Meeting the Challenges of Pillar 2 Reporting
In two short years’ time, multinationals with a consolidated revenue of over €750 million must establish tax strategies for meeting Pillar 2 requirements, ensuring the world’s largest companies pay a global minimum tax of 15%, no matter the location of their operations.
Inevitably, one of the key challenges ahead lies in how finance functions comply with providing 150+ data points, some of which might not be captured in source systems. If this wasn’t enough, the requirements get more complex and verbose when operating internationally. The answer lies in global data integration and collaboration from a single platform.
Currently, corporate tax can be a manual, spreadsheet-driven task, conducted every twelve months and then submitted to HMRC or other local regulators. The complexity in the calculations lie in tax specific adjustments, to be made in the computation. In addition, there are different rules for various sectors, such as oil and gas, and finance, as well as exemptions for significant assets and machinery. Needless to say, completing accurate tax returns takes time and effort.
The impact of BEPS 2.0
Into this already complex landscape arrives the Base Erosion Profit Shifting (BEPS) 2.0 directive, a key cornerstone of the last G7 summit, which is designed to harmonise corporation tax on a global level. Aimed at limiting the impact that businesses can create by shifting profits offshore, everyone will effectively pay at a minimum rate of 15% to companies, regardless of jurisdiction, via the implementation of a so-called “top-up tax”. The rules will apply to around 500 UK-headquartered businesses.
Let’s say, for example, you have 50% of your business in the UK and the rest spread across 20 EU countries. You’re not likely to have a dedicated tax function in each jurisdiction; you’re more likely to outsource it to local experts. However, for BEPS it is vital to calculate it all and feed it back to HQ.
The real challenge lies in the data you need to gather, especially if you operate across borders – and you might not even be collecting or reporting on it yet. Deferred tax is probably the main area that will be required for BEPS reporting, but in many instances won’t be housed within your ERP system or other dedicated software. For those using Excel, it can be a long, manual process. Instead of relying on complex spreadsheets, which are prone to human error, BEPS may push you to create a single, trusted source of all data. This will ensure you can draw on all the necessary components for any new reporting requirements.
Centralising and streamlining data
But, how do we centralise our data in an efficient way? Many companies rely on their ERP systems as a natural first choice. The problem here is that lots of these companies will have complex legacy systems that date back years, making it a real pain to collate data. SAP4HANA and Oracle Fusion are good modern versions of ERP but even they won’t necessarily gather everything you need without a significant spend to customise them.
It is also important to bear in mind that corporates typically consolidate returns at a group level, and BEPS requires an additional level of consolidation, at a country level. This sounds trivial and obvious but in most instances, it is far from it. There’s a range of system implications, so you need to assess your technology from a data capture and calculation perspective and then check the gap analysis. Undoubtedly, there will be missing data, so you’ll need to figure out how to capture it.
The alternative to all this manual work is to introduce automation on an integrated, tax-specific collaboration platform. The collaboration aspect is important: if you have people working across 15 countries, you’ll have local people completing their local spreadsheets and emailing them to HQ, who will then laboriously copy and paste the contents into one central document. Wouldn’t it make more sense to have one secure portal everyone can access and upload their figures to?
Finding a partner who can integrate your existing systems, and extract and collate the right data automatically will be a huge benefit. Too often, people expect to do it all from their ERP system but that’s more like the first step in a longer journey. ERP systems don’t typically cater “out of the box” for all tax-sensitive items that will be required for Pillar 2. You need to take the information from the ERP, integrate it with the tax return process, and make it available to those needing it. Thus, you can avoid spending months trapped in Excel with an approach that is quicker, more accurate, and controlled which gets it right, first time.
Some might panic in the face of BEPS requirements but there is plenty of time to do the work. It’s a big change but addressing it needn’t require lots of money or throwing teams of people at it. By thinking about the whole process – both upstream and downstream, and by introducing end-to-end integration – you can successfully compile, collaborate and complete your Pillar 2 compliance. What’s more, BEPS requirements will likely change, as it is something of a moving target; an integrated tax platform will also help you evolve in tandem with the directive and complement your own company’s growth.