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The future of tax operations: Integrating BEPS Pillar Two into your finance operating model

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Learn how to adapt your tax operating model and leverage technology for a successful implementation of BEPS Pillar Two.


Three questions to ask

  • BEPS Pillar Two disrupts the traditional allocation of responsibilities for tax process. Do you understand your tax reporting and compliance obligations?
  • Companies must redefine operating models to address rule variations, new data requirements and multiple levels of stakeholders. Is your operating model up to the challenge?
  • Process redesign is a chance to enhance efficiency and mitigate risks. Do you know how to approach this change to generate maximum efficiency?

In 2021, the global tax landscape witnessed a paradigm shift with the introduction of BEPS Pillar Two, fundamentally altering the basis of tax calculations to rely on consolidated financial statements and leaving little room for exemptions beyond the de minimis safe harbor. Initially, the Qualified Domestic Minimum Top-Up Tax (QDMTT) was merely a credit, not exempting entities from the Income Inclusion Rule (IIR) calculations. Since then, the landscape has evolved with the advent of new safe harbors, including a QDMTT that now provides an exemption from IIR calculations. The QDMTT is also potentially based on statutory data with local rule variations from the OECD Model Rules which heavily impacts process as local filings, based on local rules, and in the respective languages and formats are required. In addition, transitional safe harbors have been introduced, valid until 2027, offering exemption from Top-Up Taxes (TuT) under certain conditions tied to CbCR reporting, which adds another dimension to the process.

Despite these significant developments, the tax community is still in anticipation of further clarifications on BEPS Pillar Two rules. With some jurisdictions yet to implement BEPS Pillar Two and the possibility of permanent safe harbor rules on the horizon, significant uncertainty remains. This fluidity makes it difficult to ascertain a tax operating model, whilst the rule sets, compliance formats and obligations continue to change. In this dynamic environment, tax and finance professionals must act with agility and foresight. This article aims to provide five practical tips on how to address these challenges effectively.

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Chapter 1

Surface the many impacts on your tax and finance processes

Take a structured approach to understand how to adopt the new compliance rules.

Given the significant variations in local BEPS Pillar Two rules, the volume of data points needed to fulfill those rules, and the number of stakeholders involved, BEPS Pillar Two has the potential to disrupt and render the existing process operating model for corporate income taxes ineffective. To best face this challenge, taking a proactive stance is essential.
 

The first step in this journey is to thoroughly understand how the new legislation will affect tax liabilities and tax reporting requirements at both central and local levels. In other words, companies need to obtain a structured view of the interplay between the group structure, the calculation mechanisms such as TSH (Transitional Safe Harbor), IIR and QDMTT as well as the respective group-wide and statutory financial statements and central and local compliance obligations. Attention should be paid to special group structures such as joint ventures and sub-consolidations. With a clear view on those elements, companies can embark on assessing the fitness of the current operating model to meet these obligations, that is to assess whether the company’s people, processes and technologies will be able to handle the new requirements.
 

To gain clarity, a design workshop can serve as a strategic tool. The right personnel to involve heavily depends on the individual organization, but would typically include central as well as local tax and finance professionals with sufficient oversight over operations as well as functional IT and risk management. Potential discussion topics may include:

  • Make or Buy: Is it more efficient to build inhouse capabilities for corporate tax compliance across the globe or is outsourcing to a professional tax compliance services firm more fit to purpose? Can the related risks be managed better in-house?
  • Existing workforce capacity: Is the existing workforce able to absorb the additional workload? Can a shared service center take over actions done by local teams or group management?
  • Roles of tax and finance departments: Do existing decision makers have sufficient specialized knowledge to make the decisions?
  • Roles of local and global teams: If there are several entities in one jurisdiction, who will take the lead on local compliance? How does this impact the roles in the tax provisioning process? Is there a need for centralized co-ordination?

Ideally, the outcome of the workshop is a high-level vision for the target operating model, an inventory of open questions and a roadmap describing milestones towards a comprehensive operating model design. With the clarity gained and a clear roadmap to designing the operating model, it is time to embrace the next steps.

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Chapter 2

Design your processes with an efficiency and a risk management attitude

Redefine roles and processes to enhance efficiency and manage risks effectively.

Whether the outcome of the design phase is an adjustment of the existing operating model or it creates the need for a completely new set of tax processes, it is advisable to start by defining roles and responsibilities for each sub-processs. This exercise will help identify potential efficiency gains. For instance, it can highlight responsibilities that could be more efficiently handled by a shared service center rather than by many different local teams. Later in the project, the resulting matrix defining responsibilities, accountabilities, consultation requirements and stakeholders who should be informed (RACI) will help set up effective controls for risk management. At the same time, a clear view of dependencies and handshakes must be obtained. Estimating the time required to complete individual sub-processes and tasks, including the availability of related data, will provide a comprehensive basis for process design, defining the sequence and timing of activities.
 

Some practical ways to create gains in efficiency and risk management in tax operations include:

  • Automation to reduce manual errors and free up resources for strategic analysis.
  • Early documentation of tax processes and controls to ensure transparency and inform stakeholders of the design status. This will facilitate the setup of risk management controls and serve as a basis for auditability.
  • A comprehensive tax compliance calendar to evaluate the fitness of processes to meet deadlines and serve as a benchmark for process efficiency.
  • Investment in training to equip teams with sufficient role-based knowledge and skills to contribute effectively.
  • Investment in a professionally managed change management program to address the human impact of process transformations, such as changes in responsibilities or increased workloads.

As organizations pivot towards stable business as usual, they must foster a culture of continuous improvement. Regular reviews, feedback incorporation and adaptability to regulatory changes are essential for maintaining a resilient as well as agile tax and finance operating model.

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Chapter 3

Get the right team on board

Assemble a multidisciplinary team from Finance, Tax and IT for successful Pillar Two implementation.

A typical BEPS Pillar Two implementation team is multidisciplinary and spans across Finance, Tax and Finance IT departments, each bringing a unique set of skills and knowledge to the table. Tax professionals are integral for understanding the organization’s current and future BEPS Pillar Two, tax accounting and Country-by-Country Reporting (CbCR) processes. Their ability to communicate requirements clearly and review key design decisions is vital for compliance and strategic planning.

Finance experts bring to the fore their in-depth knowledge of the organization’s financial systems, accounting practices, consolidation and reporting processes. They play a critical role in identifying relevant accounts for BEPS Pillar Two and CbCR data sourcing, ensuring that the financial implications are accurately captured and reported. Meanwhile, Finance IT specialists are the custodians of the organization’s Finance IT landscape, understanding data governance and privacy intricacies. They are responsible for setting up environments, onboarding external teams and facilitating seamless data integration with any chosen BEPS Pillar Two technology platform.

Beyond the core team, the engagement of Subject Matter Experts (SMEs) is often necessary, and many organizations opt to bring in external consultants for their specialized expertise. These SMEs fall into three categories: Tax technical experts who provide detailed knowledge of BEPS Pillar Two rules and tax accounting; Tax technology experts who bridge the gap between tax requirements and system functionalities; Software development experts who are adept at executing data integration and customization based on the technical design.

As organizations consider transitioning from manual processes to advanced software solutions, external software vendors and implementation partners become crucial. Their Professional Services teams possess in-depth platform knowledge and are tasked with executing the technical design, configuration, customization and remediation of defects or bugs during implementation. After the transition, a dedicated Support team is essential for ongoing application support and defect management.

In the evolving landscape of BEPS Pillar Two, there is no one-size-fits-all solution. However, the early involvement of Finance IT is imperative to navigate the complexities of integration and ensure that the technology solutions assessed align with the organization’s specific needs and existing IT infrastructure.

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Chapter 4

Select the right technology for your specific circumstances

Select the right technology to meet tax compliance needs and integrate with your existing systems.

The advent of BEPS Pillar Two is compelling multinational enterprises (MNEs) to critically assess their tax reporting processes, signaling a shift from traditional manual methods to more advanced data management and digital tax solutions. The selection of the optimal technology, ranging from enhanced Excel solutions to fully managed services, hinges on the unique characteristics of each MNE. Strategic decisions center around whether to adopt a ‘best in suite’ approach, leveraging existing relationships with technology vendors, or to pursue a ‘best in breed’ solution that offers specialized functionality for BEPS Pillar Two compliance.
 

Key considerations in this decision-making process include the overarching Finance IT strategy, the availability of knowledgeable resources for system integration and the complexity of the group’s structure, which influences the intricacy of GloBE rule application and local legislative compliance. MNEs must evaluate potential digital tax solutions against a spectrum of criteria: Do they fulfill functional requirements such as data transformation, Transitional Safe Harbor (TSH) calculations, Top-Up Tax computations and the ability to handle jurisdictional elections as well as entity-specific tax allocations? Can they support QDMTT calculations and generate tax compliance filings in formats acceptable to local tax authorities, while integrating auditable workflows, stakeholder surveys and providing robust forecasting and planning tools? Does the vendor provide regular updates to the calculation rule set, based on the evolving regulatory landscape? Do these regular updates include both, OECD model rules and localization? How easy is it to integrate a feedback from the BEPS Pillar Two solution to existing systems, such as the consolidation system or the tax compliance management system? Does the solution need to be able to forecast or scenario model?
 

Technical IT considerations are equally critical, encompassing hosting platforms, service level agreements (SLAs), security features, user management and system integration capabilities. Organizational requirements also weigh heavily, with factors like change management, process support and the additional burden on IT personnel playing a pivotal role.
 

Financial considerations extend beyond licensing fees to encompass the total cost of ownership, including implementation, integration, ongoing maintenance and the maturity of the digital tax solution.
 

Risk management factors complete the evaluation, with the reliability of the solution, the vendor’s and implementation partner’s expertise and the product’s development roadmap being essential to ensure a resilient and future-proofed investment. In navigating these multifaceted decisions, MNEs must balance immediate compliance needs with long-term strategic objectives, ensuring that the chosen technology not only addresses today’s challenges but also positions them for tomorrow’s opportunities.

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Chapter 5

Start your implementation journey now

Don’t miss critical tax compliance deadlines. Act now.

As we approach the end of fiscal year 2024, MNEs must gear up to record provisions for BEPS Pillar Two-related top-up taxes, an exercise that extends across both group-wide and statutory accounting practices. The pivotal FY 2024 CbCR, which will inform the Transitional Safe Harbour (TSH) assessments, is due for submission by the end of 2025. Subsequently, the inaugural compliance filings, including the GloBE Information Return (GIR), are expected by mid of 2026. Several countries, including Belgium, Germany, Denmark, the United Kingdom, and Hungary have already begun to implement specific notification and registration processes with actions required in FY24 and FY25. These impending and upcoming reporting and corporate tax compliance obligations necessitate a comprehensive and precise understanding of taxing rights, forthcoming elections and a forecast of top-up tax liabilities. Group tax provisioning is the least onerous of the compliance and reporting obligations on BEPS Pillar Two, and whilst many groups have found a pragmatic solution for managing this, the remaining upcoming obligations and their recurring nature mean that it is now the right time to move forward with designing an agile holistic and efficient solution for all BEPS Pillar Two compliance and reporting.

Summary

BEPS Pillar Two introduces significant changes to global tax compliance. By reassessing operating models, leveraging technology and enhancing efficiency, companies can navigate these new requirements effectively.

Acknowledgements

We thank Alexandra Stürmer for her valuable contribution to this article.

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