Global Minimum Tax: 3 Key Priorities for U.S. Multinationals

By Perry Hatch

The OECD Pillar Two framework is a truly landmark moment for global corporate tax. Its goal is to create a global minimum tax, with large, multinational enterprises paying, at minimum, an effective tax rate of 15% in every jurisdiction in which they do business. The complexity of this new tax framework will require multinational companies to transform their tax management and consolidation approach. The key to this will be collaboration, strategic planning, and access to advanced technologies to enable and empower tax leaders and their advisors to meet the new requirements.

While the U.S. continues to debate its approach to ratification of the global minimum tax, significant global economies, including Canada, the European Union, the United Kingdom, and Japan, have already announced they are implementing the OECD Pillar Two requirements. This means multinational companies operating in these jurisdictions will now need to consider and address the resulting impact on their tax strategy and operating model.

For U.S.-based multinationals, rather than wait for the U.S. guidance, tax leaders and their advisors will need to prepare now for how they will meet the requirements of the nations in which they are doing business. Preparation is everything when it comes to managing and responding to requirements as complex and wide-reaching as this new tax framework.

The following are three key priorities when preparing for the global minimum tax:

1. Transforming tax data connectivity

In order to meet the OECD Pillar Two agenda items, entities may have to overhaul their tax data management and consolidation processes.

Existing tax data sources will only hold some—not all—of the required data points for compliance. The remaining data will be in consolidation systems and outside the finance/tax sphere. Enterprise resource planning (ERP) systems likely won’t have the granularity needed to calculate deferred tax liabilities that do not reverse in five years or meet the new ways of classifying tax credits that impact effective tax rates.

Transforming tax data management to enable greater connectivity and centralization will be vital in preparing to meet the new requirements.

2. Adjust tax processes to accommodate country-by-country reporting

Country-by-country reporting (CbCR) is a cornerstone for Pillar Two. Without it, companies will not be able to run safe harbor tests or determine if they’re exempt or alleviated from top-up taxes. 

In addition to tax data, CbCR incorporates information from finance, operations, and even HR. Determining top-line metrics across areas, including corporate income tax, transfer pricing, and employees on full-time equivalency basis, requires jurisdictional data beyond the walls of the tax department. CbCR reporting can be complex, especially when considering M&A activity and restructuring initiatives, which may result in inconsistent approaches to reporting.

Tax leaders and their advisors can support preparation for the global minimum tax through running Pillar Two safe harbor tests. CbCR is usually produced at the end of the year, but BEPS Pilar Two will require organizations produce CbCR earlier. Creating a timeline is a critical preparatory action.

3. Collaborate across functions

Tax reform of this scale and magnitude will have an impact beyond tax leaders and their advisors. Finance and IT departments will play a critical role as they will identify data locations and assist with the data manipulation to support the new global minimum tax regulations.

The CFO’s Pillar Two partner will be the chief technology officer (CTO). The CTO will be accountable for addressing with data management, technology, and change management at the group and regional levels, best practice for coordinating systems, and ensuring the appropriate data is collected, normalized, and rolled up. Finance teams and their advisors will be intimately involved in the orchestration calculations and provisioning. Tax will be present on balance sheets and in close and consolidation processes. And finance and tax teams will collaborate on determining material data, assessing controls, and supporting changes to the close process at the interim and year-end level.

Finance teams and their advisors will also play a key role in advising tax teams on how Pillar Two data will be impacted by accounting standards, like GAAP, IFRS, and local GAAPs, and how they’re applied at the entity, jurisdictional, and consolidated levels. 

ABOUT THE AUTHOR:

Perry Hatch is senior director of global product management at Wolters Kluwer Corporate Performance & ESG.