1. Respond to transactions and business developments
Due to changing macroeconomic and geopolitical changes, many organizations are making business decisions that involve new products or services, updated business models, acquisitions or dispositions and internal restructurings. Further, uncertain economic forecasts and elevated interest rates have heightened the need for effective cash management along with refinancing and deployment of capital to new focus areas of the business.
Tax accounting and reporting for business changes like these often disrupt routine processes and strain tax teams that are already stretched to meet normal demands. For instance, historical assertions on measurement and realization of deferred tax assets, reinvestment of subsidiary earnings, recognition and measurement of uncertain tax positions, and intercompany arrangements often require additional analysis following business developments and transactions. As elevated inflation and interest rates drive up the cost of capital, companies may need to reconsider realizability of deferred tax assets and reassess reinvestment implications of meeting global cash requirements.
Ideally, tax teams should be involved from the onset when business developments and transactions are being evaluated. Tax teams should liaise with the business and Mergers & Acquisition team now if these strategic decision items — such as acquisitions, dispositions, restructurings, changes to supply chains and operation models, and changes to capital structures and deployment — are being contemplated for next year. That way, the tax teams can help gather the appropriate data points needed to model the impacts to effective tax rates, cash taxes and deferred tax accounts.
2. Monitor changing tax regulations
Tax legislation is evolving rapidly around the world. Tax laws and regulations are often complex and require careful consideration of facts and circumstances to determine the appropriate application of such rules. Adapting to tax legislative changes requires a keen understanding of tax policy and administration and an ability to analyze timely the financial statement implications of these changes.
For instance, the Organisation for Economic Co-operation and Development (OECD) inclusive framework on Base Erosion and Profit Shifting (BEPS) issued Pillar Two Global Anti-Base Erosion (GloBE) Model Rules and related guidance (collectively, GloBE rules). The GloBE rules introduce a new, complex 15% global minimum tax regime applicable to multinational enterprises with consolidated revenues of EUR750 million or more. More than 50 countries and tax jurisdictions are in various stages of legislating the GloBE Model Rules into local law, with some law changes effective on or after December 31, 2023 (i.e., from 1 January 2024 for entities with calendar year-ends).
To be ready for the laws’ effectiveness, tax teams should be taking several steps, including:
- Conducting a BEPS 2.0 impact assessment
- Identifying material jurisdictions that will be focused on for purposes of the group GAAP tax provision calculations
- Identifying data providers and assessing data points needed for the Pillar Two calculations
- Meeting with external financial statement auditors
- Aligning with stakeholders on financial statement disclosures
In addition, legislative activity relating to tax incentives in the form of refundable and transferable tax credits (e.g., the US Inflation Reduction Act, enacted in August 2022) is also on the rise. These incentives serve as a form of financial assistance to businesses, encouraging activities that align with government policy objectives, such as promoting renewable energy, job creation, or research and development. The tax accounting for these incentives is often complex and requires an evaluation of the terms and conditions of each incentive.
As tax teams close out the year, they should assess and evaluate each incentive by the terms and conditions. Even if they’ve already started this process, it’s important to go over all the fine print to understand details and assess the applicable accounting to determine, in particular, if such incentives are accounted for under income tax accounting standards or under other accounting standards.
Additionally, looking ahead to 2024, tax teams must have strong processes in place to ensure they remain aware of tax legislative developments and work proactively to analyze the impact of new laws before they are enacted or effective.
3. (Re)define tax transparency
Finally, beyond traditional financial reporting and tax compliance, multiple stakeholders — including regulators, investors, employees and customers — are demanding greater transparency on tax matters. For example, the US Financial Accounting Standards Board is nearing completion of a project to enhance financial disclosures over income taxes (via ey.com US) that will provide additional details on jurisdictional effects of companies’ tax provisions.
Further, multiple sustainability (or environmental, social and governance (ESG)) reporting standards include guidance on disclosure of tax matters (e.g., total taxes paid, country-by-country reporting, and a company’s strategy on tax matters). While various tax authority and regulator policy agendas include expanded tax disclosures on country-by-country reporting and tax risk management efforts.
Tax teams should be looking at all of these disclosure requirements — both for 2023 and 2024 — and assessing if they have all the data to comply with these disclosures. Now is the time to ensure procedures are in place to monitor the broader regulatory and policy initiatives that are expanding tax transparency and to prepare for increased reporting and public disclosure on tax matters.
