FinanceTax & AccountingMay 23, 2023

Global Minimum Taxation 101: Exploring the ins, outs, and material impacts of BEPS Pillar Two

In this article, we’ll go through the ins and outs of the OECD’s BEPS Pillar Two, providing you with a solid basis for understanding and a launch point for next steps.

The Base Erosion Profit Shifting (BEPS) Pillar Two is the Organization for Economic Co-operation and Development’s (OECD) reform of the international tax system. On top of several high-stakes material, process, and technology impacts, BEPS Pillar Two Anti-Base Erosion introduces a global minimum tax of 15 percent for each country where a large multinational enterprise (MNEs) operates, if that country has agreed to BEPS Pillar Two OECD’s framework. 

In this article, we’ll go through the ins and outs of the OECD’s BEPS Pillar Two, providing you with a solid basis for understanding and a launch point for next steps. 

Here are the critical questions we’ll address: 

  • What is BEPS Pillar Two? 
  • What is the current status of BEPS Pillar Two adoption by country? 
  • What challenges does BEPS Pillar Two pose to multinational corporations? 
  • A deep dive on BEPS Pillar Two data requirements. 
  • Where should you begin? 

What is BEPS Pillar Two?

BEPS Pillar Two in a nutshell: BEPS Pillar Two is a global minimum tax directive under the OECD. Its goal is to avoid tax erosion and profit shifting in MNEs globally.  
How will it achieve its goal? Impacted MNEs must pay a minimum effective tax rate of 15%  in every country they operate (if that country has agreed to BEPS Pillar Two.) MNEs, as in the parent company or group, with effective tax rates below the minimum in a jurisdiction will be required to pay a top-up tax.  

Who is impacted?Large multinational enterprises” are defined as organizations that have consolidated group revenue over 750M EUR / 868M USD. Approximately 8000 MNEs will be impacted by BEPS Pillar Two. The OECD expects a global tax collection of over $220 billion USD

When does it begin? BEPS Pillar Two is expected to begin in some jurisdictions for accounting periods starting on or after January 1st, 2024. 

Are there any ways to simplify BEPS Pillar Two requirements? There are two ways to be relieved of some BEPS Pillar Two obligations

  • Transitional Country-by-Country Reporting (CbCR) Safe Harbor: Temporarily excludes MNEs operating in lower-risk jurisdictions from the top-up tax. One of three tests must be passed to qualify: the de minimis test, simplified ETR test, or routine profits test.
  • Simplified Calculations Permanent Safe Harbor: Permanently allows an MNE to reduce the number of complex calculations required or perform simplified calculations instead. Again, corporations must pass one of three tests: A routine profits test, a de minimis test, or an effective tax rate test. 
Global Minimum Tax
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The current status of BEPS Pillar Two adoption by country 

While 142 countries have agreed to the framework, BEPS Pillar Two will come into effect on a country-by-country basis. Countries aren’t all on the same page yet, but they will be soon. At the time of writing, 27 countries are in the process of enacting regulations. The EU, South Korea, and Japan recently published directives for adoption. The Americas and the rest of Asia Pacific are expected to follow shortly.  

Here is the status of BEPS Pillar Two for countries that have green-lit enforcement: 

 On track to enforce in 2024

 Intent to enforce by 2024

 Intent to enforce by 2025

South Korea
New Zealand
 Hong Kong 

Source: KPMG 

For MNEs in countries that have yet to announce BEPS Pillar Two enforcement, like the US, we suggest carefully watching how companies from early adopting regions handle BEPS Pillar Two, the challenges they face, what enforcement looks like, and how countries react. It will be helpful in developing your tax reporting program when your time comes.  

What challenges does BEPS Pillar Two pose to multinational enterprises? 

Applying a 15% tax may sound straightforward, but it presents several operational complexities that corporations should be aware of as they kick off their new tax reporting journey. Specifically, we see the following changes as the biggest hurdles to meeting BEPS Pillar Two requirements:

1. Material impacts: In instances where top-up taxes apply, companies will have to pay out more to regulators or revisit their global structures, value chains, and the location of their activities in order to mitigate material impacts. The potential tax impact could be significant, increasing cash tax costs and reducing earnings per share. 

2. New financial statement disclosures: MNEs will have to indicate the jurisdictions that have potential exposure to top-up tax in their financial statements. This means they’ll have to prepare by running calculations to determine whether top-up taxes are needed, what the amount will be, and add this to their existing financial close process.  

3. Data management: BEPS Pillar Two calculations require companies to pull data in from over 250 new sources, per entity, across multiple countries. Collecting and normalizing this data will be challenging for corporations that use different systems regionally.  

4. Process change:
Filing impacts companies at the group level, which means that financial close and consolidation processes must adjust to accommodate new data requirements. What’s more, BEPS Pillar Two will require a degree of change management. Employees will have to receive education and training on new processes, systems, and the regulation itself.  

5. Tech changes: ERP systems aren’t robust enough to support the complexity of BEPS Pillar Two. MNEs should carefully consider their global tech stack. We recommend implementing a CPM solution, like CCH Tagetik Global Minimum Tax, that can manage all impacted processes across the enterprise, namely the close, consolidation, and provisioning for BEPS Pillar Two. 

6. Connecting finance and tax: Tax and finance departments have historically been siloed, but BEPS Pillar Two requires these two departments to work closely together with open lines of communication, shared data, and integrated systems.  

7. Limited time to prepare: Companies have less than a year to report tax positions in statements — which also means they have less than a year to financially prepare, adjust their processes, and refine data processes.  

8. Regulatory changes: Different nations will take different approaches to BEPS Pillar Two, and many companies are afraid to start the adoption process in case more changes come down the line. An agile approach to tax reporting is required. 

9 Strategy: Going forward, companies will have to make decisions based on minimum tax provisions, such as determining where to build factories or side operations to minimize or manage material impacts. Tax will be strategically incorporated into decision making from here on out.  

A deep dive on BEPS Pillar Two data requirements

A recent FSN & Wolters Kluwer webinar explored the impacts of global minimum tax and broke down three ways data management under BEPS Pillar Two will impact existing processes. 

New data requirements 

BEPS Pillar Two filings will draw on 250 new non-financial data points per entity. So, if your organization has 200 entities, that’s over 50,000 new data sets that you need to pull into your systems. Going forward, tax will have a presence in your financial close, quarterly statements, and on your annual report.  

Here are just some of the data points MNEs will be responsible for managing: 

blog img tax

Effective tax rate (ETR) + constituent entities 

Unique to BEPS Pillar Two is the need to understand constituent entities, which differ from legal filing entities, and the need to calculate your effective tax rate. Corporations must add the effective tax rate formula, which requires the 250 data points mentioned above when creating financial statements.  

Global calculations and impacts on consolidation 

Pillar Two’s global calculations are complex because local or in-country organizations must collect information and send it up so that you can perform consolidation at the top. As a result, global consolidation processes will have to change to accommodate tax where it didn’t have to before.  

Where should you begin? 

Collecting and normalizing the data required to calculate BEPS Pillar Two liabilities will require a data management overhaul. And transforming your tax and consolidation processes will take time.  

The first step to PEPS Pillar Two preparedness should be to run an impact assessment.  

Consider the following questions: 

  1. What entities in your business are subject to BEPS Pillar Two? 
  2. Are any jurisdictions eligible for safe harbor status?  
  3. What will the approximate cash impacts on your corporation be? 
  4. What are your “at-risk” jurisdictions for top-up tax? 
  5. How will you pull data in from multiple new sources?  
  6. Can your current systems accommodate new calculations on large data sets? How long will it take to produce results? 
  7. What does the BEPS Pillar Two workflow look like? 
  8. What governance measures will you need to implement to ensure data accuracy? 
  9. Can you easily adjust your tax and consolidation processes to accommodate future BEPS Pillar Two updates and rule changes? 
  10. Can your current technology support BEPS Pillar Two’s complex requirements and quick adoption or should you consider implementing a new solution? 

Ease into the BEPS Pillar Two Transition —fast — with CCH Tagetik Global Minimum Tax

By directly connecting BEPS Pillar Two data with consolidation, our solution harmonizes the new tax process across local closing and group consolidation. With these processes fully aligned, you’ll meet BEPS Pillar Two reporting needs while being able to assess its material impacts.  
Learn more about CCH Tagetik Global Minimum Tax > 

perry hatch
Global Product Leader at Wolters Kluwer Corporate Performance & ESG

Perry Hatch, is Senior Director of Global Product Management at Wolters Kluwer Corporate Performance & ESG. She directs and manages a large global team of specialists providing support to deliver direct and indirect tax solutions to enterprise and mid-market corporation. 

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