In the words of Benjamin Franklin, “In this world, nothing can be said to be certain, except death and taxes”. Few would challenge the permanence of this statement. Even now, digital evolution has created new pillar 2 taxation challenges for companies – many of which are rooted in fundamental data challenges. I’ll get to the data impact momentarily. First, let’s level set on the expectations of standards proposed for international taxation and related jargon.
Recognizing the problems
The continued actions of corporations exploiting mismatches between different international tax systems has led to domestic tax base erosion and profit shifting, or “BEPS” for short. Unsurprisingly, developing nations with higher reliance on corporate income tax suffer disproportionately. Business operates internationally, so governments must act together to tackle BEPS and restore trust in domestic and international tax systems. According to the Organization for Economic Co-operation and Development (OECD), BEPS practices cost countries 100-240 billion USD in lost revenue annually, equivalent to 4-10% of the global corporate income tax revenue.
Working in the OECD/G20 Inclusive Framework on BEPS, over 135 countries have agreed to implement 15 Actions to tackle tax avoidance, improve coherence of international tax rules and ensure a more transparent tax environment. The collaborative international effort also looks to address tax challenges arising from the digitalization of the economy through a two-pillar solution. The second of these pillars, aptly named Pillar 2, seeks to establish a level playing field by setting a global minimum corporate tax through a set of interlinked model rules.
Setting the standards
Pillar 2 stipulates a 15% global minimum tax rate through introduction of primarily two interlocking rules, the Income Inclusion Rule (IIR) and the Under-Taxed Payments Rule (UTPR), collectively referred to as the global anti-base erosion or “GloBE” model rules. Under the IIR, where an entity’s effective tax rate in any jurisdiction is below 15%, the ultimate parent entity is liable for a “top-up tax” to bring the rate up to 15%. As a backstop, the UTPR can be applied by way of a denial of a tax deduction for payments which give rise to income taxed at less than 9%.
The Pillar 2 model rules apply to all public and privately held multinational groups with consolidated revenue over €750m, with only some exemptions, for example government entities or non-profit organisations.
Each country must enact its own legislation to apply the Pillar 2 rules. A few countries have already enacted legislation while many have publicly announced plans to introduce legislation based on the Model Rules. For example, EU member states have unanimously adopted a directive requiring them to introduce the rules by 31 December 2023. Implementation timelines for Pillar 2 in USA however are still to be confirmed. The 2024 election may prove critical to whether legislation is possible in 2025. The prospects of double tax on US multinationals and revenue leakage could create significant pressure for lawmakers to rapidly implement tax changes.
Mounting pressure from all fronts
Ok – that’s quite a lot to take in, so let’s focus on the implications and extract ourselves from the intricacies of the rules. Firstly, there’s no shying away from the ask given the mandated conversion of the Pillar 2 rules into local laws. Secondly, the regulations are complex, hard to navigate and require an in-depth examination to apply them correctly. Unfortunately, readiness for Pillar 2 must be managed alongside other mounting tax demands, such as the transition to digital tax filings and real-time reporting, and ongoing business challenges including driving resiliency in volatile international markets, cost pressures, supply chain disruptions or war on talent.
Needless to say that preparation is key as the clock ticks on to enact the rules across global jurisdictions. Peeling back the layers, many of the challenges to determine tax liabilities and successfully operationalise Pillar 2 requirements revolve around data – be that sourcing, access, collection, transformations, and lineage – as is so often the case with new regulatory and compliance mandates.
Why are there challenges with Pillar 2 data?
Feedback from global studies run by the Big 4 accounting firms estimate that there are approximately 150 data requirements per entity that require collection, preparation or calculation for Pillar 2 compliance. The high number of critical data elements stems from a few immovable assertions in context of Pillar 2, such as considerations of non-financial data sources, and a heightened need for more granular information.
Common Pillar 2-related data challenges many of our multinational customers face include:
- Extensive and complex data consolidation: Enterprises must harvest data from a wide range of disparate data sources including asset registers, core accounting and forecast systems as well as enterprise resource planning (ERP), human resource and entity management systems. This is no easy feat and is exacerbated by a complex entity structure and plethora of financial and non-financial systems.
- Limited information and granularity: Existing repositories are likely to only provide half of the required data points. The remaining data is more complicated to source because it includes data points outside the usual Finance and Tax sphere. Lack of data granularity in ERP and other systems will create significant data gaps and the need for ‘new data’. Consider for example, new data tracking requirements such as deferred tax liabilities that do not reverse in five years, or new ways of classifying tax credits that impact effective tax rates.
- Mapping data requirements: Aligning data requirements to model rule calculations is no easy feat. Consider the Pillar 2 rules that make it necessary to report on a country rather than entity basis, while various currencies need to be converted into the local statutory currency where the effective tax rate is being calculated. There is also added complexity regarding the different legal definitions of entities between jurisdictions.
- Varying calculation levels: Tax calculations must be executed at various levels within a group. Consider for example data collection at entity level, effective tax rate calculation at jurisdictional level and tax payment at the level of a group entity. There are also complex interactions between domestic and global tax rules and computation such as calculation of GloBE income or adjusted covered taxes of a constituent entity.
Given difficulties to implement GloBE processes on the same timetable that countries are implementing Pillar 2 model rules, many businesses may continue their reliance on Country-by-Country reporting as referenced under the transitional safe harbor provisions. These fallback measures may provide some temporary breathing space to develop an effective data and reporting strategy for Pillar 2.
How can Alteryx help organizations deliver Pillar 2 requirements?
As discussed earlier, timing as to when Pillar 2 rules will take effect is varied across entities, though EU member states are bound by the regime from 2024 onwards. Businesses that are committed to meeting their Pillar 2 compliance needs will have already started to assess the viability of their technology capabilities. “The amount of data and the frequency of reporting required by Pillar 2 means that you simply can’t do this data work offline using spreadsheet workarounds. It’s impossible,” says Albert Lee, EY Global and Asia-Pacific Tax Technology and Transformation Leader. The voice of our customers supports this notion.
Many organisations are realizing the benefits the Alteryx analytics platform offers to address data, reporting and analysis needs and deliver against the Pillar 2 compliance requirements. Here are five areas where Alteryx can help:
- Align multiple data sources. Alteryx can simplify the execution of data diagnostics and identify data requirements. For example, does data exist within group systems? Does segmentation align to financial statements and map to the Chart of Accounts? Alteryx also streamlines data access to tax balances and granular data sources, as well as accelerate and control the aggregation of source system data across jurisdictions.
- Monitor GloBE balances. Alteryx can help consolidate data to monitor deferred tax balances at more granular levels closer to real-time. Consider the splits needed between balances unwound in less than five years or more than five years. Alteryx can also schedule workflows to track historical or transferred carrying values, different from accounting carrying values.
- Run forecasts and sensitivity analysis. Alteryx can accelerate scenario analysis outputs covering, for example, tax impact of transactions and cash flow models. With Alteryx’s simulation capability, users can run simulations to assess tax implications across key territories and jurisdictions. Consider for example assessment of tax cost footprints or identifying opportunities for legal entity simplification.
- Run complex GloBE calculations. Alteryx can maintain repeatable data workflows to calculate covered taxes, effective tax rates, substance-based exclusions, and jurisdictional top-up tax calculations. The process for recalculations can be automated with increased transparency on allocation mechanisms.
- Delivering compliance reporting. Alteryx provides compliance assurance by reconciling GloBE reporting to consolidated financial statements, local financial statements, local tax returns, tax transparency reporting and Country-by-Country reporting disclosures. Organisation can deploy Alteryx to maintain transparency of adjustments and carve-outs to mitigate audit challenges.
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We may not know exactly when Pillar 2 rules will take effect across all jurisdictions, but we do know that the new requirements will test the data and analytics capabilities of multinational enterprises. Effective due diligence and preparation is critical, and technological and automation decisions need to be made imminently to address what is fundamentally an abundance of data challenges. Given Alteryx’s strong footprint across the Tax and Finance landscape, delivering Pillar 2 requirements with Alteryx should be seen as a seamless extension of platform with minimum business disruption.
See how WESCO leverages the power of Thomson Reuters and Alteryx to contribute to growth in a complex tax landscape.