The Pillar Two model is almost here: why you can’t delay any further

Lucia Higgs

Tax Technology Specialist,
Wolters Kluwer

The introduction of the OECD’s Pillar Two rules will lead to more significant data collection requirements, and tax teams need to understand if their current systems can accommodate this.

The OECD’s Pillar Two Model Rules bring about massive change in the international tax world. The Global Anti-Base Erosion Model Rules (Pillar Two) or ‘GloBE rules,’ are designed to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on income arising in each jurisdiction where they operate.

The aim is to provide a floor on tax competition. The mechanism is a system of ‘top-up taxes’ to bring an MNE group’s Effective Tax Rate on income in each jurisdiction up to the minimum rate of 15%. This is the latest and most radical move in the project to tackle tax base erosion and profit shifting (BEPS).

What do the Pillar Two rules mean for MNEs?

For MNEs, this means another layer of complexity to calculating their tax liability, requiring additional data sources and involving the application of tax accounting principles. The rules will be layered over existing tax compliance and reporting obligations.

Some MNEs are getting ahead and have working groups planning for the data collection and calculations. Others are taking a ‘wait and see approach,’ given the rules are in draft — or still subject to change. However, several countries, such as the UK, Australia and Singapore, are now expecting to enact domestic legislation soon — based on the GloBE rules — to apply from 2024 or 2025. If the legislation applies for 2024, then corporates need to consider the impact of GloBE tax in their budgets and forecasts later this year.

Identifying current data sources to ensure compliance

Complying with new, complex rules spanning multiple jurisdictions, calculations and associated filing requirements will place an enormous burden on already stretched tax teams. The challenge will be to identify current data sources and ensure accurate compliance calculations.

The comment that the rules are subject to change will still be relevant. There will be the transitional Safe Harbour rules to consider, plus many other issues to be managed. However, ‘subject to change’ is not an excuse for not doing anything. MNEs need a strategy for collecting data (some top-down, some bottom-up), calculating the tax and managing the inevitable added complexities as the group corporate structure changes or more countries enact legislation.

Subject to change is not an
excuse for not doing anything.

Tax teams will need to embed Pillar Two calculations quickly because other tax obligations will need attention soon: DAC 7 (the EU Directive on tax transparency rules for digital platforms) and in the UK — Making Tax Digital, to name a few. Tax is part of a corporate’s environmental, social and governance (ESG) strategy, and we expect more tax obligations to come.

How to address tax obligations

While some MNEs use tax software to manage their tax calculations, many are collecting the data they need in a disparate and disjointed manner — with many only using spreadsheets.

Corporates tell us what they want in an ideal tax solution: one that connects with accounting and other data; a source of data which can be repurposed for all tax filing obligations, from group and local tax provisions and tax returns to Country-by-Country Reporting; and now also for Pillar Two calculations. In short, a tax platform that can deal with Pillar Two as it is now and is flexible enough to adapt to future tax legislation changes.

Wolters Kluwer CCH Integrator has met the needs of tax professionals for over 15 years, within the profession and in-house. With CCH Integrator, all Pillar Two requirements can be met by leveraging its existing controlled processes and calculations. Our tax specialists are speaking with businesses to discuss the implications of the new rules and how our global tax provisioning software can address these.