Strategic tax planning is already a complicated undertaking. But for multinational companies facing upcoming changes to tax law under new BEPS guidelines, it’s about to get even more complex. Companies doing business in multiple countries should plan now to get ahead of the challenges that BEPS Pillar 1 and Pillar 2 pose in the coming year.
What Is BEPS?
Let’s begin by reviewing the basic information about BEPS, which stands for “Base Erosion and Profit Shifting.” It’s a set of rules and standards established by the Organization for Economic Co-operation and Development (OECD) and subsequently adopted by numerous countries around the world. The primary purpose of BEPS is to establish a minimum baseline for corporate taxation such that multinational businesses are no longer incentivized to shift profits from higher tax countries to low-tax nations.
BEPS consists of two broadly defined provisions, which the designers refer to as “pillars.” Pillar One pertains to the allocation of business profits to various countries based on actual business activities in each of those nations. In essence, this rewrites the rules pertaining to nexus, opting instead to allocate profits based on the jurisdictions where a company’s goods or services are used or consumed. Initially, Pillar One will apply to companies with worldwide revenues of €20 billion or more. Over the next seven years, that threshold will be reduced such that businesses with €10 billion or more in revenue will also be included.
BEPS Pillar Two will affect a much larger number of companies. Pillar Two is aimed at establishing an effective global minimum tax rate of 15%. Under BEPS Pillar Two, companies will first calculate taxes for each country in which they operate. If their effective tax rate for any of those jurisdictions falls below 15%, then they will be liable for paying that 15% minimum in those respective countries.
Fundamentally, BEPS is a set of non-binding rules. Its creator, the OECD, has no statutory authority to set tax rates or regulations for the 139 member countries. However, BEPS is available as a common standard which those nations may choose to adopt through legislation. The general framework of the rules has been agreed upon, but the formal adoption of the rules is still being negotiated and clarified. Over thirty countries have signaled their intent to eventually adopt BEPS, and if that number continues to grow, BEPS may become a de facto global tax regulation.
Getting Ready for BEPS in 2023
Most companies will not be affected by Pillar One–a fact that will probably change eventually, as it’s likely that the revenue threshold will be lowered further over the course of time.
Pillar Two is a different story. Any multinational entity with consolidated group revenues of €750 million or more will be subject to the effective 15% minimum tax rate.
The so-called “Inclusive Framework on BEPS” (“IF”) has already been approved in principle by 130 countries. Although only about 30 have passed legislation adopting BEPS, many more will presumably do so in the near future. That means that regardless of the particular countries in which you’re doing business, you will almost certainly be affected by BEPS.
This represents an enormous change for tax planners and tax compliance professionals around the world. According to the OECD website, Pillar Two will represent “a radical shift in the tax landscape.” Changes are coming in 2023, so for companies looking ahead to their tax planning strategies for the next calendar year, now is the time to implement new systems and processes.
Putting the Right Tax Planning Tools in Place
The OECD is very likely to modify BEPS in the next few years. As the new rules are put into practice, there is little doubt that fine-tuning the system will require some changes. Any new tools and processes that corporate tax planners implement must therefore be flexible enough to accommodate those coming changes.
insightsoftware has been working with tax professionals in midsize and large corporations since 1994. Our Longview Tax product improves tax planning and reporting across the enterprise by replacing disconnected systems, manual spreadsheets, and error-prone communication with a single source of truth, purpose-built for centralized tax planning, provisioning and reporting, analytics, and comprehensive tax management.
While many companies continue to grapple with the complexities of these various functions using manual processes and a disjointed set of software tools, Longview Tax brings it all together under one roof, streamlining and simplifying processes, managing operational transfer pricing, and improving accuracy at the same time.
As BEPS looms on the horizon, now may be the right time to start bringing order to that relatively chaotic world. Longview Tax is already doing that for our customers, so it’s only natural that many of those clients are looking to insightsoftware for help in optimizing their processes and strategies in the context of BEP Pillar Two.
Over the past year, the international tax experts at insightsoftware have met with top global CPA firms, large multinational customers, and others to understand the implications of BEPS for our clients. We’ve been working side-by-side with people who will be directly responsible for complying with the new BEPS rules, and we’ll continue to do so even after the rules take effect. Longview Tax is an ideal solution for companies that need a forward-looking view of potential tax liability, including taxes that could be levied under the BEPS 15% effective minimum rate.
In many organizations, finance leaders are often unable to see their group company’s effective tax rate (ETR) until it’s too late for them to do anything about managing it. When BEPS goes into effect in 2023, that lack of visibility will become even more of a liability. Companies that want to clearly understand their options should put systems in place in 2023–in fact as soon as possible–to reap the benefits of smart corporate tax planning strategies next year.
If you’re wondering how insightsoftware can help you manage the effects of BEPS within your multinational company.