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3. 5 ways to proactively prepare tax processes for Global Tax R...
FinanceTax & AccountingJune 05, 2024
5 WAYS TO PROACTIVELY PREPARE TAX PROCESSES FOR GLOBAL TAX REFORM IN 2024
By: Perry Hatch
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
GLOBAL MINIMUM TAX
Simplify the tax reporting process. Harness enterprise data. Turn tax into
strategy.
Learn More
4. IMPLEMENT AUTOMATION AND ADVANCED TECHNOLOGY INTO THE TAX PROCESS
At the TP Minds International Conference in June of 2023, 74% of participants
described the level of technology within their transfer pricing function as
minimal and manual, involving spreadsheets, demonstrating that tax and
automation haven’t always gone hand in hand.
Data management is at the very core of adhering to global tax reform. Collecting
the 250+ data points required per jurisdiction to determine the effective tax
rate, top up tax, and tax provisioning requirements is not a task for Excel.
What’s more, tracking and then complying with each country’s unique
implementation of BEPS Pillar Two rules will add another layer of complexity.
Then, what happens when an entity changes thorough the year and adjustments are
required?
Here are five ways automation and advanced technology can aid in coping with
global tax reform:
* Data points mapping
* Automated calculations
* Out of the box dashboarding and reporting
* Data validation notifications / alarms
* Keep track on the data points have been mapped
5. TAKING A CORPORATE PERFORMANCE MANAGEMENT APPROACH TO BEPS PILLAR TWO
Global tax reform doesn’t just overhaul tax processes; it overhauls group
consolidation, local close, and IT implementation. Global tax reform doesn’t
just impact tax data; it requires data points from operations, finance, and HR.
Global tax reform doesn’t just involve headquarters; it will involve all
subsidiaries and entities at local levels.
BEPS Pillar Two will touch performance at all levels of an organization. It’s an
interdisciplinary, intersectional reform that requires input and analysis from
all levels of an organization. That’s why we don’t see tax reform as just tax’s
issue to solve — it’s a corporate performance management function.
Here’s how a CPM approach to global tax reform will help organizations:
* CPM platforms interconnect tax processes with core processes
* CPM platforms have advanced data management capabilities that can collect,
identify and calculate requirements
* CPM platforms have sophisticated governance mechanisms that track data in
audit logs for tax reporting
BIG TAX REFORM REQUIRES A REFORMED APPROACH TO TAX REPORTING
CCH Tagetik Global Minimum Tax is a complete BEPS Pillar Two solution. By
streamlining BEPS Pillar Two data collection, calculations, reporting, CbCR,
planning and performance management, it enables finance and tax teams to uphold
the OECD guidance.
Learn how our expert solution provides a superior approach to BEPS Pillar Two.
Perry Hatch
Global Product Leader at Wolters Kluwer Corporate Performance & ESG
Perry Hatch, is Senior Director of Global Product Management at Wolters Kluwer
Corporate Performance & ESG. She directs and manages a large global team of
specialists providing support to deliver direct and indirect tax solutions to
enterprise and mid-market corporation.
EXPLORE RELATED TOPICS
Corporate performance managementDigital transformationEnterprise softwareTax
Solution
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strategy.
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