By Jonathan Howe Connected Tax Compliance UK and EMEA and Doug McHoney Pillar Two Leader
Pillar Two is an unprecedented change in corporate international taxation and it is deceptive. Tax functions and related stakeholders must prepare, and prepare in detail.
A global tax system with minimum tax rates in up to 139 jurisdictions is something many suspected would never come to pass. But it is here and it is a game changer: the OECD’s Pillar Two tax regime is the first ever global tax, meaning for those companies with greater than EURO 750 million in revenue they will have to file local returns and a global return, and do it consistently across multiple territories. The first important deadline for compliance falls in Q1 2024 for those public companies subject to IFRS or US GAAP. And very few companies are fully ready for what is effectively a new set of financial books for Pillar Two.
We know this because in a recent PwC global survey on the future of tax, fewer than a quarter of companies (23%) said they were fully prepared for Pillar Two, and more than a quarter of companies (28%) are close to being entirely unprepared. What is more, larger companies which have the greatest exposure to Pillar Two risks are the least likely to be fully prepared.
So how do organisations prepare for the ongoing compliance elements of Pillar Two?
“Pillar Two is a game changer as companies will need to change the way they approach data, it will change process management, it will change controls and thus the whole end-to-end process of delivering compliance. Current compliance and provision practices will just not be fit for purpose.”
Jonathan Howe, Connected Tax Compliance UK and EMEA
Organisations need the kind of consistency in local and global data and processes that very few cross-border businesses have achieved. With around 260 data points, most outside of the ERP systems, the approach to recording and collecting data will need to be revisited.
Most companies have been content to use different providers and different data strategies in different territories, because they have never needed to do otherwise. But with Pillar Two it is inevitable that the piecemeal ‘territory first’ approach will have to change: to deal with a global tax, companies will need a unified approach.
But it's even more complex than that, as whilst Pillar Two requires an entirely new set of global accounts, the specific compliance requirements will vary by jurisdiction, depending on how and when the Pillar Two regime is adopted by individual national tax authorities. This creates a continuing regulatory scanning and compliance burden for companies with operations in multiple jurisdictions. Of more than 130 countries in the so-called OECD/G20 Inclusive Framework, around 80 have already proposed or published implementations of Pillar Two, although these rule sets may evolve and vary as Pillar Two becomes a reality.
“So multinational organisations will have to undertake constant regulation scanning to track a fast-evolving cross-border rule set, identify new data sets to gather, and develop new compliance processes (which may look different in each territory). And that’s before we even get to the task of modeling potential tax exposures and reconciling local operations with global reporting demands. Organisations will need a cross functional team, have to centralise their tax processes as never before, and structure their data in a way that works for all jurisdictions.”
Doug McHoney, Pillar Two Leader
What is the answer?
Organisations are going to need to do 4 things:
- Have cross functional teams (inhouse or working with a outsourced/managed service provider) who can help navigate the complexity of Pillar Two, on an ongoing basis
- Work closely with finance and data specialists to centralise their tax processes and data gathering, with a structure that will work across jurisdictions
- Companies are going to need a new kind of tool to handle this new kind of compliance demand. This is why we have created the PwC Pillar Two Engine, a centralised rules-based tool that can be implemented in different ways depending on whether a business wants to outsource Pillar Two capability as a cloud-hosted managed service or insource the licensed version to do the calculations in-house
- ‘Connect’ Pillar Two with your wider compliance processes and data requirements
“The Pillar Two Engine will enable companies to interpret the rules for every single implementing jurisdiction, including QDMTTs, with real-time response as rules continually get updated.And it helps that it is backed by the deep expertise of PwC’s international tax practice.”
Doug McHoney, Pillar Two Leader
The Pillar Two Engine is part of PwC’s Connected Tax Compliance approach. In Connected Tax Compliance we help companies both build on what they have in terms of compliance and reporting as well as prepare for the new (and Pillar Two compliance is new, demanding data and calculations not needed in existing tax procedures). We help clients determine how current reporting and Pillar Two requirements will interact, preparing them for all aspects of the Pillar Two reporting process. Which is ‘connected’ from start to finish to give our clients holistic insights and the ability to see where they are at with all of their compliance filings at any one time.
So what are the things you can be doing now?
As always, time is not on the side of organisations, but there are some steps you can take today to help you make up some ground if you are feeling unprepared:
- Set up your cross functional team: who will be charged with looking at the impact of Pillar Two on your current processes, teams, data and technology.
- Pillar Two Operational Readiness: consider the impact of Pillar Two on your operating model, specifically across four broad categories (people, process, data and technology).
- Pillar Two Data Strategy: identify the data requirements and develop a data strategy aligned with your systems and processes that can provide for future compliance.
- Quantitative assessment: consider undertaking an impact assessment leveraging tools such as PwC’s Pillar Two Engine that will help you evaluate the preliminary impact of Pillar Two to your organization, allowing your cross functional team to better understand and prepare.
- Think about what Pillar Two compliance option will add more value to your organisation: outsourcing, insourcing, co-sourcing or managed services, and how this will coexist with the rest of the tax compliance burden.
The challenges created by Pillar Two can sound daunting, and they are if we continue to deliver tax in the same way with the same mindset. But a game changer like Pillar Two pushes us to shift mindsets, embrace new technologies, new partnerships and new ways of doing things. A connected approach to compliance will enable you to accelerate outcomes, delivering value beyond just the return.
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