The Change Is Now: Pillar Two Forces Transformation for Finance Leaders

When the Organization for Economic Co-operation and Development (OECD) introduced the Pillar Two model rules, it fundamentally changed how companies will calculate, pay, and report taxes on a global scale.??

Pillar Two enacts a minimum tax rate of 15% on multinational companies with at least €750 million in revenue for the parent company in two of the four fiscal years preceding the tested fiscal year1.?

To date, 135 countries and jurisdictions have agreed to implement the Pillar Two rules, with some going into effect on January 1, 2024. Each country is responsible for developing and passing its own legislation, so the rollout will be incremental, adding to the complexity. Early adopters include Japan, South Korea, Switzerland, and the United Kingdom.?

The new rules are complex—dependent on how and when jurisdictions implement them and the structure of corporate entities that reside there. There are three ways tax is calculated:?

1. If the effective tax rate in a jurisdiction is below 15%, the jurisdiction may impose a qualified domestic minimum top-up tax (QDMTT).??
2. Absent the QDMTT, the income inclusion rule (IIR), which imposes tax on the parent entity, may apply.??
3. If no QDMTT exists and none of the low-taxed entity’s owners are in a Pillar Two jurisdiction, the undertaxed payments rule (UTPR) serves as a backstop. It complements the IIR, allowing any Pillar Two jurisdiction in which the group entity operates to impose the top-up tax.?

Multinational companies will need to prepare for each of these rules. Preparation includes the management of increasing data needs, the calculation of complex jurisdictional tax liabilities, and the preparation of multijurisdictional financial and tax reporting. For example, companies must present profit and loss statements in local currencies, regardless of the legal entity’s functional currency, and must present it excluding Financial Accounting Standards (FAS) 52: “Foreign Currency Translation” gains and losses.??

While the OECD has provided several transitional safe harbors that may delay the impact of the Pillar?Two rules, spinning up the data, expertise, and processes needed to address calculation and reporting requirements will take time.??

Discover more here and learn more about Deloitte’s Pillar Two Advisory Services here .?

The Need to Transform Finance?

Pillar Two rules fundamentally alter how internal Finance capabilities will engage with each other. Tax teams might present the challenge, but fully cross-departmental teams will likely be the ones to address it.??

That is because the scope is massive. CFOs and tax leaders may be challenged to evaluate the potential impact of, and exposure to, Pillar Two rules across a company’s international footprint. Operationalizing Pillar Two and weaving it into the daily fabric of business, may require strategic, bold new thinking from a host of areas but driven by Tax teams.? ?

Finance transformation is a foundational part of the Pillar Two journey. And, it starts with the granularity of legal entity data needed.?

Data Needs Accelerate Rapidly?

Complying with Pillar Two will require companies to collect and analyze substantively more data. Estimates suggest more than 150 core data points will be required for each legal entity. This includes accounting data (e.g., trial balance accounts, ownership-based data, and transaction analyses) and tax reporting data (e.g., breakdowns of current and deferred tax workings, transfer pricing adjustments, and controlled foreign corporation taxes). Company and human resources (HR) data will also come into play: company names, taxpayer identification numbers, jurisdictions, activities, ownership, number of eligible employees, payroll, fringe benefits, and more.?

Many organizations hold a fraction of this data today or lack the visibility to where the data lies: whether in their enterprise resource planning software (ERP) or sitting on the hard drives of employee’s computers. It will be essential for Finance leaders to understand and document the definitions for each of the data elements and to interpret these definitions for their groups. Finance leaders will need to know where data resides and how to access it. They will need a plan to address gaps and consider opportunities for increased data accuracy, automation, and improvement of tax positions and planning.?

Ultimately, Pillar Two reporting will require a transparent data model that drives the calculations and meets reporting requirements. Diagnosing the current state of data and modeling baselines will be critical to creating new process road maps.?

A Focus on Process and Technology?

Significant updates beyond data management and governance may also be needed. Pillar Two imposes new calculations and reporting obligations that may require businesses to implement appropriate systems (Pillar Two calculation engine) and processes to identify, gather, and process the required data. This includes highly complex rule sets that could altogether lead to a need for new data transformation capabilities.??

ERP-specific impacts and considerations for Pillar Two might include setting up additional ledgers and extensions, along with required master data like local charts of accounts. Fourth currencies and clean company code reporting may be needed. Many companies currently have, or are planning to have, secondary or local ledgers for their statutory reporting and accounting. Local tax calculations may already be happening in these local ledgers that can be used for Pillar Two. The key design decision is often where Pillar Two calculations will occur: In a new ledger in the ERP, a data lake, a calculation engine, or a reporting tool/system.?

An Opportunity for Controls Modernization?

As part of any transformation, there is typically a consideration of risk, controls, and governance. While new regulatory requirements will likely necessitate a review of policies and related controls to determine whether they are still relevant, this also may be an opportunity to modernize and transform controls. This can be accomplished through the use of automated tax compliance systems and/or bespoke automations, which can both streamline and automate the control environment. Governance procedures will need to be established and aligned with stakeholder departments over the use of these tools and the related data.??

The Skills to Perform?

Talent may also need to evolve. Finance leaders may need to make the decision to build, buy, borrow, or “bot” the skills and knowledge required to coordinate and execute Pillar Two reporting. Keeping talent engaged, while realigning to new missions, is critical to success and may require a holistic look at the roles and reporting structures required to support new processes. Ultimately, enduring human capabilities like storytelling, risk escalation, partnering, critical thinking, problem solving, and adaptability often drive the path forward.?

Given that many organizations may not be fully equipped with these capabilities, CFOs will be faced with the following consideration: Building in-house capabilities or outsourcing. As with any service delivery model consideration, there are trade-offs to be considered, weighing the benefits of an in-house Pillar?Two capability against the up-front investment of developing processes, technologies, and upskilling of talent.?

?

Next Steps?

Impact assessments and diagnostics are just the tip of the Pillar Two iceberg.?

Finance leaders should:?

1. Be prepared to guide their companies through the changes. A successful transformation journey will likely include key stakeholders from across the C-Suite. Roles outside of Tax—those in accounting, finance, HR, information technology, legal, investor relations—should be invested in the work, factoring Pillar Two into business decisions and strategic planning.?
2. Seek to understand the full scope of the impact on Finance by coordinating with their Tax colleagues, while taking the opportunity to reconsider their overall tax strategy, including legal entity restructuring and tax-planning considerations, factoring in the ramifications of Pillar Two.?
3. Consider a realistic look at their current capabilities at global, country, and jurisdiction levels to identify data, process, and reporting gaps to develop potential mitigation strategies.??

It is likely that organizations have already started to explore new or enhanced technology and processes to meet compliance and reporting requirements for 2024. This work should continue with an eye towards Q4 and year-end returns. Detailed plans to prepare for first-year impact by IIR, UTPR, and QDMTT—in conjunction with processes to facilitate real-time data capture and reporting—can set companies on a solid footing for the future.?

Looking beyond 2024, flexing the organization to plan for the Pillar Two requirements will likely require substantive investment, resource reallocation, change management, and coordination across multiple disciplines. Finance leaders should consider beginning their transformation journey today. Companies that can take a strategic, measured, and long-term approach to the changes can effectively prepare for navigating the road ahead.???

Learn more about how Deloitte can help you navigate your Finance Transformation journey and help you address Pillar Two regulations .?

Citations?

1. Deloitte, “Navigating pillar two and global tax reform .” Harvard Business Review. March 18, 2024??

This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.?

?

About Deloitte?

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about ?to learn more about our global network of member firms.?

Copyright ? 2024 Deloitte Development LLC. All rights reserved.?

Brad Ford Cassidy Carter Jonathan Turka

#pillartwo #pillar2 #tax #oecd #CFO #financetransformation?