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

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.

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.

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.