What is Pillar Two and where do we stand today?
Pillar Two is a new global top-up tax regime designed by the Organisation for Economic Co-operation and Development (OECD), and it seeks to set a global minimum effective tax rate of 15% for multinationals with a revenue of more than 750 million euros.
Pillar Two is also referred to as Global Minimum Tax. The name Pillar Two comes from the (OECD). Pillar Two is part of the Two-Pillar Solution of the OECD Base Erosion and Profit Shifting (BEPS) project which aims to end the ‘race to the bottom’ on corporate income taxes.
Close to 140 countries have agreed to implement the Pillar Two rules and to date 33 countries have incorporated the rules into their legislation including the UK, the countries in the European Union, Canada, Japan and South Korea.
And what we are seeing so far is that the rules in each of the countries are similar but not always the same as the OECD model rules
How is Pillar Two impacting the corporate tax department?
The first thing to note is that this is a real tax, meaning real money to be paid to tax authorities. Which means that these rules impact the financial statements and therefore it has attention from the c-suite. Thomson Reuters Corporation for example predicts an increase of the effective tax rate of 200 basis points.
This is significantly different from other BEPS initiatives that have come out: think of Country-by-Country reporting and DAC6 / MDR. These are both reporting requirements but are not directly leading to additional taxes.
In addition to this, the calculation itself is very complex because this is a global calculation that is heavily impacted by local calculations.
The calculation requires new data points coming from data sources, new to the tax department.
And last but not least, the increased number of reports and filings that have to be made.
So the tax impact, combined with the complexity of the calculation and the increased number of compliance and reporting obligations, mean a significant change to how tax departments work.
Where the global tax department historically heavily relies on local controllers, now a truly integrated global approach is required.
You mentioned the globalization of the departments, can you speak more about this?
The pro-active tax departments we are working with, have appointed a Pillar Two task force, who take a look at the data, the people, the processes and the technology needed to support all this.
They acknowledge that this requires seamless collaboration between people involved in different locations. Some of our clients have a 2 day financial close, meaning that in 2 days you need to run a global tax calculation taking into account the outcomes of the various local calculations. This requires a seamless collaboration between the global tax function and local finance departments.
Also think of the impact of practical matters like time zones and language.
Having the right technology in place to support the calculations as well as the compliance forms and filings, helps managing tax technical complexity. In addition to that, technology can help facilitate and streamline the data collection and collaboration that is mentioned earlier.
How does Orbitax help to get tax departments ready?
Orbitax works closely with tax advisory firms such as the Big 4 Accounting firms, who are Orbitax Certified Services Providers, meaning that they know the software solution well. Combined with their experience in tax transformation projects and the Pillar Two rules, they can use the
technology as an enabler to get our joint customers ready for the financial close and compliance obligations.
What are some of the things corporate tax departments can do to help navigate Pillar Two?
Offense is the best defense. In other words, being proactive will save you from problems down the line. CFO’s need to acknowledge that this is a serious matter and they will need to invest in people, time and money to address this properly. They should not think that the tax department can do more with less and they should enable the tax department to take on this momentous task.
There are some transitional safe harbors in place that will give corporations time to get their ducks in a row. Use that time wisely. Thinking that you don’t need to do anything is a false sense of security, because come 2026 you need to do your filings and you don’t want to find out that your safe harbor did not apply after all, which might lead to a restatement of your financials or a material true-up.
This change of rules is also an opportunity. We often hear that tax wants a seat at the table earlier. This is an opportunity to be involved earlier. The benefit of all these data points is that you have them. If you want to run scenarios, for example in an M&A situation, you are able to run these scenarios much quicker, because you already have all this data in one place. This is your opportunity to get your budget and support for your department.
Podcast link: Click Here
Host: Nadya Britton – Enterprise Content Manager for Tax, Accounting & Trade, Thomson Reuters Institute
Guest: Bianca Kuijper – Chief Operating Officer, Orbitax