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Is BEPS Pillar II more of a compliance burden than a tax-raising opportunity?

Chris Danes · October 19th 2023 · read

As we approach the first new reporting requirements under BEPS Pillar II, MHA, Baker Tilly and Winmark Tax Director Network recently held a workshop to discuss the preparations that will be required. 

The timing of our event couldn't have been better, as this week brought news about the updated UK legislation on the Multinational top-up tax, including the adoption of the undertaxed profits rule and other amendments. These changes, which were made on September 27, 2023, also encompass adjustments related to the Domestic Top-up Tax, aligning with the most recent administrative guidance from the G20 — Organisation for Economic Co-operation and Development inclusive framework.

Delegates from UK and foreign parented multinationals discussed their respective plans and thinking with unanimous consensus that the compliance burden would be the most significant consideration in the years to come. Before we dive into the detailed feedback from the workshop, it might be helpful to revisit exactly what BEPS Pillar II comprises for multinational companies with annual consolidated revenues of more than €750 million. Those impacted will have to justify their position regarding the new minimum global tax rate of 15%.

Pillar II introduced one new global reporting requirements for affected companies, being the GloBE Information Return (GIR): a detailed report that companies will be required to file with their tax authorities on an annual basis. The GIR will contain information on the company's global income, expenses, taxes paid and other relevant financial data.

The GIR will be used by tax authorities to identify companies that are subject to the global minimum tax and to calculate any top-up tax that may be due. Companies will also be required to maintain documentation to support their GIR, and the Country by Country Report filings which are vital in relation to the GIR. Tax payers are also being asked by tax authorities of any changes to their corporate structure, business activities or transfer pricing policy that could affect their tax liability under Pillar II.

Key conclusions from the session were:

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We’ve carried out an impact analysis, there were no jurisdictions that have caused concerns and we don’t see any change to our current overall tax rate for the group. However, the compliance burden and resource requirements will be significant, so managing all stakeholders is vital.
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Data quality is essential, regarding all the data points required to ensure robust compliance.

In some respects, the consensus was that the easy part had been the initial assessment of the impact on the overall tax rate and making a statement to this effect in Financial Statements has advantages in relation to the market perception and from an ESG standpoint. Whilst the message to their respective boards was a positive one of no additional tax, the challenge of convincing these boards that additional investment in reporting and analysis is required has remained.

Some participants felt that the Safe Harbour provisions, designed to simplify and reduce the compliance burden, would be helpful during the initial implementation phases. Certainly, the transitional Safe Harbour will allow companies to use the qualified aspects of their Country-by-Country Report data to calculate their GloBE income and effective tax rate. Longer term, investment in new systems and software will be required.

Concern about the consistency of data quality was a common theme amongst participants. Several participants said they had plans underway to evaluate their data to ensure consistency across jurisdictions. In most cases this had necessitated evaluating the underlying compliance processes to gain the consistent data. Prioritising these activities has better prepared them for deploying software in due course. Several products are already available in the market, and participants spoke of their plans to invest in Data Scientists and/or Tax Technology expert advice to ensure they select the right software vendor and model their data appropriately.

Given the obvious and paramount importance of tax authorities for the enforcement of Pillar II, discussions moved on to what level of support or advice had been forthcoming.

So, what to make of the current status and the road ahead? 

MHA and Baker Tilly firmly believes that starting with good data is essential. Clearly, inaccuracies or omissions in data could lead to incorrect calculations of GloBE income and the effective tax rate, leading to consequential unexpected tax charges and penalties.

Key BEPS Pillar II actions for organisations should be:

1

Understanding the impact of Pillar 2.

2

Making sure you know where the data is or whether data is missing. Take the opportunity to assess your data and evaluate your processes so that you’re ready for tomorrow.

3

Ensuring you have data consistency. You will need to ensure that data is consistent across different jurisdictions. This may be challenging given different tax rules and reporting requirements, but your advisors can provide guidance.

4

Prioritise steps in the Pillar 2 journey according to risk, complexity and tax exposure.

Get in touch

If any of the information and comments raised in this article are of interest or you would like to talk through any aspects of the implementation of BEPS Pillar II in your own organisation, please get in touch with our Corporate Tax team using our online enquiry form

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