Multinational enterprises are facing new and complex tax rules stemming from the OECD and G-20 countries’ BEPS 2.0 project—particularly the project’s Pillar Two 15% global minimum tax, which is set to apply to multinational groups with global revenue of more than €750 million ($829 million).
Enforcing these rules will require unprecedented global cooperation between tax authorities, and implementation approaches likely will vary among jurisdictions adopting the rules, making compliance a challenge and creating the risk of controversy. Multinationals also will need to manage a substantial increase in data collection and tracking required to comply with these rules.
Given the rules’ scope and complexity—and implementation as early as 2024 in many jurisdictions—multinationals need to evaluate and update their existing data strategies now.
The Organization for Economic Cooperation and Development’s first base erosion and profit shifting project focused on 15 identified actions to address what was viewed as “artificial” profit shifting to low- or no-tax jurisdictions. In 2015, the OECD released a package of tax reform measures, many of which have been adopted in jurisdictions around the world.
BEPS 2.0 emerged from the OECD/G-20 inclusive framework’s continued concerns over digitalization of the economy and its impact on international tax rules. In October 2021, following several years of technical work and negotiations, a high-level political agreement was reached on a widely supported, two-pronged approach to global tax reform.
- Pillar One increases the allocation of MNE profits to their market jurisdictions.
- Pillar Two creates a 15% global minimum tax on MNE income.
The rules’ complexity requires a substantial amount of additional data management. Pillar Two alone requires tracking 150 to 200 data points that span financial, tax, HR, and corporate data. These data points can vary and are partially determined by the multinational’s structure.
With many jurisdictions working toward Pillar Two rule adoption, multinationals have work to do. That includes assessing data infrastructure, scenario planning for potential new obligations and requirements, and determining compliance-driven changes.
Pillar Two’s Impact
Around the world, jurisdictions are already making significant headway toward implementing Pillar Two. South Korea has already enacted it, effective for tax years beginning in 2024. Japan included legislation to implement an income inclusion rule to align with Pillar Two in its tax reform bill enacted this year.
In late 2022, the EU agreed on a directive requiring all member states to implement Pillar Two rules. Other countries—including Switzerland, the UK, and many others—have begun enacting legislation implementing Pillar Two and are looking to 2024 as the effective date. As domestic legislation is enacted globally, companies will need to consider the financial statement impacts and possible disclosures.
The calculations required to determine Pillar Two’s applicability are complex. Unlike other tax rules, Pillar Two calculations must start from financial accounting numbers rather than tax numbers for each jurisdiction in which a multinational operates. They also require data gathering and calculations far beyond what existing systems are designed to perform.
According to the EY 2022 Tax and Finance Operations survey, nearly 80% of Fortune Global 500 companies say they already spend a significant amount of time and resources acquiring data. The data gathering and calculations required for BEPS 2.0, and particularly for Pillar Two, will only add to this challenge.
Multinationals will need to analyze their existing systems and consider whether to invest in new technology and improved processes. This examination starts with understanding the data needed for Pillar Two calculations, where that data may exist and reside within the organization, and whether existing systems are sufficient to collect, store, track, and maintain the data. Because Pillar Two calculations require financial and non-financial information from multiple departments across each entity in the enterprise, existing systems and repositories likely are insufficient.
Multinationals also will want to consider technology and automation investments that can help collect the data needed for analysis, mapping, and calculations; sensitize any new data points as the data is entered, store calculations, results, and filing data in an audit-ready format; and calculate any top-up tax obligation.
Equally important is the ability to facilitate data collection and sharing among the departments holding the information across the multinational’s various entities. This must at least include the company’s finance, tax, HR, IT, tax, accounting, and treasury departments.
Lastly, Pillar 2.0 represents a potential opportunity for organizations to rationalize the data they’re collecting across the tax function. As Pillar 2.0 requires significant data, including legal entity, trial balance data companies can invest in process and technology improvements that will allow them to use the same data set across multiple financial statement calculations.
Many companies may opt for more advanced data management solutions such as data warehouses, data lakes, or enhanced collaboration and document management platforms. Regardless of the path companies take, Pillar 2.0 provides them with an opportunity to revamp their data collection and management processes, along with their technology.
These enhancements will allow companies to comply with the Pillar Two more easily and become more efficient, reducing risk across the organization. This will reduce the time spent on data collection and make the data more audit ready. These technology and process investments also will help the company comply with current and future tax requirements.
By spending less time on the gathering and cleansing of data, companies can shift their focus to more sophisticated analytical reviews—and this planning needs to happen sooner rather than later.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kevin Flynn is EY Americas vice chair of tax. The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.
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