BEPS 2.0 is also having a talent impact in that it is creating a whole new set of tax accounting rules. Running tax calculations and managing data has become far more labor intensive than it used to be.
“It’s become a lot harder to find the relevant skillsets in the market,” says Matt Gengler, EY Senior Manager, Intercompany Effectiveness. “And not only is it difficult to hire and retain these people, others are retiring and there’s a lack of people coming into the profession, especially as you start to move away from the tax technical side of things and more into the systems data and automation side, which people aren't as comfortable with. It requires a whole new set of skills.”
Against this background, it is unsurprising that 61% of life sciences respondents agreed that one of the most significant benefits of co-sourcing is that it drives effective talent management, allowing teams to focus on higher-value work, including focusing on data and analytics to drive value for the organization, which in itself can be attractive to tax professionals from the perspective of skills development and pathway for promotion.
The legislative landscape
Life sciences is one of the most stringently regulated sectors and already bears significant regulatory requirements burden. For tax and finance functions, that burden is set to increase significantly through the implementation of the OECD’s BEPS 2.0 project, including both Pillar One and Pillar Two.
A long time coming, many aspects of BEPS Pillar Two – which provide for a global minimum tax rate – became effective for businesses with tax years beginning in January 2024. The TFO survey, which took place in 2023, shows that 95% expect a moderate to significant change to tax and business operations from BEPS 2.0. Those expectations are now becoming a reality as many companies are having to forecast and document their estimated Pillar Two liability as part of the Q1 2024 tax provision process.
“It's the first time that businesses have to include BEPS-related estimates in their financial statements, so there is bound to be uncertainty as to the impact,” says Colleen Sebra, EY Tax Technology and Transformation. “Companies will have done their modeling and leveraged their 2023 numbers under the safe harbor rules, where possible, and thus mitigate any top-up tax issues for now. But the whole process is only going to become more complex in the years ahead.”
“In fact, we are already seeing some data-related challenges in connection with the Q1 2024 tax provision processes,” says Rick Fonte, EY Global Life Sciences and Healthcare Tax Leader. “The transitional CbCR safe harbor calculation is a good example, as running the calculation using 2023 data as a proxy is a lot different than running it based on a 2024 full-year forecast.
“Historically, CbCR [country-by-country reporting] was information reporting only, and most companies don’t have a set process to forecast this data, particularly intercompany revenue and profit forecasting which would require forecasting by legal entity. So, there is a lot to do to get to a forecasted CbCR calculation,” adds Ana Maria Romero.
“This lack of robust legal entity forecasting capability will also result in broader challenges in connection with running the overall GloBE [Global Anti-Base Erosion] calculations, especially as we get closer to year-end.”
As much as skills shortages are going to be problematic for tax functions in a BEPS context, the need for data control and consistency is going to be central to delivering success. And this goes beyond just Pillar Two.
“You’re basically dealing with a third set of books to calculate what your Pillar Two liability is going to be because it's not straight US GAAP, but rather US GAAP with an OECD spin to it,” explains Jill Schwieterman, EY America’s Global Compliance & Reporting Leader, Ernst & Young LLP. “This creates a lot of complexity from a transfer pricing perspective, as that modified GAAP needs to start with the right transfer pricing, which is not necessarily what is in the US books. And so it puts a lot of pressure into getting your transfer pricing right during the year, as opposed to doing adjustments at year-end.”
Another potential issue comes from Amount B under Pillar One, which aims to simplify existing transfer pricing rules and will affect anyone that already follows the OECD’s transfer pricing guidelines. The challenge here is that while it’s in the OECD’s guidelines, it is optional for countries, which has the potential to create all manner of inconsistencies. Another challenge is that there is still pending guidance on scoping that may impact which companies are in or out of scope for Amount B.
Given this scenario, the fact that there may or may not be a treaty in place, and the fact that current status quo transfer pricing might set a return higher than Amount B or lower than Amount B, there are 72 distinct potential outcomes between two jurisdictions associated with distribution returns. This is particularly relevant with regards to the point above on the GloBE calculation requiring parity across jurisdictions for transfer pricing purposes as it not only increases the complexity of potential transfer pricing controversy but also the complexity of the GloBE calculation and potential exposure to double taxation.
BEPS more broadly could present significant risk of controversy. Many life sciences businesses will hope to get advance pricing agreements (APAs) in place because they don't want to deal with the uncertainty that comes with countries taking their own spin on the rules.
Indeed, in the 2024 EY International Tax and Transfer Pricing Survey, 59% of life sciences businesses say unilateral APAs will be very useful to managing transfer pricing controversy over the next three years – more than double the 29% who said so in the 2021 survey.
“It’s important for companies to get a handle on what their exposure to BEPS is, and data is absolutely critical here,” says Gengler. “The reality, however, is that the more data that is required to complete calculations, the more companies are going to struggle. It’s a vicious circle. In order to get an APA in place, for instance, a company will need the data. This is certainly one of the key reasons why tax and finance functions are looking at co-sourcing.”
The role of data, AI and technology
As much as life sciences organizations use advanced and ever-evolving technology to drive the frontiers of healthcare, it’s equally essential that they leverage such technologies in the tax and finance function in order to optimize operations and minimize manual activities, improve quality, drive value through insights, overcome cost constraints and ensure compliance with all regulatory and legislative requirements.
The TFO survey, however, indicates that there is work to be done in this area, with 43% of respondents saying that the inability to execute a sustainable plan for data and technology is the biggest barrier preventing their tax and finance function from delivering its purpose and vision.