On 1 July 2021, we witnessed history as more than 130 countries approved a framework for reform of international tax rules. It was agreed that the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) would take a two-pillar approach, with a planned adoption in 2023.
Pillar One aligns taxing rights more closely with local market engagement and is intended to address the challenges posed by electronic commerce and digitization. This is a departure from the standard international tax rules of the last century, which often required the business to have a local physical presence before that country has a right to tax.
Pillar Two establishes a global minimum taxation framework through a series of interconnected rules. It is an unprecedented agreement on a global minimum level of taxation that stipulates a floor for tax competition amongst jurisdictions.
There are numerous challenges facing tax professionals as the emerging BEPS framework becomes clearer and they prepare for adoption:
- Inconsistent rules – Model rules were released December 2021; however, the market is still lacking enough detail to be able to effectively apply them. It is critical for tax leaders to understand how and when they will need to update their organization’s systems to produce the data needed to comply with the final rules. Legislation differences across various countries will make it difficult to track when laws come into effect in relevant jurisdictions.
- Capturing the right data. Another key challenge is capturing the data at the correct granular level to enable, and where applicable, automate the calculations.
- Increasing disclosures – Adding BEPS 2.0 to the existing array of global or regional frameworks is sure to provide a challenge for tax professionals. Current reporting obligations include the Global Reporting Initiative’s global tax reporting standard (GRI 207), as well as the OECD and European Union’s public country-by-country reporting rules. Tax leaders must have a thorough understanding of each relevant framework and how to reconcile their organization’s disclosures under each.
- Building stakeholder understanding – Senior business leaders are, quite rightly, very concerned about the impact of BEPS 2.0 on their business, not just from a tax impact, but also the process and reporting/compliance changes. Tax professionals must understand new requirements and any predicted changes to tax profiles in enough depth to explain it in non-financial terms to key stakeholders. Stakeholders are likely to have a surface level understanding but may not have considered the wider business impacts of BEPS 2.0 adoption. For example, tax function budgets are expected to rise, and any employee who touches the compliance process needs to be aware of new data collection and reporting requirements. The high volumes of data that must be gathered and analyzed could push existing tax reporting processes and technology to breaking point.
- Strained resources. Tax teams are continually asked to do more within the same time constraints. Therefore, process efficiency gains are essential and can be achieved by adopting more sophisticated, streamlined, and integrated (and dedicated) technology solutions.
- Alignment across multiple teams – It will be critical for tax functions to liaise closely with finance teams to ensure consistency among tax and accounting data. Working from the same system and the same set of numbers will be key to success here.
- Individual country reactions – Most countries have reacted positively to the proposals. But before adopting BEPS 2.0, countries will need to examine their existing tax processes, for example reconsidering incentives to attract foreign investment. Tax professionals need to keep a finger on the pulse of their relevant jurisdictions to understand how their group will operate locally and on a global scale.
For the best outcomes, tax professionals preparing for the reform should do so in a collaborative fashion, working closely with other departments and using the right tools to ensure that all needs are met. Many of the above challenges require long-term systematized solutions, but there are a few immediate actions that tax professionals would be wise to consider:
- Develop a BEPS working group and/or leverage external project management – Multidisciplinary collaboration will be essential when trying to identify and manage the full range of the potential business impacts of BEPS 2.0. Responsibilities will span across many departments, including finance and transfer pricing. With new developments coming in every month, it would be wise for tax professionals to build an internal working group to ensure all decisions are made with an integrated mindset. Alternatively, given the scale and complexity of the impending requirements, some organizations are appointing dedicated project managers to coordinate the skills and knowledge needed to be successful.
- Talk to your community. Consulting with peer groups and partner firms is critical for improving the depth/breadth of your understanding and to learn how other organizations are evaluating the impact to their process and systems.
- Update scenario modelling (and maybe systems) – The reforms become even more complex when you consider their intersection with existing domestic rules. With each new update of the rules, previous modelling will need to be redone. Tax leaders need to consider revisiting the assumptions and limitations used in any prior modelling and run new calculations when needed.
- Integrate the right technology tools – International companies must use the appropriate assessment tools to model impacts, evaluate interdependencies, and minimize the extent of additional Pillar 2 Top-up Tax or other undesirable outcomes. To develop a truly integrated approach and cope with increasing pressure on their teams, tax leaders need a solution that can pull data from multiple sources and enable collaboration with the finance function. Dynamic organizations and changing statutory environments demand a system, like Longview Tax, that pulls data from your ERP or consolidation system, boosting collaboration, time savings and timely delivery of accurate data.
- Utilize recent year-end reviews to identify data gaps – For international companies recent year-end reporting and analysis offer an opportunity to gauge the organization’s readiness to comply with the impending BEPS 2.0 data and reporting requirements. Tax leaders can use this information to see what data is already being collected, what needs to be adjusted before use, and what other information may be needed for compliance or to support elections.
At insightsoftware, we believe that taking a collaborative approach is the only way to address major reforms like BEPS 2.0. We’ve created customer and partner working groups to identify and prioritize the requirements that are of highest concern. We are working with these groups over the coming months until we are confident in our understanding of the situation. After this period of consultation, we will present the results back to them with a prioritized list of the enhancements we will be making to our products.
We have dedicated a significant percent of our engineering capacity in the fall to delivering on this list of prioritized enhancements, based on the feedback we have received. We know BEPS 2.0 has the potential to substantially impact our customers and anticipate it will remain a focus in our roadmap for multiple future releases. From the ability to book an accrual and calculate GloBE adjustments, filing at a later date, to tracking and potentially restating historical positions, we are working hard to ensure our customer’s success when it comes time for BEPS 2.0 adoption.
Sooner or later, BEPS 2.0 is coming. There is speculation that BEPS 2.0 adoption will be delayed to Q1 2024. But this does not change the inevitability of a new framework, it just gives us more time to prepare. Tax leaders must move quickly to assess the potential impacts, advise senior executives and other stakeholders on the coming changes, and determine what needs to be done to comply with the new rules and manage their implications. Collaboration and automation through the right tools will be critical to staying agile and successfully navigating BEPS 2.0 adoption.
insightsoftware is a leading provider of reporting, analytics, and performance management solutions. Over 30,000 organizations worldwide rely on us to support business needs in the areas of accounting, finance, operations, supply chain, tax, budgeting, planning, HR, and disclosure management. We enable the Office of the CFO to connect to and make sense of their data in real time so they can proactively drive greater financial intelligence across their organization. Our best-in-class solutions provide customers with increased productivity, visibility, accuracy, and compliance. Learn more at insightsoftware.com.