This article will look at challenges you face when implementing a solution for Pillar II reporting with a specific focus on data collection.
The Pillar II rules are complex and require you to implement a solution that supports several steps to determine if you need to pay any top-up tax. In general, there are two main steps that you will need to consider:
- Determine if you are exempt under the safe harbor rules (yet to be released), or qualify under the consolidated revenue test
- If not, calculate how much top-up tax you need to pay and in which entity
Both steps include data collection to complete the step. Step one is relatively simple since you likely already have the data available to complete the safe harbor check. It might be based on the Country-by-Country reporting, a Qualifying Domestic Minimum Tax (QMDT) check, or a white list, of the three safe harbor alternatives currently discussed. Since we do not yet know how to calculate the exemption under the safe harbor rules, we will not look deeper into this step.
The second step includes the GloBE calculation and consists of heavy data collection. This article will look deeper into the required data collection for this step.
To calculate the GloBE income, you need to identify all constituent entities in your group and in which tax jurisdiction they reside. In addition, you need to remove excluded entities and break out any P.E.’s you may have in your group.
When you have identified all entities that should be included in the calculation, you need to collect the required financial figures of your entities and P.E.’s as the calculation is based on an entity level. For P.E.’s, you must consider the local tax treatment to determine GloBE income.
Where do you find the required data
First, you must identify which data points are relevant for your group depending on the business, organization, and accounting setup. When you have decided on the relevant data points, you need to identify where you can find the required data.
Depending on your existing ERP and tax accounting setup, the required data is likely retrieved from different sources. In most cases, the data can not be retrieved from one source, instead, you will probably need to find a solution that makes it possible to collect the data from different sources.
Different sources where you may find data
- Legal entity management system
- Your CbC reporting
- Group accounting system
- Local accounting system
- Tax accounting process
- Locally sources outside of a system
In summary, you need to establish a new process to gather data from these different sources efficiently. The process implies that you need a central and a local approach in your data collection process depending on where the required data is accessible in your environment.
Establishing a new data collection process for Pillar II
It would help if you considered a few things when establishing a new process for Pillar II, either manually or by utilizing a tool developed to support Pillar II reporting.
First, you need to make sure you have all entity data and that you can keep track of the corporate structure and how that structure changes over time. Since you file historical data or do calculations during the year, you need to know which entities to include and how to calculate where to pay the top-up tax. To ensure that you control the corporate structure, you need a process to update the ownership changes and additions of new entities regularly. It may be so that you need to utilize a legal entity management system and make sure you can retrieve the required data from this system.
The next step is to identify to what extent you can find the required data in existing solutions such as your group/local accounting systems or tax reporting process. We will highlight some challenges with collecting data from these sources further below.
Since you likely will not find all the required data in the accounting or tax reporting systems, you have to establish a process to collect the necessary data centrally or from your local reporters.
If you need to collect data from many entities, you probably want to utilize a system for data collection to avoid manual email send-outs, copy-paste, and manual monitoring. You should avoid a manual collection process if the reporting is made more than once yearly.
The above means that the tool that supports the overall process must be set up so that you can automate data collection from accounting/tax reporting systems, collect data with manual central input and retrieve data from local reporters. Furthermore, the tool must be able to structure the data and make the necessary calculation of the top-up tax. The tool should also make it possible to review and analyze the calculations and convert the data to the required reporting format.
You need to ensure that you have a process that makes it simple for the local reporters to enter the requested data making them understand what information is required. Since Pillar II reporting is complex, you may not have local experts with deep knowledge of Pillar II.
Challenges collecting figures from local or group accounting system
Challenge 1 – the need to integrate with several accounting systems
You may want to collect figures from your local or group accounting system. Suppose you have only one local accounting system with a central data hub for the group. In that case, this step will be more straightforward (if you have the figures for each entity as determined by the consolidated financial statements for the ultimate parent entity). However, if you have several local accounting systems, you must collect data from each system (if the correct figures are available). This challenge will require collection via either (i) integration with several systems to a central data hub, (ii) establishing a new data collecting process, or (iii) making a manual process to collect data from all accounting systems.
Most groups find it costly and time-consuming to set up and maintain a full integration with several accounting systems, especially if they do not already have the correct figures in these systems. In addition, maintenance is often costly and requires special knowledge to keep up to date; thus, this path is less common.
If you have a central data hub, you have established a process for collecting data for the group. The hub can be expanded to include all the necessary data if you can collect it on an entity and P.E. level and if you have updated information on all entities regularly. The collection of entity data and the group’s corporate structure is vital as you are required to file this information, and it is needed to calculate where to pay the top-up tax.
Challenge 2 – finding data on entity or P.E. level
A benefit of using the group accounting system is that you already have an established process for collecting figures regularly. This regularity may be required if you need to book the top-up tax in the financials and include them in the quarterly reporting to the market. You may also want to do a forecast calculation to establish what top-up tax you need to pay and investigate if you can restructure the group to avoid unnecessary payments of top-up taxes before the year-end.
The challenge with many group accounting systems is that GloBE requires that you collect data on a legal entity level and figures for your P.E.’s and the corporate structure. Not all groups collect figures on a legal entity level or for P.E.’s, which may be included in the “parent entity.” Several legal entities often report in one operating unit, or a legal entity is split up and reported in several operating units. The operating perspective may be challenging in a group accounting system.
Challenge 3 – Consider reporting flexibility
Depending on the complexity of the filing requirements, there may be another challenge in using the group accounting system. Many group accounting systems are inflexible when handling units (legal entities). If you are required to make the complete calculation only for a selection of entities, you may want to restrict the reporting only to these entities. A group accounting system where this is impossible will make the reporting visible and burden all reporters. The need to exclude entities from the GloBE calculation would likely be relevant under the QDMT, the CbC, and the white list safe harbor.
Some group accounting systems can set rules per account and restrict access per user group or for a report. However, suppose one user has entities that should be reported and others that should not be reported. In that case, that user will see the reporting for all entities irrespective of whether they should be reported. In addition, if the entities which should be reported change between years, it will be even more complex to maintain the correct reporting access for the relevant entities.
Challenge 4 – building and keeping the data collection model updated
Another challenge is building up the data collection module that supports the complex calculations needed for deciding the top-up tax and fulfilling the compliance requirements for reporting.
You need to secure resources from the group accounting application managers and the tax people to understand the calculation mechanism. This implies that you have tax people in the group with knowledge about the complex legislation available and that they have time to keep themselves up-to-date with the legislation, adjust the data collection model, plan a project, and test the completed version when it has been changed in the group accounting system.
You also need to update the data collection model in the group accounting system and to keep that model updated with changes in the organizational and business structure and the regulatory environment.
To update the data collection model, you need to secure resources from the group accounting application managers and the tax people. The updating likely requires fine-tuning due to several reasons every year. Thus, you will depend on the people who maintain the group accounting system and must compete for prioritization to make your fine-tuning or new reports in time.
Challenges using the existing tax accounting process
Excel could support the tax accounting process; it could be carried out in the group accounting system or be supported by a specialized tax accounting system.
Utilizing Excel requires a manual process and will need a lot of data input, as described above and below. Unless your group is small, setting up a process in Excel is a manual process that requires extensive maintenance, which could be burdensome.
Utilizing the tax reporting from the group accounting system faces the same challenges as described above. However, you may have already collected some of the required information and established a working relationship with the group accounting people.
You may want to look into how a specialized tax accounting system could support your GloBE calculation if you already use such a system. You face similar challenges here as with the group accounting system and establishing a new process. However, you may have established a reporting collective that knows your tax data collection process, and you do not have to rely on the group accounting people to adjust the GloBE calculation. If you already have implemented a tax accounting system, you may want to look into if this system has the functionality to support your Pillar II process. If you do not have a tax accounting system in place, we believe it is better to set up a new tailored process for Pillar II, since it likely will be less costly, more secure, and support your process better.
In many cases, it will be difficult for a multinational group to build up the Pillar II reporting in an existing system.
Instead, you must establish a new process to support your Pillar II compliance reporting.
When doing so, you need to look at your current data collection process for tax data and establish what data I have readily available, what data you can retrieve in existing processes, and what data I need to retrieve via a supplementary collection process.
The Pillar II calculations are complex, and existing systems may not have the support you need. Therefore, you may want to look at establishing a new process that can provide you with the following support:
- Manage and update legal entities and P.E.s
- Provide you with an efficient and automatic data collection process
- Allow for flexibility to adjust calculations and manage exclusion of entities
- A robust Pillar II calculation engine that is automatically updated to avoid burdening internal resources
- Reconciling several data sources
Blika provides an integrated solution to manage the data collection needed for Pillar 2. At the same time, we have vast experience in international tax law and how to facilitate required processes in a multinational group with the help of system support. We are currently developing a Pillar 2 solution. If you want to keep yourself updated regarding how your peers in the market consider approaching this complex area and how Blika can support your Pillar II process, please get in touch with us for a discussion.
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