BEPS 2.0 is not only a significant development in international taxation, but also a fundamental change in the mechanism for calculating corporate tax for international organizations.
The historical basis for calculating corporation tax was residence or permanent establishment. BEPS 2.0 has now introduced an allocation of profits by markets (first pillar) and an overall minimum tax by jurisdiction (second pillar). In addition, the second pillar Qualified Supplementary National Minimum Tax (QDMTT) allows jurisdictions to introduce a minimum corporate tax rate and thus maintain a competitive tax regime. These modifications modify the calculation mechanism and the data required.
With the start date of BEPS 2.0 typically pushed back to early 2024, implementation by tax authorities will likely be staggered by jurisdiction, giving businesses only around 12 months or less to prepare processes and the systems. In addition, although an organization may not be liable to pay Pillar 1 or Pillar 2 tax, it will need to calculate the QDMTT indirectly, applying similar mechanisms as a baseline.
Data is essential to avoid manual work and reconciliations using spreadsheets. Based on work done by EY, around 150-200 data points are needed for BEPS 2.0, covering financial data, tax data, HR data and business data. Plus, there’s a whole range of local variations and elections to deal with.
The role of business systems
Nevertheless, financial information systems are a good starting point. It is the business system of an organization, such as ERP (enterprise resource planning), EPM (enterprise performance management) and other business productivity platforms. ‘company.
ERP has become the backbone of an organization’s accounting process, where most of the underlying transactions are recorded or accounted for. In fact, most organizations have transformation initiatives with a best practice goal of integrating multiple systems into a single ERP. However, most organizations still need to consolidate multiple instances or legacy systems, or just need a one-time data break. This is where EPM gained popularity.
A recent EY survey of 1,650 global executives found that the C-suite is putting pressure on tax departments to transform and increase their use of technology – 91% of chief financial officers (CFOs) say they transform their tax function.
EPM has traditionally been used for financial consolidation or reporting, planning or budgeting, and forecasting. As these processes provide much of the data required for taxation, it is becoming common to see EPM being used for taxation. The benefits of using an EPM for tax are many – such as reduced manual labor to extract, transform, load (ETL); reduced reconciliation; and improved analytics functionality – but the strongest part is creating a single source of truth.
At the very least, an EPM could be deployed as a staging database even when current data is incomplete, with data captured through an additional pack that can be added to this database.
If ERP and EPM are properly configured, organizations could also leverage these systems to account for income tax; country-by-country reports; environmental, social and governance (ESG); and BEPS 2.0.
The concept of tax data warehouse is not new. However, if we leverage enterprise systems, it has the potential to improve enterprise system ROI and organizations can save on training and increase productivity.
Once the data is centralized, the efficiency of the processes should be evident: starting with group generally accepted accounting principles (GAAP), subject to adjustments to produce local GAAP, then applying permanent and temporary differences to arrive to the tax payable, from which you can make a pillar 2 BEPS or QDMTT calculation.
Diagram 1 shows an overview of how to leverage your company’s reporting systems for BEPS 2.0.
Time is limited. If you’re working backwards from early 2024, allowing a parallel run shift, you should allow at least six months for implementation, which would include design, configuration, testing, and deployment. In EY’s experience, it also takes time to get a budget and approvals. An EY survey found that 81% of Fortune 500 companies plan to invest in tax technology over the next three years and 70% plan to acquire, upgrade or update their ERP systems over the next two years.
If an ERP or EPM transformation initiative is underway, quickly seize the opportunity to integrate the new requirements.
A broad impact assessment is important. This is a review or modeling of assessing the impact of the new rules and whether additional taxes need to be paid and then the impact on accounting and reporting of taxes.
When performing the fiscal and financial analysis, data and systems requirements and gaps should also be noted. By taking inventory of your current technology stack, you can leverage your system investments and processes and accelerate your solution for BEPS 2.0.
From this larger work, a high-level design, roadmap, and most importantly, a budget or business case can be developed. This business case is essential to get on the agenda of the executive suite or board as soon as possible so your organization can be ready for BEPS 2.0.
The views expressed in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.