By the Numbers: Navigating Pillar Two and Global Tax Reform

The impact of OECD Pillar Two

OECD Pillar Two model rules are designed to ensure that large multinational enterprises pay a minimum level of tax on income arising in every jurisdiction they operate in. These rules are ambitious in scope and reach, designed to accommodate diverse international tax systems, tax consolidation rules, income allocations, entity classification rules, and business structures.

Global tax reform at this scale changes many aspects of how multinationals pay tax, manage increasing data needs, calculate tax liabilities, and report under both financial reporting and tax compliance requirements. To help mitigate some of this complexity, at least in the near term, the OECD has recently published transitional safe harbors in advance of December 31, 2026. Companies will need to review and monitor safe harbor frameworks to understand which apply over time. The OECD Inclusive Framework is also exploring dispute prevention and other mechanisms for increasing tax certainty.

The need for a proactive approach

As you are most likely aware, the new Pillar Two ruleset is complex. Deloitte’s dedicated global tax policy teams closely monitor both the OECD and local - country developments to help organizations comply with the specific taxes covered under Pillar Two:

• A main rule, known as the Income Inclusion Rule (IIR) that requires multinationals earning over €750M to pay a minimum 15% tax in each country they operate in
• A backstop rule, known as the Undertaxed Profits Rule (UTPR)
• Local tax rules, known as Qualified Domestic Minimum Top-Up Taxes (QDMTT)

Given the complexity and potential impact of the new requirements, global corporations will need to take an informed, proactive approach to compliance—developing a clear understanding of the rules; conducting detailed assessments; and rolling out a targeted, compliant response backed by the necessary data, technology, processes, and resources. To make sure your business is prepared:

• Address data needs. Pillar Two returns include many new data points, which require time and effort to identify, access, or create. You’ll need to know where this data is coming from, and which tools you need to access it. A data gap analysis is a good place to start.
• Set expectations. To manage internal and external expectations, you'll need to generate and communicate estimates of future impact on an established timeline.
• Inform tax planning. Scenario analysis can offer insights into projected impacts and risk areas, and help you model restructuring options, election impacts, and technical interpretations.
• Advocate and communicate. Working closely with taxing jurisdictions can help you articulate questions and needs—and keep internal stakeholders aligned and up to date on potential impacts. 

With so much at stake, clarity and thoughtfulness are a must. To that end, here are the Pillar Two data types, calculation considerations, and reporting requirements to evaluate now to ensure compliance with current and upcoming OECD directives.

Data types

Pillar Two requires more than 100 accounting, tax, and company data points per entity, including:

• Accounting data in group GAAP (excluding consolidation items), including trial balance accounts, ownership-based data, transaction analysis, and industry-specific items
• Tax reporting data in group GAAP including breakdowns of current and deferred tax workings, along with detailed tax workings, for example transfer pricing adjustments and controlled foreign corporation taxes
• Company data such as names, TINs, jurisdictions, activities, ownership data, and employee numbers

To capture all these data points, you need to interpret the definitions for your group, know where your data resides, how you'll access it, and how you plan to address any gaps. And remember that while Pillar Two demands a lot, it also offers an opportunity to increase data accuracy, automate the reporting process, and possibly improve your tax positions and planning. 

Calculation considerations

To comply with new, more complicated tax rules, you’ll need to determine baseline requirements. Eventually a complex and complete return calculation engine will be required, these are under development by software vendors and advisors – decisions will need to be taken on the compliance platforms, but the most immediate need is to model Pillar Two results for the purposes of planning and accounting. To that end, groups are working through:

• Identifying data inputs. What level and availability of data do the calculations require? Where is your source data coming from? Consider ERP and finance systems, tax provision, tax compliance, consolidated financial statements, and master data.
• Generating calculations. Spreadsheet-based modeling with visual basic for applications (VBA) code provides full transparency into calculations. Perform modeling to complete safe harbor, book-to-GloBE, IIR, UTPR, and QDMTT calculations. These need to be rightsized to your business but also need to have traceability and transparency through the calculations. We have a predeveloped model with 5-year scenario planning, inclusive of safe harbour, book to GloBE calculations, robust election functionality, and other critical Pillar Two computations.
• Analyzing results. Customizable visualizations let users quickly see, forecast, and compare results, while comparative scenarios can further deepen understanding and help you hone tax forecasts. Consider scenarios for how you can quickly digest and communicate your modeling results, through the use of dashboards and visualization tools.

It's unlikely that your current tax technology can support all of your Pillar Two data, calculation, and reporting needs. And in the absence of off-the-shelf solutions, it's important to figure out exactly which enhancements can fill the gaps.  

Reporting and filing details

The OECD is in the process of developing a standardized information return. In the meantime, the public consultation document published by the OECD contains a comprehensive set of required data points, including general information about the group and filing entity, effective tax rate (ETR) computation and top-up tax, and top-up tax allocation and attribution. The initial filing deadline is 18 months after year-end for the first year a company is in scope; subsequent deadlines will be 15 months after year-end.

Going forward, there is an expectation for proliferation of QDMTT requirements at the country level, which, in addition to impacting the eventual filing, may require flexible calculation solutions and more data gathering. The local requirements will lead to the need for close policy monitoring on the latest developments and must be considered for compliance planning.

To stay informed, closely monitor the standardized return and additional filing information as it becomes available.  

How Deloitte can help
 

Deloitte’s OECD Pillar Two Tax Advisory service brings together the deep expertise of Deloitte tax specialists and the analytical power of our data and technology solutions to help multinational businesses assess and evaluate the tax implications of global tax reform. We offer support for everything from initial gap assessment to tax impact analysis to implementation, including these end-to-end services:

• Policy
• Impact assessment modeling
• Data assessment
• Finance system enhancement
• Tax technology
• Technical advisory
  
• Accounting and tax provision
• Global compliance