Future of Tax Insights series episode 6: Tackling the complexity that Pillar Two is bringing to compliance and reporting

Transcript

Frank Schmidt
Welcome to episode six in our Future of Tax Function Insights series. I'm Frank Schmidt, the German Connected Tax Compliance leader. And here with us is Arne Schnitger, PwC’s Pillar Two leader in Germany. Our last episode focused on why it was so difficult to obtain good quality data for compliance, and that issue is even more prominent given the extra complexity that Pillar Two - the new world tax system introducing a global minimum taxation of 15% - is bringing to compliance and reporting. Therefore, today's video will build on this, focusing on how to tackle the additional compliance elements of Pillar Two. Arne, in our recent Future of Tax survey we ask how prepared organizations felt for Pillar Two. What were the key messages coming out of these and their responses?

Arne Schnitger
Thanks, Frank. Actually, that's really an interesting one. And when I actually asked myself the question, I was quite puzzled to read the answer. It's 87% of organizations who basically think Pillar Two has an impact on the organization. And that's, I think, a quite high number. I was a bit puzzled to be, to be honest, when I when I read this and that of course means we will see a very sharp increase of compliance burden - tax compliance burden - in the future.

And why is that? Well, to begin with, it's the calculation by itself. If you look at the Pillar Two calculations, those calculations are complex. They require a lot of data points, and the data point is already the starting point where the exercise starts and where also the challenging starts because a lot of those data points are not currently available, are not available if you want to do your finance or tax compliance.

And therefore the data gathering is one of the first really key challenges which our clients are basically being faced with. And then the question comes, of course, where do clients stand in this challenge so far? And also again, I was quite interested in the survey, if you look at that, because the question comes how many feel well prepared?

Frank, What's your view? How many do you think really feel well prepared? You don't know the answers? No.

Frank Schmidt
I don't know.

Arne Schnitger
It's 2% - 2% basically think we are well prepared. I think that's not a high number. And 57% still feel we are partly prepared, and 13% still need to consider - which means they haven't started yet. So what does it mean? Well, it means really it's a process, and the process is now starting.

Frank Schmidt
Okay. So as you say, it is a real mix of where the organizations are at. So how do organizations become more prepared with Pillar Two?

Arne Schnitger
It's a good question. Well, to begin with - The foundation to manage your Pillar Two is the need to be prepared for the annual compliance circle. And if I'm saying “compliance circle”, I will consciously say that - because the Pillar Two exercise it's a recurring task which clients have to do.

So therefore, I think it's quite clear that its really a topic we all need to focus on and clients need to focus on. So what does it mean being prepared? Well, you need to start by looking at the calculations - and calculations means global calculations, because Pillar Two is a global exercise, but also means local calculations.

Why? Because those global rules ultimately will lead to implementation by the different states. It will lead to local rules, and as always those local rules they might deviate to a certain extent. So therefore, i’m emphasizing that its also local calculations that needs to be considered . And then if we talk about local requirements, there's also local compliance requirements - because eventually a tax return has to be filed.

And as always, there might be some local flavor towards that. So also keeping that in mind is quite important. And then also to be considered - this is a moving target. What do I mean by this? Those rules have been developed the last two to three years, and they have been changing even this year, we had multiple changes coming in.

And therefore in this whole adventure of mastering Pillar Two it's important to stay ahead of the rules, as well monitor and adjust your calculations in case some new rules comes in. And then, last but not least - consistency is important because you need to roll this out on a global basis.

And of course, even with all the deviations, the data need to be consistent. So therefore, it is really important to have a controlled centralized process basically. And to have this in place in order to manage this and that, you will not see any kind of deviations in the future.

Frank Schmidt
Thanks Arne. Can you explain how PwC are helping their clients to achieve this?

Arne Schnitger
It's a good question. I guess, I would like to start on a positive note. The positive note is that there is usually something already in place. You have a compliance process where you gather your tax data, your recurring information to do your tax filing, to do your compliance. And that's usually something we would like to build on as well.

So the first question is always to what extent are processes in place? To what extent can we also use those processes to leverage the Pillar Two exercise? So the first question is really to understand your current process and see to what extent can we use this process in order to include Pillar Two calculations and include the addition of Pillar Two data points?

So it really is about having an interplay of the Pillar Two compliance - future compliance process - and the current process really important. And we also encourage clients to basically look at this wider because this is kind of also a possibility for you to basically streamline your process, make it from overall perspective, just more lenient, basically.

And therefore, I think a few questions which we are actually asking - is the first one: Really evaluate your existing processes. Look at to what extent you include your Pillar Two process. Then two - of course - Integrate your political calculations. Trying to get your compliance processes up to date, include your quarterly and year-end provisioning. That's all something which needs to be done. And then create the documentation.

You need to have an audit trail for the future. Tax authorities will have a look at that. It's a tax return in the end. And therefore you will go through audit - and the documentation audit trial is therefore also important. And then last but not least, of course, technology. This is a global exercise and also the reporting will be digital.

So you're not going to do this somewhere on the napkin. You will have to do this in a digital format. So therefore, the question is what kind of technology might help you to do this? And it needs to be technology which comes from a global scale, but still includes the domestic requirements.

And then there is a question - which technology can be used? And of course, PwC Pillar Two engine could be perfect fit for that - because it's actually that's what it's meant to build for.

Frank Schmidt
So as always, there seems to be a lot of areas to consider. What is the one key message that you would like people to take away?

Arne Schnitger
This is a good one. Well, let me start like this: The tax function is already busy. We're all aware of that. And now Pillar Two comes on top of that and might not have been a priority so far as it was in the beginning. But I think now is really the time to make it more of a priority. And the good news is that there are organizations who can help and PwC is such an organization.

I can really tell you with confidence, that once you start kicking off this process - trying to analyze what we talked about - the whole exercise becomes more digestible. So therefore, I think the good news is really having seen that - and I have been included in projects already which are running for a few years - once you start... the problems start to disappear.

But you need to start of course. And Pillar Two is, for sure, a challenge. So I think now the time to kick it off. Also, bearing in mind that it's very soon that we need to include Pillar Two for provisioning - that's not very far off.

So therefore, I think it is really now a good time to start.

Frank Schmidt
Okay, so go for it.

Arne Schnitger
Go for it.

Frank Schmidt
Thanks, Arne. For more information on how Pillar Two preparedness is included in our human led tech powered Connected Tax Compliance approach - visit our website. Thank you for coming. We hope you have enjoyed these conversations about the future of the text function.