Rising to the challenge: Addressing the difficulties of pillar 2 reporting
By Russell Gammon, CSO at Tax Systems
Multinationals with revenue of over €750 million will be preparing to rise to the challenge of meeting Pillar 2 of the Base Erosion Profit Shifting (BEPS) directive. This set of rules was developed by the Organisation for Economic Co-operation and Development (OECD) to address the issue of tax avoidance by multinational corporations. It will establish a fairer distribution of taxing rights to significantly limit international tax avoidance and ensure that big businesses pay their fair share of tax – a global economic win!
These groundbreaking regulations were a cornerstone of the last G7 summit and include measures to tackle problems, such as transfer pricing, hybrid mismatch arrangements and country-by-country reporting, with relevant organisations liable to pay a global minimum tax of 15%, irrespective of where they operate.
The EU and the UK will have subtly different implementations of the rules. This currently looks like it will affect over 500 businesses in the UK, who will have to report information relating to Pillar 2 to HMRC by 2026 (18 months after December 2024 year-ends). However, it’s worth noting that some businesses have already started disclosing this in their most recent sets of glossies.
For those organisations meeting the criteria, this brings a range of major considerations and challenges. Understanding how to comply with these large numbers of data points required under Pillar 2 – some sources state this to be as many as 150+ items – is the important first step.
Change is gonna come
In many cases, the most logical and effective strategy to adopt is to focus on building global data integration and collaboration processes, ideally via a single technology platform. This is particularly important for international organisations, where the requirements and complexity imposed by BEPS increase further.
But, why do organisations need to change their approach and why aren’t existing processes sufficient? Let’s take corporate tax as an example – today this is often still a manual task, carried out annually with the use of spreadsheet-intensive routines. Complexity is inherent in the system, with detailed tax calculations and sector-specific rules adding to the challenge facing finance teams and their advisors. Utilising a similar approach for Pillar 2 means another compliance burden, taking a significant amount of time, on a tax team that is likely under-resourced as it is.
To comply with Pillar 2, all calculations must be provided to corporate headquarters. One of the major challenges this presents comes from gathering and collating data from multiple sources, particularly for those organisations working across borders. Indeed, some finance functions might not currently be collecting or reporting on this data at all.
In addition, despite the fact that deferred tax is likely to be among the main areas required for Pillar 2 reporting, many organisations will find that this information cannot be found within their ERP systems or other dedicated software tools; the information typically lives in spreadsheets today. And for those reliant on Excel, the process is likely to be long and complex. Either way, Pillar 2 may well end up meaning that organisations need to create a single, trusted and centralised source of all relevant data, not least because it will ensure finance teams can discover and report on everything required for submission.
The big question here is how can data be centralized in an efficient and cost-effective way. Getting back to the role of ERP systems, while many companies will see these tools as the obvious choice on which to base a centralization strategy, this is made much more difficult by the prevalence of complex legacy systems that make the collation process very challenging. Granted, more modern solutions such as SAP4HANA and Oracle Fusion are increasingly more widely used, but even these may not meet the needs of organizations focused on Pillar 2 compliance without additional – and potentially expensive – customization.
The challenges don’t end there. Many enterprises currently consolidate returns only at a group level, whereas Pillar 2 requires this work to be carried out, in addition, at a country level. Making this change isn’t just a matter of running some additional calculations, there is potentially a range of implications to address when updating technology. So, ideally, organisations should assess their data capture and calculation capabilities, and apply gap analysis to understand where any missing data resides and how to gather it.
The role of automation
But, all is not lost! Among the rapidly emerging technologies designed to address the serious limitations of manual processes and legacy technologies is, of course, automation. Implementing these advanced capabilities as part of an integrated, tax-specific collaboration platform enables geographically-diverse organisations to work together on a central document, managed via a shared portal. This delivers enormous efficiency benefits compared to traditional approaches where spreadsheets must be manually merged at HQ.
As with any important technology project, working with a partner who can integrate existing systems to work as part of a unified and collaborative process is key. And while there is still time to address the challenges that BEPS undoubtedly brings, building a tech-led collaborative strategy puts organisations in an ideal position to build modernisation into their wider approach to tax processes, reporting and compliance.