Five internal controls to assess with the new global minimum tax

The overarching goals of controls are to enhance an organization’s overall effectiveness and sustainability, enabling the business to better manage complexities and achieve its strategic objectives with clear-sighted confidence and integrity. Controls play an essential role in maintaining reputation and trust, fostering a culture of accountability and transparency within the organization. They also form a critical framework to mitigate a company’s risks, help to deter fraudulent activities, and ensure organizational compliance with complicated and changing laws and ever-changing regulations that can be difficult to manage manually. By providing a systematic approach to all organizational processes, internal controls can help to instill confidence among stakeholders regarding the integrity of the organization’s financial reporting and overall governance.

What’s changing and why?

More than 140 jurisdictions in the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 Inclusive Framework agreed to a two-pillar solution to address digitization and globalization of income taxes. Pillar Two of the solution calls for a global minimum tax of 15% for multinational corporations with group revenues of more than €750 million in at least two of the past four years. The global minimum tax introduces a completely new international tax regime and is the largest coordinated effort to align on a common international tax system.

As of the time of this article’s publication, 30 jurisdictions have enacted local versions of the new global minimum tax regime, with more jurisdictions expected to enact the law in 2024. In 26 of the 30 jurisdictions that have already enacted the new global minimum tax, the law is effective in 2024. Tax accounting teams should re-evaluate and update their tax accounting systems, processes and models now to account for the new law.

The Pillar Two global minimum tax is vast in both its reach and complexity, with rules that define a new tax base and a nuanced formula to calculate minimum top-up tax on a jurisdictional basis, rather than on a legal entity or a consolidated reporting unit basis. Tax department budgets and capacity are already under significant pressure, and companies that are subject to the global minimum tax regime will see a notable increase in their reporting and compliance burden. Impacted companies need to update data sourcing, systems, processes, and controls to manage and account for the new minimum taxes.

In this evolving tax environment, here are five steps for business leaders and their teams to consider when evaluating the impact of the global minimum tax on internal controls:

1. Reassess tax risk

Companies should regularly assess and update their tax risk profile considering changes in tax legislation in order to identify potential key areas of concern and immediate action. Countries and tax jurisdictions are enacting the global minimum tax at different times and each with their own variations on the rules. It is important to consider and assess existing tax laws, as well as complex new laws, the evolving tax audit environment and how controls are executed at the local-entity level. Certain calculations for the Pillar Two global minimum tax (e.g., Qualified Domestic Minimum Top-up Tax (QDMTT) and Income Inclusion Rule (IIR) calculations) may be performed by local affiliates. The processes and highly complex calculations may require enhanced coordination and information-sharing across jurisdictions, as well as enhanced internal controls for those calculations.

2. Consider impacts to the payment process

The global minimum tax is expected to raise approximately $220 billion in tax revenues annually worldwide. Organizations must familiarize themselves with payment instructions for these jurisdictions to prevent interest and penalties due to underpayment in minimum tax payment collections. Under the global minimum tax rules, the entity remitting the tax may be an affiliate of the entity with the low-tax earnings subject to the minimum tax rules. As a result, companies may need to effectuate cross-border movement of funds to satisfy tax liabilities. This increased complexity in funding tax liabilities may require companies to enhance internal controls for tax payments and internal funding processes.

3. Understand legal-entity organization charts

Companies should maintain an inventory of all entities and permanent establishments in the multinational entity’s (MNE) organization chart, including the location, ownership structure and tax nature of each entity. Knowing the details of the organization chart, relationship hierarchies and structures will enable companies to determine the constituent entities in scope of the global minimum tax. While seemingly straightforward, this step may be a challenge for some MNEs with many corporate legal entities, flow-through entities, transparent entities and permanent establishments. Minority-owned entities, non-equity-owned consolidated entities and other unique structures may present additional challenges. Monitoring ongoing changes to the organization chart (e.g., due to changing business needs and internal and external transactions) and the impact of those changes on the global minimum tax calculations will be an ongoing activity. Companies may need to implement enhancements to the processes for tracking and maintaining organization charts, as well as enhanced controls for approval and tracking of changes to organization charts.

4. Evaluate technology changes

Reporting and compliance for the global minimum tax will require companies to extract, transform and store data in new ways. The global minimum tax will also require companies to deploy new technology platforms (from spreadsheets to third-party software) to calculate the global minimum tax for both reporting and compliance processes. Companies may use this opportunity to re-evaluate technology investments and processes across finance, implement data warehouses and enhance vendor selection. All of these changes require companies to consider the impact on the company’s internal control framework and what changes may be required.