Enrich your wider compliance process by addressing Pillar 2 complexities head on

The introduction of the Pillar 2 rules is expected to result in an increased number of tax returns filed annually by multinational corporations (MNCs). For groups within the rules, there will likely be a number of domestic minimum tax (DMT) returns in addition to an annual GloBE return, each of which will require additional collation and data analysis on top of existing compliance obligations.

This Pillar 2 related increase in annual workload may be the trigger for many to make the compliance operating model changes that they have been considering. This initial pain may give rise to a number of lasting benefits.

What a good compliance process looks like is not a secret. Some of these elements are a must have, such as complying with the law and filing on time. Some, however, are more of a ‘nice to have’, such as proactively managing tax risks, automated data validation, standardisation and efficiency in process, real time insights and governance.

The overlay of Pillar 2 requirements is making some of these ‘nice to haves’ more important, and, at the same time, making the must haves harder, and potentially more expensive, to achieve.

For many groups, compliance processes and outsourcing arrangements focus on getting the right tax expertise for each tax, and each territory, to complete a return. However, increasingly the focus has been on an end-to-end compliance process, from base data all the way through to business insights. After all, the compliance process is complicated and time consuming, so ideally businesses will get more from it than ‘just complying’.

This focus now also includes the below:

Minimising the time spent internally in identifying the data, gathering it and validating it - often in real time. We find that up to 80% of the time spent internally by tax and finance on tax data can be taken out of the process with a modern tax compliance operating model - freeing up valuable time and resources as well as improving quality and efficiency.
A focus on global controls and oversight. Having confidence in returns worldwide, ensuring that transactions and data flows have consistent treatment and messaging, and also having the confidence that everything that needs to be done, is being done.
Ensuring that the huge amount of information gathered globally across territories, taxes and years from the compliance process is available to the business on demand, to bring insight and help make business decisions.

The requirements of Pillar 2 make all of these areas vital, particularly the following:

Pillar 2 compliance and reporting burdens relate to a new tax system which will take time and effort to understand and apply.
These new, local filings will be based on global generally accepted accounting principles (GAAP) data, often not considered at local level. Groups need to be able to get this data at a local level, ensure its quality and be able to reconcile back to local books and records. This is something new, that existing processes will not provide for.
To manage the inclusion of deferred tax calculations in the calculation of the GloBE effective rate, which is different to other tax return requirements and where a group wide deferred tax model is likely to be required.
Data capture systems will not be optimised initially for Pillar 2 related data capture requiring offline manipulation and aggregation.

Taking all this into account, it is no surprise that we are seeing Pillar 2 as a catalyst for groups to revisit their tax operating models. Although some are looking for more short-term, tactical solutions to address the immediate Pillar 2 compliance needs, many others are taking the opportunity to revisit their broader compliance processes. This way, they ensure it is both Pillar 2 ready, and maximises the wider business benefits from a modern compliance approach.

What should you do now? Our view is that MNCs should be proactive in addressing the challenges arising from the new Pillar 2 compliance framework head on:

Document and identify the challenges in the existing end-to-end compliance processes, drilling down to the root causes and creating a plan to address them in a systematic way.
Map-out the way that data is collated and categorised and the time that is taken to do this.
Realistically assess the resources needed to deliver the existing and expected tax compliance and reporting requirements with and without the incremental Pillar 2

Including the outputs from this analysis in your Pillar 2 impact assessment will articulate the incremental costs of Pillar 2 and will help build the case for investing in a modern fit for future purpose compliance process.