As the negotiations around BEPS Pillar I and Pillar II seem to have reached a point of no return, multinationals need to start preparing for the upcoming change.
Although there is still a significant way to go and many hurdles to take, it seems that the international tax rules will be rewritten for a large part if and when the BEPS Pillar I and Pillar II regulations get approved. The impact of the new regulations will be of an unprecedented nature and brings a new tax reality for multinational companies to comply with. Much more disruption is to come, with among others public country-by-country-reporting, public effective tax rate reporting and the Business in Europe Framework for Income Taxation (BEFIT) looming at the horizon. If the Twenties appear to be as roaring as some predict them to be, multinational companies better start preparing now.
Early June the G7 finance ministers reached political agreement for a landmark reform of the international tax system. The Biden Administration played a crucial role in the negotiations, which ran in parallel with the announced US tax reform, and pushed to reach an agreement to keep momentum. This disruptive reform includes the reallocation of a share (and thus taxation rights) of the residual profits to so-called market countries (in line with BEPS Pillar One) together with the commitment of phasing out any unilaterally implemented Digital Services Taxes. The reform includes as well a global minimum tax rate of at least 15% on a country-by-country basis applying to the profits of multinational corporations (in line with Pillar Two).
The new regulations are still in an early stage in the global adoption process, however through a statement that has been published on July 1st, 130 countries of the OECD Inclusive Framework seem to back the plans. The elephant in the room, represented by the conflict of interest between certain jurisdictions, seems smaller than expected. There is more and more the belief that a point of no return has been reached. In-house tax teams therefore should take a proactive stance and prepare for the upcoming change.
We have listed below a number of actions that can be taken now to achieve the highest levels of future preparedness.
This sounds like a very obvious position, but the reality is that many multinationals struggle to have a comprehensive line of sight on the business, the legal organizational chart, and the overall global footprint / presence. Ideally the single source of truth can be accessed by different departments, whereby keeping the truth up to date becomes a joint effort between tax and other corporate departments like finance, legal and treasury.
It is not a secret that often nobody but tax cares about the statutory reality. It is of the utmost importance to centralize all statutory and tax key data points in a single place, backed up by their underlying documentation. For the upcoming BEPS regulations also USGAAP / IFRS financials will need to be available, however that is typically less of a concern. Multinationals should create now such a one-stop location for all the tax relevant data points to have them at their fingertips when preparing for upcoming regulatory change.
Multinationals are not static and tend to change on a daily basis in terms of structure, footprint and business models. Periodic compliance processes produce data that should be captured to update the single source of truth. It is recommended to track all data and documents from, among others, the global corporate tax compliance process and tax projects and let them flow through into the single source of truth and statutory reality.
Tax teams should have smooth access to the most important regulatory data including statutory tax rates, ideally through access to global tax databases. Effective tax rates should be monitored internally and the underlying calculations should be readily available. Customizable tables that can be sliced and diced allow for real-time reporting and help identifying any gaps between effective and statutory tax rates that should be investigated and the root causes of which should be surfaced.
Tax teams should fully understand the business reality, obtain a clear view on the activities in different countries and the margins realized. Tax should increase partnering up with the business and build close relationships ensuring that all changes get captured.
To achieve the above listed objectives, tax leaders should source the right people, install the right processes and foresee the right resources. Knowing that budgets continue to be under pressure, it is extremely important that awareness of the upcoming regulatory change is created at the highest levels in the organization to free up the necessary resources. A digital transformation of the tax department supported by proper tax technology remains a cornerstone and should be high on the agenda of tax leaders and their organizations!
COO & Co-founder