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How tax accounting teams can prepare for BEPS 2.0
In this episode of the Tax and Law in Focus podcast, the speakers discuss necessary steps to ensure compliance, preparedness and success in 2024 and beyond in the BEPS era.
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This episode of the EY Tax and Law in Focus podcast, hosted by Susannah Streeter, delves into the complexities of BEPS 2.0 and its implications for global taxation. Brian Foley, EY Global Tax Accounting and Risk Advisory Services Leader; Jason Yen, Tax Principal in the International Tax and Transaction Services Practice at Ernst & Young LLP; and Jay Wright, Partner, Tax Accounting and Risk Advisory Services Practice at Ernst & Young LLP discuss the monumental shift BEPS 2.0 represents in the global taxation landscape, particularly affecting multinationals with annual revenues exceeding €750 million. They explore the intricate technicalities of Pillar Two, emphasizing its role in establishing a global minimum tax rate of 15%.
The podcast highlights the challenges multinational enterprises (MNEs) face, including adapting their tax operations, data acquisition, and infrastructure in response to these changes. It underlines the importance of technology in smoothing this transition. The discussion also touches on the operational and compliance complexities, the role of accounting in navigating these changes, and the significance of keeping abreast with the evolving legislative landscape globally.
The guests provide insights into the strategic approaches companies must adopt, including re-evaluating corporate structures and transfer pricing decisions. They emphasize the necessity of proactive engagement with external auditors and the criticality of timely data analysis and documentation.
Key takeaways:
- Global tax overhaul: BEPS 2.0 marks a transformative shift in international tax laws, establishing a new, unified tax framework that significantly impacts large MNEs.
- Operational and compliance revamp: MNEs must undertake significant operational changes, focusing on tax operations, data management, and compliance processes while emphasizing robust process documentation and active coordination with auditors.
- Navigating legislative flux: With the evolving landscape of BEPS 2.0, companies need to continuously adapt to diverse global legislative enactments and allocate resources efficiently to stay compliant and proactive.
Susannah Streeter
Hello. I'm Susannah Streeter, and welcome to the EY Tax and Law in Focus Podcast. 2024 is a big year for global taxation changes. More than 140 jurisdictions in the OECD inclusive framework agreed to a two-pillar solution to address challenges in international regimes. Pillar Two will apply to companies with €750 million, approximately $810 million or more in annual revenues, with an aim to achieve an effective global minimum tax rate of 15% in each jurisdiction. For those companies affected, getting ready for BEPS 2.0 is a pretty huge task, and it's crucial to get it right. In EY's 2023 tax risk and controversy survey, Pillar Two was cited as a major source of potential risk for MNEs. Technology will, of course, play an essential role in helping companies to transition smoothly. But significant tax operation evolution will be required for everything from modifying data acquisition and updating process infrastructure to implementing more robust controls. In this podcast, we're going to explore the challenges ahead and set out the steps needed to ensure compliance, optimization, and ultimately success in the BEPS 2.0 era and beyond. And I'm very delighted to say we will be joined by global subject matter experts to help guide you through the fog of complexity. But before I introduce them, please remember, conversations during this podcast should not be relied on as accounting, legal, investment, nor other professional advice. Listeners must, of course, consult their own advisors.I'm very pleased to welcome Jason Yen, Tax Principal in the International Tax and Transaction Services Practice at Ernst & Young LLP. Jason, welcome. Where are you speaking to us today from?
Jason Yen
Hi, Susannah. Thanks for having me. I am in Atlanta today.Streeter
Fantastic. Well, it's great to have you with us. Also, please welcome Brian Foley, EY's Global Tax Accounting and Risk Advisory Services Leader. Hello there, Brian. Where are you?Brian Foley
Hello, Susannah. It's great to be with you. I am in Denver, Colorado today.Streeter
Fantastic. Well, welcome to the podcast. And also welcome, Jay Wright, Tax Partner in the US National Tax Accounting and Risk Advisory Services Practice at Ernst & Young LLP.Jay Wright
Hello, Susannah. Hey, Brian. Hey, Jason. Good to be with you guys again today. I am coming at you from New York City.Streeter
Well, it's wonderful to have you all with me on the podcast today. So much to talk about. But let's first of all focus on the wider picture before we dive into the complexities, how would you describe the magnitude of BEPS 2.0 for the global taxation landscape? What impact are we going to see for MNEs with a revenue of €750 million or more? Jason, what's your take?Yen
Yes, I think this is a complete sea change to the world of international taxation. It's the closest thing we've ever had to a true global tax, where there will be rules that are set by a global tax body that apply universally to basically all large multinational companies. I think about it a little bit like Lord of the Rings, that there's one ring to rule them all. Well, this is like a global tax that sits above all other country-by-country taxes, and will apply on top of all their existing corporate tax regimes that we currently face. So it's hard to undersell this. It is a completely new tax system of the likes that we have not seen.Streeter
So one ring to rule them all. And Jason, to what extent do you think the increasingly digitalized economy and the digital delivery of products and services prompted this sea change?Yen
I think it played a big role. Even though these new rules will apply to all companies, whether they're mostly digital companies or non-digital companies, the system and international tax architecture that we had for over a century was governed under a set of principles way before the digital economy. The new digital economy is what precipitated a lot of governments to decide that they needed to rethink how the existing international tax architecture work. And that allowed for the political space to decide to address issues that haven't been changed or modified or even talked about for such a very long time. I do think that like many of our daily lives that are being transformed by the digital economy, international tax is another one where we're going to see significant changes to all parts of the economy and the world of tax due to the change in the economy from digitalization.Streeter
Yeah, so it certainly is a sea change. Let me bring you in, Jay. How do you think these recommendations will introduce substantial complexities into tax forecasting and reporting processes? Is it going to be a bit of a revolution?Wright
It goes to how these rules will actually be administered. And under the proposed framework, there are really three administered levels. When you think about the way in which a top-up tax is to be determined, assessed, and essentially paid to a taxing authority. And the three charging mechanisms start with a qualified domestic minimum top-up tax, which is really a top-up tax that's assessed at the legal entity level. You then can be subject to the second charging mechanism, which starts with a parent in the MNE group or chart that sits above a subsidiary or legal entity that is subject to or has a low-income tax rate. And that second charging mechanism is referred to as the income inclusion rule, which enables that parent entity to essentially collect a top-up tax on a lower tier, low-taxed constituent entity. And then to the extent that the IR is not available for charging and assessing a top-up tax, a third ability comes into the structure by way of the under-tax profit role, the UTPR, which enables a subsidiary at the lowest level of the MNE group org chart to essentially go upstairs into the org chart to tax and collect top-up tax on other members of the org chart up and out. And so when you think about the pervasiveness and the complexities when considering the three prongs in which this low tax can be collected, it's important to consider how they interact with one another.Streeter
Absolutely. So, given what Jay has outlined there, Brian, what implications would this have for corporate structuring and transfer pricing decisions?Foley
Absolutely. And I would say that it's going to have very sweeping implications for corporate structuring as well as transfer pricing. Fundamentally, corporate structuring involving acquisitions, dispositions, internal restructurings, changes in business, all of those new conditions and circumstances traditionally have been subject to corporate tax and considerations for the existing regime. But with this new international tax, global minimum tax, that is overlaid above the domestic existing taxes, that means that companies are going to have to put a new filter or a new lens on all of their analysis, all of their diligence, all of their planning and strategies around the corporate structuring. Looking at acquisitions, they will have to take into account the implications of adding to existing jurisdictions or adding new jurisdictions to their structure. And that's going to have to be done real time within this new regime once the rules are effective. As it relates to transfer pricing, as Jay mentioned, the starting point fundamentally is book income on a separate entity basis. And as that book income is then aggregated into individual jurisdictions to assess against that 15 % minimum tax, that means that companies are going to have to really think long and hard about their operations and how they're actually applying transfer pricing on a contemporaneous basis. Sometimes transfer pricing is managed at a statutory level. But when group gap income is the starting point for the calculations, companies are going to have to be thoughtful on how they timely account for transfer pricing in all of their jurisdictions, all of their entities in more of a real-time basis.Streeter
So there's an awful lot of analysis that needs to be done. I mentioned in my introduction that in EY's 2023 Tax Risk and Controversy Survey, Pillar Two was cited as a major source of potential risk for MNEs. Can you tell me more about that survey, Brian?Foley
Certainly. This is a survey that we do on a repeated basis, and it has shown trend lines over years. One of the new trends is certainly the impact that Pillar Two is expected to have, and this global minimum tax is expected to have on the larger multinationals. All of which have acknowledged that whether or not top-up tax or additional tax liability is going to result, the administrative effects of simply complying with and reporting on filing tax returns related to the global minimum tax, will put additional strain and stress on already stretched budgets and resource bases within these largest companies. So it will introduce additional risk, it will introduce additional complexities. And companies are preparing now to try to figure out how best to deal with those risks, whether through the expectation of additional P&L tax, cash tax, or simply the compliance requirements of this new regime.Streeter
Now, the OECD has no legal jurisdiction over its member nations. But countries who signed up are adopting recommendations under BEPS 2.0 Pillar Two as law. So Jason, what have we learned from their experience?Yen
It's a great question. I mentioned earlier that this Pillar Two tax is like a global tax. And if you had a global tax, you would have a global tax authority, a global legislator, some global court to resolve disputes. Well, we have none of that because the OECD, as you mentioned, it does not have legal jurisdiction. So instead, all of these rules are being implemented piecemeal by countries. And for the most part, what we're seeing is that these countries are doing their absolute best to implement the rules consistently based on the model rules that the OECD put out. However, at the same time, we're seeing that there are differences, and in many cases, these differences are not perhaps intentional. But when you have a very complex set of rules that you're now translating into dozens of different languages and you're adapting them for local law, specific tax issues, they're going to see some differences, interpretive differences, whether intentional or not. And that's going to mean that eventually there's going to be disputes among countries over how to interpret these rules that may have all stemmed from the same set of model rules but have been implemented somewhat differently. So that's going to raise a lot of challenges, and we're already seeing these differences pop up as countries are implementing. The second thing we're seeing, though, is also that different countries are on different timelines. Many countries have said we're going to implement, but not until 25. Other countries have said we're definitely implementing in 24. Other countries said we're implementing in 24, but at the very last minute, we're hearing some of them may delay at the last minute to 25. Some countries are even saying they may delay to 26 I would say the experience has been characterized by a combination of lack of certainty on the consistency of the rules, but also quite a bit of variability in the staggeredness of the implementation.Streeter
And Jason, what else does this show us about the variations in local legislation?Yen
It does show that there's going to be a lot more work that will need to be done by the OECD to conform these rules and set up a process by which these interpretive differences and transition issues involving staggered implementation can be resolved. Now, whether that's from a robust peer review process or from an eventual multilateral treaty remains to be seen. I do think that it seems the OECD has said that this is less of a priority, these sort of issues, than some of the other issues that they're dealing with. But I think it's got to be elevated and rise up to a higher level of priority because we're already seeing a lot of issues arise to these questions.Streeter
It certainly seems so. And Jay, many other countries are, of course, now at various stages of enacting the rules. So how should companies pace their preparation efforts?Wright
I think as a general or practical matter, as countries go to enact or adopt the proposed framework by the OECD, the idea is that those frameworks lay out similar rules in order to have a streamlined flow of how each country interacts with the other, as far as how they're going to implement the rules. And ensuring things like a domestic minimum top-up tax qualifies as creditable against an income inclusion rule tax. And as a result, I think when you go to enable a process and/or develop a process or series of processes when going to really assess the potential implications of this new tax regime to your organization, you can get ahead of how you suspect once countries enact legislation on a country-by-country basis that there will be a degree of similarities, right? And so when you think about building an initial process, the idea is that we're seeing many companies build a platform derived from the proposed model framework by the OECD. The challenge is to create that flexibility such that when you go to digest the actual enacted legislation versus proposed legislation by country, it's important to make your process nimble. You must be able to flex as you think about digesting differences between the proposed framework and actual legislation to be enacted and made effective by the country.Streeter
So from EY research, which you were talking about earlier, Brian, what have we learned about MNEs preparedness and all the incoming changes?Foley
Well, what we have learned right now is that companies' levels of preparedness are still measured across a very wide spectrum. We have some companies that are really front-running these changes. They have been working on understanding the implications of the rules, the technical merits of the rules, the data consequences of implementing for this new regime, and really being in front of the law changes. We have some companies that have been preparing on this basis for not just months, but in fact, a couple of years since the original model rules were released in December of '21. And the other end of that spectrum is companies that are just getting started. So I think in terms of the learnings, it means that time for preparation is now. Companies should be looking at their legal structures, the technical merits of the rules, doing an overlay of the technical merits of the model rules against their structure, and then monitoring for legislative developments so that they know when the various charging provisions that Jay spoke of earlier actually come into force with respect to their legal structure based on enacted law.Streeter
So it really does seem as though companies need to be constantly scanning the horizon. What else should they be monitoring and analyzing to be as prepared as possible, Brian?Foley
So in addition to monitoring ongoing legislative developments, which is going to be very very key, we expect 2024 to be a very active legislative year with many countries not only addressing issues related to the global minimum tax, but a number of other local country corporate tax issues in their normal regimes.Companies are not only going to have to monitor those legislative developments, they're also going to have to be monitoring business change. And that's everything from not just the corporate structuring issues that we talked about earlier, but also process changes internally, transformational changes around finance and accounting. Many companies are making system changes to improve their financial reporting and accounting systems. All of those things are not only going to have impacts on the traditional business, but in a Pillar Two context, will require companies to think differently about how they can source data, who owns the data, where we will be able to do the calculations for Pillar Two, and who's going to have responsibilities. So it really cuts across people, process, systems, and data as companies are thinking about all the different implications that they need to be monitoring and staying abreast of going forward into next year.