The Road to Reshaping Business is a series of articles exploring industry trends, strategic imperatives and practical steps for enterprise leaders who are looking to embed continuous advantage into their operations. In this article, we explore the near-term implications of the upcoming Pillar Two corporate tax rules, how multinational corporations can prepare, and tips for evaluating third-party service provider support.
The upcoming implementation of the Organization for Economic Co-operation and Development (OECD) Pillar Two regulation is changing corporate income tax as we know it. Put simply, for the first time, multinational groups that have an annual turnover of more than 750 million euros will be required to pay a minimum 15% tax in each jurisdiction where they operate. This is an ambitious project and the rules, which can be complex, require multinationals to calculate a new tax.
And the impact won’t be limited to just the tax department. These rules and their implications are so broad that boardrooms globally need to be aware and play a role in forward-planning compliance.
According to Deloitte’s recent Tax Transformation Trends Survey, Pillar Two readiness is squarely on the radar of senior tax and finance leaders. Asked about their priorities for the next 3-5 years, 38% of respondents said their number one focus is complying with new tax law changes. Another 37% stated their top priority is managing their effective tax rate, something that will become more challenging for some as countries implement the 15% minimum tax rules introduced under Pillar Two.
Pillar Two is largely a solution to address the tax challenges created by the digitization of the economy and an increase in mobility of multinational groups. There has been growing concern by governments that lower corporate tax rates/ no taxation in some jurisdictions is incentivizing international groups to ‘shift’ taxable profits to those jurisdictions. Pillar Two data requirements are unlike anything corporations have had to produce before. More than 100 accounting, tax, and company data points will be needed for every entity within each corporate group and most of the data being asked for will have to be calculated specifically to comply. In other words, it’s not about just accessing new data, it’s about obtaining, analyzing, and reporting on information that was not previously captured for tax purposes in new and different calculations. Corporations will now have to source new Pillar Two use case-specific information from across their entire organization. Transitional "safe harbors" have been introduced which could significantly reduce the burden for the first three years however, these will need to be considered in conjunction with local country rules being implemented.
The level of technical tax knowledge—not in one country or in one region, but everywhere you conduct business—is also unprecedented. Understanding the rules and how they apply to your business, managing the sheer volume of data, and then executing delivery of accurate information and returns are significant tasks. Is your organization planning for the type of specialized skillsets and volume resources to manage this?
Most in-scope multinationals aren’t required to make their first Pillar Two filing until 2026, but, for those that haven’t started already, the time to start preparation is now. Many multinationals will need to include some disclosure in their next public financial statements indicating the impact Pillar Two will have on their business. Any group with a calendar year-end who reports results quarterly will have to include their first Pillar Two provisions in their reports for March 2024. These early reports will be subject to auditor scrutiny, so accuracy is critical.
Many corporations we speak to are currently focused on the safe harbor benefits and are reviewing their country-by-country reports to ensure that the processes that were set up in 2016 are still efficient and appropriate and that the country-by-country report will be regarded as qualifying for Pillar Two purposes. This is not as simple as it may sound, and some groups are finding that steps taken to produce their historic reports put them at risk of not qualifying.
The safe harbors are a valuable short-term measure to exempt a group’s operations in certain countries from Pillar Two compliance, such as if they are smaller or applying a simplified tax rate calculation (a separate calculation based on the tax data including deferred taxes) the rate is higher than the minimum rate set in the rules (increasing annually – 15%, 16% and 17%). Companies should consider the level of resource and attention required for this country-by-country reporting to ensure accuracy, build flexibility on timing, and help mitigate potential risks associated with incorrect reporting.
At Deloitte, we’re beginning to see some clients proactively resource planning and asking their broader boardrooms—"what people requirements will we need to comply with Pillar Two over the next 3-5 years?” That may include undertaking a cost/benefit analysis of managing Pillar Two in-house or identifying an outsourced service provider to work with.
For many companies, the challenge and cost of hiring in-house professionals in multiple jurisdictions and investing in new technology-enabled systems is proving to be higher than working with a third party. In fact, 40% of respondents in the Tax Transformation Trends Survey are considering outsourced services as a strategy to lower costs and more organizations are outsourcing their group tax provision exercise as a direct result of the incoming Pillar Two rules.
Given the critical nature of Pillar Two compliance, evolving mandates, resourcing challenges, and multi-year program rollouts, some organizations are considering working with next-generation outsourced, otherwise referred to as “Operate” service providers, to help lower the operational risks associated with the reform and draw from the experience of subject matter experts.
Here are three key capabilities to look for when evaluating an Operate service provider for Pillar Two transition readiness and ongoing operational support: