In the world of Finance, we find ourselves in a remarkable era filled with unprecedented opportunities to transform the finance function, overhaul systems, and elevate our capabilities. Revolutionary advancements like Cloud computing/Software-as-a-Service, Automation, and Artificial Intelligence/Machine Learning are reshaping businesses and functions, including the Office of the CFO. Yet, this exact surge in digitalisation has brought with it a pressing compliance challenge for Finance; one that has significant implications for our colleagues in the Tax department.
In 2021, the Organisation for Economic Co-operation and Development (OECD) introduced a two-pillar regulation under the Base Erosion and Profit Shifting (BEPS) initiative.
This regulation is designed to address the complex tax challenges arising from the digitalisation of the economy. Its primary goal is to ensure that multinational enterprises (MNEs) with global revenue exceeding EUR 750 million are subject to a minimum tax level on income earned in each jurisdiction they operate in. This ambitious move has a far-reaching impact, affecting over 8,000 MNEs worldwide.
More than 130 countries have come together to implement a minimum corporate tax rate of 15% in an initiative aptly referred to as “GloBE” (Global Anti-Base Erosion). By 2024, over 27 countries will have enacted this regulation, with the rest expected to follow suit in the coming years.
Beyond the potential tax implications and the weight of staying updated on local regulations, these new requirements pose significant challenges across the business landscape that need to be addressed within a tight timeframe. Overcoming these challenges and ensuring compliance necessitates an increase in collaboration among various departments. Challenges include:
- Data – The new landscape demands data from diverse sources, including ERPs, forecast systems, asset registers, Human Resource, and entity management systems. Managing this influx of data will be a pivotal task.
- Collaboration – The journey to compliance involves a wide spectrum of functions, spanning Finance, Tax, Human Resources, and IT. Cross-functional collaboration efforts of across these functions is vital for success.
- Business process change and education – Adapting to the new data requirements will require adjustments in Financial Close, Consolidation, and Reporting processes. Closer collaboration between Tax and Finance departments is imminent, marking a significant shift in their working relationship.
- Technology – Existing systems and applications may struggle to keep up with the increasing levels of complexity such as the ability to accommodate greater data volumes, provide enhanced visibility in reporting and planning, to foster collaboration, and establish standardisation.
As with any significant regulatory change, the keys to success lie in change management, process optimisation, education and governance. These factors will play an instrumental role in making the transition to the new reporting requirements smoother.
Another factor to consider is the existence of advanced enterprise performance management (EPM) solutions. These solutions are designed to seamlessly integrate with existing financial and tax systems, thus supporting compliance with reporting requirements. Additionally, they offer a wide array of functionality, including modelling and analysis, tax provisions, and country-by-country reporting. Effectively, modern EPM solutions empower organisations to gain a comprehensive understanding of the impact of Pillar 2 regulations across all their entities and jurisdictions and are capable of addressing the complex demands of Pillar II reporting.
They achieve this by introducing automation across various critical calculations, such as:
- Transitional and Permanent Safe Harbour analysis
- Assisted GloBE Income or Loss calculation
- Assisted Adjusted Covered Tax calculation
- ETR (Effective Tax Rate) and Top-up Tax calculation and allocation
- IIR (Income Inclusion Rule) Allocation
- UTPR (Undistributed Taxable Profit) Allocation
- Reporting outputs
- Country-by-Country Reporting
Considering the formidable challenges posed by these new requirements within tight timeframes, selecting and implementing the right solution is key. Such a solution will empower your organisation to:
- Collect, aggregate, and securely store the data necessary for these intricate calculations
- Efficiently map, manage, and align data
- Forge connections between tax and consolidation, automating essential processes and calculations
- Generate the required reports
- Access data and conduct scenario analyses to inform strategic decision-making
Together with BDO, inlumi has built an Enterprise Tax Reporting solution that provides functionality for Pillar 2, Tax Provisioning and Reporting, and Country-by-Country Reporting (CbCR). The solution is built as part of OneStream’s Intelligent Finance Platform. It is fully validated and supported on an ongoing basis by the BDO global network ensuring any changes to interpretation of the Pillar 2 legislation or reporting requirements in all jurisdictions are automatically updated in the solution.