Building Pillar 2 into your technology planning is key to success

The key to meeting Pillar 2 obligations is understanding the role of data and technology and aligning them to tax accounting and reporting.

Data, and where it is sourced, is key

On face value, a Pillar 2 calculation is not necessarily complex: determine the adjusted covered taxes; divide by adjusted GloBE income and calculate your ETR. The necessary adjustments to get to each of these key Pillar 2 numbers will vary for different groups, as would be expected for existing reporting and compliance processes. This is due to factors such as the number and detail of local ledger systems, group consolidation systems and the approach to group and elimination adjustments. Those differences result in complexities in the data: that is why a data dictionary – a register or catalogue of all the data points required for a particular process, with the attributes and details for each item – is both foundational and essential to being able to meet the requirements of Pillar 2 successfully.

Few groups have an existing financial data ecosystem that can accommodate Pillar 2’s new and complex requirements. Establishing a data dictionary will enable the understanding of the source data points which will drive their Pillar 2 calculations at multiple levels, including jurisdiction, entity and account/adjustment levels. A “data dictionary” is simply a register of the source system and data and how it is mapped against the required data fields for a specific process. From a Pillar 2 perspective, this is likely to start with the financial consolidation system or local ledgers, with additional layers added for data from other sources, such as other tax systems.

How Pillar 2 makes new demands on tax technology

Preparing the data dictionary is the first step on the Pillar 2 technology journey, as it will highlight gaps in the existing finance systems – for example, where GloBE adjustments are not easily identifiable from accounting data – or where system setup or structure causes challenges for Pillar 2 processes, such as group adjustments posted to a notional, topside entity, rather than allocated to a jurisdiction or legal entity.

In addition to identifying the group’s current state, the completion of the data dictionary helps to create the technology roadmap for Pillar 2 readiness. Adjusting finance systems can be time consuming and costly, so identifying and communicating the necessary changes to stakeholders early in the process is essential. It ensures a smoother, more efficient change.

Finally, preparing a data dictionary will help other parts of the group make better decisions and ensure that everyone is operating from a single source of truth. The required Pillar 2 processes will be intricately linked with the tax accounting and tax reporting processes, as such the data dictionary will help to inform groups considering how to drive greater automation through their existing tax reporting. As many existing tax reporting and compliance teams already have time and resource constraints, automation provides the opportunity to relieve some of the existing tax and reporting burdens whilst simultaneously progressing along the Pillar 2 technology roadmap.

The challenge for many MNEs is getting the right blend of tax, accounting and technology expertise working on implementing Pillar 2. That’s why many have started the conversation with PwC. We have established expertise in tax, accounting and technology and we have it globally. That makes a big difference when an MNE needs to consider the bigger picture of regulatory changes and ensuring they strategically respond to the challenges they pose.