Is Pillar Two a reason to rethink your decentralised finance and tax model?

By Jonathan Howe Connected Tax Compliance Leader and Doug McHoney Global International Tax Services and Pillar Two Leader

For many organisations a regional/decentralised approach to finance and tax has suited their culture and organisational structure.

And there have been many drivers for this:

• Considerable difference in local tax laws/filings and regulations across territories
• Locally hosted technology systems and data sets
• Limited need to globally aggregate taxes and filings

Pillar Two, combined with the cloud transformation of legacy local technology systems and databases, is changing this paradigm.

Pillar Two is the first global tax of its type - a global tax regime with a 15% minimum tax rate applying to companies with greater than €750m annual group revenue. As many as 36 jurisdictions have or will enact these rules in 2024, with dozens of others to follow. Organisations within these rules will have to file local returns for domestic top-up taxes and the GloBE Information Return (GIR), and do it consistently across multiple territories - this is a requirement unlike any other.

Changing the way you approach data

The Pillar Two data burden is significant and massively impacts tax functions and other stakeholders across organisations. For every single entity or branch in a group’s structure, as many as 270 data points have to be gathered, with our research showing that only around 50% of this data will currently be recorded in accounting systems. Pillar Two requires large data work in every territory, owned by different teams, with a focus on consistency, efficiencies, governance, and audit trails that may not have been needed at this scale previously.

Many companies have been content to use different tax providers and different data strategies in different territories. But with Pillar Two it is inevitable that this approach will have to change: to deal with the requirements and rules of this global tax, companies will need a more centralised approach.

A more centralised approach

Most of the Pillar Two calculations are based on the financial accounting system of the ultimate parent entity (UPE), which requires not only keeping a new set of books but deep involvement, coordination and leadership by the group's headquarters.

The Pillar Two rules involve complex analyses and dozens of adjustments, elections and attribute tracking, creating unique challenges. UPEs must have a coordinated strategy to manage these complex calculations and the different mechanisms to collect the tax (including the qualified domestic minimum top up tax or QDMTT, which can be based on local GAAP or the accounting standards used by the UPE, depending on the local adoption of the Pillar Two rules), while developing a global auditable approach and preparing for implementing multilateral dispute resolution that may arise in the future. A subsidiary acting alone, for example, risks not having the data, information or expertise to adequately comply with these rules.

These changes don’t mean that you have to centralise every aspect of compliance. The domestic nature of a lot of the filings and regulations in territories may mean a decentralised approach in a number of areas can still be an efficient model. But connecting the aspects of domestic and global calculations and filings will be a must for an efficient and forward-looking approach to tackling Pillar Two. So how are previously decentralised organisations starting to think differently?

• They are working with finance and data specialists to centralise their tax processes and data gathering, with a structure that will work across jurisdictions.
• They are looking at technology to help achieve this including our 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, or a mix of both.

But perhaps don’t limit your centralisation/connecting data and processes to what you need for Pillar Two compliance. Take the opportunity to challenge whether ‘better connecting’ and ‘centralising’ your tax compliance can provide wider benefits, such as:

• Greater visibility, enhanced controls over compliance - Better, clearer, more intuitive data and standardised processes could provide more confidence in your tax compliance for your leadership, regulators and stakeholders.
• Ability to see things in ‘real time’ when everything is in one place - A 360 degree view of your tax landscape that provides a different type of insight, e.g. an ability to look at what taxes you pay and where and what that means for your organisation.
• Streamlined processes and technologies and a data first approach - Freeing your teams up from data wrangling to focus on what matters in your wider business.
• Easier to access global data in real time - Ready for the move to real time reporting and tax authorities connecting directly into your systems.

It’s clear to see why the debate of a centralised vs decentralised finance and tax model has resurfaced due to Pillar Two. What is right for your organisation will depend on your circumstances. But what is important is that you revisit this now, given the potential impact of Pillar Two. In this new paradigm of a global tax system with complex international filings, the driver for, and the benefits from, centralising aspects of your compliance model may be much more powerful than it was before.