No Match Found
Multinational enterprises (MNEs) often rely solely on the tax function to understand and comply with routine tax policy changes. But Pillar Two is anything but routine. It’s unprecedented, with approximately 140 countries agreeing to implement this new global minimum tax regime.
It’s hard to overstate its complexity or the new levels of cross-disciplinary and cross-jurisdictional collaboration needed to comply. Preparing for Pillar Two’s imminent impact will be a disproportionately large endeavor for the tax and finance functions compared to other routine tax legislative changes.
It involves gathering data from different stakeholders beyond tax in different countries that most MNEs don’t currently collect. No single person or function has all the necessary data. Bringing the expertise together to meet the requirements of Pillar Two demands the same rigor for managing change as any major transformation. It starts with setting the right tone from the top, aligning leadership and establishing a central project management office (PMO) to coordinate efforts.
There’s not long to prepare. MNEs could duplicate work and spend excessive time resolving data issues if they fall back on ad-hoc data requests. They’re also at greater risk of inaccurately calculating their top-up taxes.
In simple terms, Pillar Two aims to make sure MNEs pay a minimum level of tax on profits in each jurisdiction in which it operates. It introduces a global minimum effective tax rate (ETR) of 15% on profits through a prescriptive set of rules, using accounting principles as the starting point to determine the amount of top-up tax and the jurisdiction that has the right to collect it.
Under IFRS Accounting Standards, MNEs must disclose information about its assessment of exposures to Pillar Two in its financial statements for annual reporting periods beginning on or after January 1, 2023. MNEs must also report top-up taxes accrued as a current tax separately from financial statements for periods in which the tax is effective. For most MNEs, these legislative requirements may be effective as early as the first quarter of 2024. Therefore, it’s imperative to start preparing now.
CFOs can play a valuable role helping their organization get ready for Pillar Two. But many don’t yet appreciate the size and scale of this new global tax regime or its impact on the workforce. At a minimum, the CFO should expect a significant increase in compliance costs that extend beyond the tax function. And yet now, more than ever, CFOs expect to do more with less. This expectation makes it more challenging to reduce risk, stay ahead of changing regulations, and boost resilience and trust.
The results from our 26ᵗʰ Annual Global CEO Survey illustrate the urgency for companies to rethink their approach to compliance and other business challenges: 25% of Canadian respondents think their company will no longer be viable a decade from now, if it continues on its current path. And nearly half (44%) say regulatory changes will significantly affect their profitability over the same timeframe. But by leaning into a transformation agenda, MNEs can do more than just navigate this disruption. They can build greater resilience and strengthen their long-term viability by developing the capacity to meet the reporting requirements of Pillar Two and other emerging regulations.
Pillar Two is a regulatory disruption that introduces new pressures on the supporting infrastructure of an MNE to meet its compliance requirements. Tax leaders must educate the CFO, audit committee and board on the magnitude of Pillar Two, why it matters to them and their roles in the MNE’s operational readiness. The CFO, in particular, needs to understand the impact of Pillar Two on the global ETR, the financial statements and the compliance costs of the MNE.
A successful Pillar Two transformation requires the CFO to engage leaders within their organization in two important ways:
Set the tone from the top: Different stakeholders in the enterprise need to understand their new responsibilities and make them a priority. It’s unrealistic to treat Pillar Two preparations as a side project. It’s an effort unlike any previous undertaking that needs dedicated resources and an integrated team. MNEs may need to source additional resources, invest in upskilling, license new technology, engage external service providers or a combination thereof to prepare.
A central PMO, managing the operational readiness for Pillar Two, can make gathering the required data smoother and more cohesive. This central team can also play a critical role in intentionally managing the change and considering how best to set the organization up for success in the long run. This includes:
aligning leaders around a common vision and objective
stakeholder mapping, which includes assessing the change impacts on key people and groups, as well as the processes they follow
developing a strategy, plan and communications to engage and enable affected stakeholders
designing and delivering relevant training or knowledge transfer activities
evaluating the overall success of the implementation and compiling lessons learned to apply in the future
A helpful resource is our Pillar Two Data Input Catalog, which identifies more than 230 data points—and the typical owners of that data—MNEs need to track for each of its constituent entities. For example, think about who controls the following information:
Finance: Share and asset transactions, and stock-based compensation expenses and deductions
Legal: Records of transactions, dividend payments, share issuances and changes in ownership structures
Tax: Current and deferred tax rates, and net tax expense
It’s also crucial to engage technical experts in your finance department. Approximately 40% to 60% of the necessary data resides within the enterprise resource planning (ERP) systems. This raises technical questions: how can that data be effectively extracted? And how can your organization electronically collect the remaining data located in other systems or not currently captured?
Your Pillar Two stakeholders will be better positioned to meet your new reporting requirements if an individual is designated to lead, manage and execute the work plan under the central PMO approach. These temporary communities of stakeholders will come together quarterly, at year-end or for purposes of analyzing a transaction, strengthening your ability to comply today and in the future.
Pillar Two compliance requires MNEs to transform how employees in different departments—and, often, different countries—collaborate to collect and share information. Applying the change enablement fundamentals highlighted above to guide your transformation lets you go beyond simply collecting the necessary data to meet this specific global reporting standard.
It strengthens your ability to create intentional, cross-functional teams who can meet these and other emerging regulations, such as Canada’s modern slavery reporting requirements or environmental, social and environmental (ESG) disclosure standards, including the new Corporate Sustainability Reporting Directive (CSRD) in Europe.
These teams will likely find new ways of working together, such as replacing one-off data requests with end-to-end solutions that automatically pull real-time information from ERP systems. Conversations between data owners and compliance teams move beyond asking for information to analyzing and interpreting the underlying data.
MNEs that create this framework accomplish more than simply meeting compliance requirements. They disclose more reliable information while fulfilling reporting obligations and reducing risk.
Now is the time to prepare for the new global minimum tax regime. MNEs with an operational readiness plan are best placed to manage this tax disruption and stay ahead in the wake of this new reality.
Who in your organization needs to be involved in the Pillar Two steering committee? Who will lead it?
How will members of your tax, legal, IT and finance teams understand their role in complying with Pillar Two?
What internal and external resources will you need to meet the ongoing reporting requirements of Pillar Two?