For the tax departments within multinational corporations, the new Pillar Two tax regime will bring a host of new challenges and costs, as well as new reporting and compliance obligations
In 2024, the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two tax regime will go into effect, instituting a global minimum tax of 15% on the profits of multinational corporations that generate more than €750 million in revenue in each jurisdiction in which they operate.
Countries around the world — such as Australia, Japan, the United Kingdom, and member countries of the European Union — are implementing Pillar Two, which means that multinational corporations operating in those countries must soon adhere to new tax rules and reporting obligations.
For multinational corporations’ tax departments, Pillar Two ushers in a host of new challenges, including more complex tax calculations, additional reporting and compliance obligations, a higher risk of tax controversies, and an array of additional costs and other considerations. And yet, according to KPMG research from October, many companies are still wrestling with major decisions about how to comply with Pillar Two requirements mere months before the new tax rules are enacted.
Preparing for Pillar Two
“Pillar Two is going to require significant additional controls and data,” says Alistair Pepper, a managing director in KPMG’s Washington National Tax practice. “Most companies are still working through exactly what this means and what they need to do in order to fulfill Pillar Two reporting obligations.”
KPMG’s research involved interviews with chief tax officers (CTOs) and senior tax leaders from approximately 100 multinational corporations that generate $1 billion or more in revenue, 75% of which operate in more than 25 jurisdictions. Overall, 82% of respondents that KPMG interviewed said they were actively preparing for Pillar Two, primarily by addressing questions about additional staffing and technology, as well as data flows, inter-departmental communications, budgeting, and available safe harbors.
Data is perhaps the most complex component of Pillar Two compliance. Not only must companies have access to consistent data in order to calculate their tax burden under the new rules, but they must also adapt their internal processes, controls, and systems to gather and report data even as the OECD continues to issue clarificatory guidance about how the rules should be applied.
“The new Pillar Two rules are quite extensive and involve hundreds of data points that companies don’t necessarily have access to,” says KPMG’s Pepper. “As a result, we’re seeing lots of groups look at transitional (country-by-country) safe harbors that allow them to defer the full calculation for up to three years, giving them time to fill data gaps and get the additional data they need.”
Pillar Two contains three transitional safe harbors — a simplified effective tax rate, a routine profits test, and a de minimis test — all of which relieve those multinational corporations operating in low-risk countries from having to report full Pillar Two calculations until Dec. 31, 2026. According to Pepper, a majority of KPMG clients will likely qualify for safe harbors in some jurisdictions.
Indeed, while 85% of the respondents to the KPMG survey said they had initiated discussions with upper management about the additional administrative and compliance costs associated with Pillar Two preparation, only 11% had asked for and received the extra budget needed to cover those costs. The three-year extension that safe harbors provide may be one reason Pillar Two compliance costs have yet to be budgeted.
Additional costs: technology and staff
Though Pepper says it is difficult to estimate what the total cost of Pillar Two compliance will be for any given company, the bulk of the additional spending is likely to be directed toward in-house technological upgrades, additional staff, and possible third-party assistance.
On the technological side, Pepper explains, many companies will need to invest in upgrades to their enterprise resource planning (ERP) systems to get the data they need. On top of this, “people will need some kind of Pillar Two calculation engine that takes your income and taxes and tells you whether you are above or below the 15% tax threshold.” Those with jurisdictions below the 15% threshold will have to pay a top-up tax to reach 15%.
Additional staff will also likely be needed to collect and manage the data required for Pillar Two, Pepper says. According to the KPMG research, 57% of respondents from multinational corporations surveyed said they expect to hire additional full-time staff at the junior level to handle tasks related to Pillar Two, and 46% plan to hire extra managerial staff. And 18% said they expect additional hires at the director level, and 4% are looking for a new VP. Just 11% said they are unsure if they will need extra staff at all.
For multinational corporations’ tax departments, Pillar Two ushers in a host of new challenges, including more complex tax calculations, additional reporting and compliance obligations, a higher risk of tax controversies, and an array of additional costs and other considerations.
Multinational corporations are also engaged in a healthy debate about whether to manage Pillar Two requirements in-house or co-source reporting obligations with a third-party provider. According to the KPMG research, 54% of respondents interviewed said their companies are considering co-sourcing their tax function to leverage a third-party firm’s tax expertise and stronger technological capabilities. However, 36% said they prefer to manage Pillar Two requirements in-house to avoid dependence on a third-party provider and its tools. Other costs associated with Pillar Two compliance include a surge in external audit costs (expected by 69% of those surveyed) and a rise in tax liabilities.
For Pepper, however, the most interesting statistic uncovered by the KPMG research is that 27% of respondents said they expect Pillar Two to have no effect whatsoever on their companies’ tax liability, and an additional 57% said they expect their companies’ liability to increase by less than $50 million.
Pepper says that “some people are asking the question: Is Pillar 2 really worth it?” After all, he adds, many companies are going to be put in the position of having to invest in the technology, people, and systems necessary to meet the requirements for Pillar Two, only to report that they do not owe significant additional taxes.
“The biggest companies are fairly well prepared for Pillar Two,” Pepper says. “It’s the small- and medium-sized businesses that are still getting up to speed on what these rules mean and what they need to do from a systems standpoint. It’s difficult, though, because these rules are a moving target and will remain so for an extended period — possibly up to five years.”
In the meantime, Pepper advises those companies still preparing for Pillar Two to:
- determine if and how the company can benefit from safe harbors;
- estimate the impact of Pillar Two on the company’s financial reporting; and
- decide which compliance strategy and model the company should adopt.
Finally, communication with executive management is paramount, says Pepper, because while 73% of the tax professionals KPMG interviewed said they had already discussed the potential compliance and administrative costs associated with Pillar Two, 27% said they had not, or had only discussed it in high-level terms.
“Pillar Two involves more than the tax department,” Pepper explains, adding that the additional costs associated with Pillar Two preparation are going to require support and approval from the top. If the tax department has yet to engage executive-level management about Pillar Two compliance, it should do so now, he advises, because Pillar Two compliance can’t be put on the backburner for much longer without any consequences.