Instead, tax needs to be considered during the accounting period. For the office of the CFO, this means bringing tax data into the financial close and consolidation process. We recommend connecting tax data into the close and consolidation as one of the first items on your BEPS Pillar Two to-do list.
Since BEPS Pillar Two will crank the heat on close and consolidation processes that are already at a boiling point, CFOs could also consider moving to an early close to give them the space to accommodate BEPS Pillar Two and other tax changes.
3. Evaluate current local and global systems
While an ERP is an essential tool for every organization when it comes to collecting transactional data, it falls short when that data needs to be analyzed. Such is the case with BEPS Pillar Two. Pillar Two works at the group level, not the entity level where ERPs operate. A more sophisticated level of analysis is required.
Where to begin: Deploy a single version of the truth
MNEs need the ability to aggregate group data and investigate regional data. An ERP is not enough. What's the alternative? A Corporate Performance Management (CPM) solution. CPMs enable teams to analyze financial statements while facilitating close and consolidation processes. Unlike ERPs, legacy solutions, or spreadsheets, CPMs act as a central data source for all types of information, not just financial.
CPMs are the preferred system for BEPS Pillar Two because they:
- Facilitate group consolidation while retaining original local data
- Provide a BEPS Pillar Two-specific workflow for all subsidiaries and the group
- Instill a secure governance process for sensitive data.
- Delegate responsibilities to specific users
- Provide teams with the ability to create reports
- Enable teams to simulate and adjust tax-related positions to inform decision making
4. Determine which operating jurisdictions will be impacted and whether they'll be subject to the top-up tax
BEPS Pillar Two will require MNEs to pay a minimum 15% tax rate in every country they operate, if that country has country has agreed to BEPS Pillar Two. In jurisdictions where the company falls short of a 15% effective tax rate, it must pay a top-up tax to meet this minimum.
Where to begin: Determine the material impacts on your business
MNEs need to determine which jurisdictions will be impacted, if they'll have to pay a top-up tax, and, most importantly, how this will affect the big financial picture of the company.
Going forward, enterprise decision making will always have to consider the tax impacts of operational plans. For example, if you were deciding between two countries in which to build a new facility, one could throw you into a top-up tax scenario. CFOs will have to think through these dynamics going forward.
5. Determine eligibility for transitional safe harbors
CFOs have the opportunity to determine if their business is eligible for safe harbors as a way to ease into the BEPS Pillar Two transition. There are two kinds of safe harbors:
- Transitional Country-by-Country Reporting (CbCR) Safe Harbor: This safe harbor temporarily excludes MNEs operating in lower-risk jurisdictions from the top-up tax.
- Simplified Calculations Permanent Safe Harbor: This safe harbor permanently allows an MNE to reduce the number of complex calculations required and perform simplified calculations instead.
Where to begin: Determine whether you qualify
To qualify for a safe harbor, you must pass one of three tests.
For the Transitional CbCR Safe Harbor, you must pass either the de minimis test, simplified ETR test, or routine profits test.
For the Simplified Calculations Permanent Safe Harbor, you must pass the routine profits test, a de minimis test, or an effective tax rate test.
Here's a summary of each test:
- De minimis test: An MNE group reports a total revenue of less than EUR 10M or USD 10.6 and profit (loss) before income tax less than EUR 1M or USD 1.06M in a given jurisdiction.
- Simplified ETR test: An MNE group has a simplified ETR equal to or greater than the transition rate in a given jurisdiction.
- Routine profits test: MNE group's profit (loss) before income tax in a jurisdiction is equal to or less than the substance-based income exclusion amount for constituent entities in that jurisdiction.