As a CFO, you are likely already aware of Pillar Two and the significant global tax changes it brings. However, it is imperative to understand this is one of the most fundamental changes United States multinational entities have seen in years. This change will not only impact your organization's taxes, but it could also substantially impact your company's IT accounting, finance and other major business operations.
With the implementation deadline looming at the end of the year, it's critical to have a serious discussion with your tax director about the upcoming changes and how your company should prepare. Putting plans for implementation into motion as soon as possible is vital, as a lot of work is required for compliance, and waiting until the last minute will undoubtedly be a headache. In short, it is essential to be proactive in preparing for the changes brought about by Pillar Two and to ensure that your tax department is adequately equipped to handle the transition.
The Background of Pillar Two
It's important to understand that Pillar Two is part of a larger initiative to update international tax laws for our increasingly digitally interconnected era. As part of its framework, the Organization of Economic Cooperation and Development (OECD) developed a two-pillar approach to address tax avoidance issues, enhance international tax rule coherence and encourage tax transparency.
Pillar One aims to redistribute taxing rights for very large multinational entities; however, the technical work for that section is still underway. Pillar Two strives to ensure income is taxed fairly and appropriately by enforcing complex rules. These rules — which reform the international tax system — introduce a global minimum corporate tax rate of 15% for large-scale multinational entities whose consolidated group revenue exceeds EUR 750 million.
It seeks to achieve this by the operation of two mechanisms:
- A Subject to Tax Rule (STTR)
- The Global Anti-Base Erosion (GloBE) rules.
Implementation for Pillar Two must be completed by the end of the year, as the change goes into effect on Jan. 1, 2024.
Preparing for Implementation
To ensure compliance with the upcoming changes, your organization must begin the implementation process as soon as possible. The road to compliance is complex and requires vast and diverse amounts of data, which makes working with a trusted international tax professional a must. Given the intricate and massive amounts of work, as well as the legalities involved, partnering with a reputable professional can give your organization the necessary expertise to navigate the new regulations successfully.
In addition to the complexity of the compliance process, another critical reason to begin Pillar Two implementation early is that it requires a country-by-country analysis. Suppose your organization conducts business in multiple countries. In that case, you will need sufficient time to analyze each of those jurisdictions against your revenue to determine which, if any, applies to the change. Waiting until the last minute to start this process would be detrimental — beginning early, however, can help ensure your organization is well-prepared and avoids the risk of non-compliance.
As your organization begins the implementation process for Pillar Two, it's critical to work with your international tax team to conduct an eligibility analysis to determine which tax jurisdictions apply to your organization and evaluate which data needs to be collected. In addition, organizational leaders must test their current technologies and capabilities to ensure compatibility with the new regulations. Educating and training relevant employees on the new regulations and communicating the changes to all stakeholders is essential for transparency.
The Silver Lining
While many organizations may not be eagerly anticipating the implementation of Pillar Two, it's important to remember that it's not all doom and gloom. Many countries will likely reinvest and strengthen non-tax factors or improve incentives, such as research and development, to remain competitive and attract international business.
For instance, Singapore has recently announced its implementation of Pillar Two, and government leaders are taking the opportunity to review and update the country's broader industry development schemes. These efforts aim to maintain Singapore's competitiveness and attractiveness as a destination for international business, even as the tax landscape continues to evolve.
In addition, certain tax incentives might be possible under Pillar Two and need to be identified on a case-by-case basis.
At CBIZ, our international tax, accounting and IT experts stand ready to assist you with a comprehensive understanding of the Pillar Two rules, assess the impact on your organization and work collaboratively with you to develop a customized approach to ensure future compliance. Contact us today.
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