BEPS debriefed

All market leaders and financial teams are subject to various regulatory standards. Despite this, regulation was cited as a top industry challenge by CFOs across all sectors. Most businesses have not been affected by BEPS Pillar One, yet the subsets of BEPS, namely Pillar Two and 2.0, are a different story. While strategic tax planning is already a complicated undertaking, it's about to get even more complex for multinational companies facing upcoming changes to tax law under new Base Erosion and Profit Shifting guidelines, or BEPS for short.

BEPS 2.0 Pillar Two took effect in early 2024, imposing new data reporting requirements and additional global tax compliance rules for every multinational business with a turnover greater than 750 million euros. This legislation increases the pressure surrounding already over-stretched tax teams that will now have to collect more data from multiple sources and across departments. Companies that are currently doing business in multiple countries should already be preparing for the new complexities BEPS 2.0 Pillar Two will pose to the tax and reporting process. 

Decoding BEPS, the evolution of global tax compliance 

BEPS is a set of rules and standards established by the Organization for Economic Cooperation and Development and subsequently adopted by numerous countries around the world. The primary purpose of BEPS is to establish a minimum baseline for corporate taxation such that multinational businesses are no longer incentivized to shift profits from higher-tax countries to low-tax nations.

BEPS consists of two broadly defined provisions, which the designers refer to as "pillars." Pillar One pertains to the allocation of business profits to various countries based on actual business activities in each of those nations. In essence, this rewrites the rules pertaining to nexus, opting instead to allocate profits based on the jurisdictions where a company's goods or services are used or consumed. Initially, Pillar One will apply to companies with worldwide revenues of €20 billion or more. Over the next seven years, that threshold will be reduced such that businesses with €10 billion or more in revenue will also be included.

BEPS Pillar Two will affect a significant number of companies. Pillar Two is aimed at establishing an effective global minimum tax rate of 15%. Under BEPS Pillar Two, companies will first calculate taxes for each country in which they operate. If their effective tax rate for any of those jurisdictions falls below 15%, then they will be liable for paying that 15% minimum in those respective countries.

Fundamentally, BEPS is a set of nonbinding rules. Its creator, the OECD, has no statutory authority to set tax rates or regulations for the 139 member countries. However, BEPS is available as a common standard that nations may choose to adopt through legislation. The general framework of the rules has been agreed upon, but the formal adoption of the rules is still being negotiated and clarified. 

Although there may be some minor adjustments, business leaders still need to be cognizant of the effects BEPS 2.0 Pillar Two will have on organizations. 

Outlining its challenges — assessing the impact of BEPS

BEPS 2.0 Pillar Two is anticipated to make tax planning more complicated than ever before, with tighter deadlines and more stringent audits applying increased pressure on already strained tax professionals. As a result, many of these employees will likely struggle to work strategically if ill-prepared.

Research indicates that while 90% of respondents say BEPS 2.0 Pillar Two will have a moderate or significant impact on their business, just 30% have completed an impact analysis. As the new regulations start being implemented progressively around the globe, organizations must start preparing their teams. 

Tax leaders must move quickly to assess the potential impacts, advise senior executives and other stakeholders on the upcoming changes, and determine what needs to be done to comply with the new rules and manage their implications. 

Beyond being adequately prepared, BEPS 2.0 Pillar Two will introduce new complexities into the tax forecasting and reporting processes, potentially with powerful implications for corporate structuring and transfer pricing decisions. Specifically, challenges around consolidating, cleansing and analyzing tax data from across the organization will be magnified. 

For example, organizations relying on spreadsheets to support their tax forecasting and reporting processes may find the shifting landscape under these new regulations will create new challenges that may be difficult to manage, including the introduction of inconsistent data integrity that could lead to errors in tax reporting and forecasting. This can result in enormous financial and legal costs for organizations. 

It's generally agreed that the plan will result in higher corporate taxes for most global companies, but the reality is that BEPS constitutes a radical shift in the way taxes are levied on multinational companies. For organizations to be successful with upcoming changes to BEPS, they need to understand how these soon-to-be-imposed data and reporting regulations will transform the industry.

What BEPS means for the future of financial reporting 

BEPS already requires companies to itemize their revenues by country, and as taxation bodies develop more sophisticated models that compare BEPS data with corporate tax return data, there may be an increase in investigations. This reinforces the growing need to ensure tax and accounting teams have a foundational understanding of the implications coming from BEPS changes.

To that point, BEPS represents a change in global taxation, but it isn't the only change. Other elements of change include IFRS 16/17 and parallel modifications to lease accounting under U.S. GAAP, political uncertainty, a push toward higher tax rates and increased enforcement, and rising inflation in 2024. In response, organizations must remain vigilant in reviewing the latest legislation and analyzing recent changes within the business. As new rules are put into practice for BEPS, there is little doubt that fine-tuning the system will require some changes. This should include bringing operations together under one roof. To do this, automation will be crucial, especially to ease tax compliance, reduce data silos, and deliver better analytical insights. 

With that said, organizations should look for purpose-built tax planning and tax reporting solutions that can automate these processes by collecting and collating information from source accounting systems, modeling scenarios, and predicting the likely tax implications, as well as serving as a foundation for documentation and compliance transfer pricing decisions. Many companies may struggle to perform tax forecasting and reporting with manual processes, spreadsheets and a disjointed collection of tools. Fortunately, tax reporting technology can bring it all together under one central location to, effectively streamline and simplify processes while also managing operational transfer pricing, and improving accuracy. 

Finance and accounting leaders are often unable to see their group company's effective tax rate until it's too late for them to do anything about managing it. Under BEPS, that lack of visibility will become even more of a liability. Companies that want to clearly understand their options should put systems in place — as soon as possible — to reap the full benefits of smart corporate tax planning strategies. Collaboration and automation through the right tools will be critical to staying agile and successfully navigating the looming presence of BEPS 2.0 adoption. 

Ultimately, the next few years will be a pivotal time for finance and accounting departments at multinational companies. For tax professionals in particular, this is an opportunity to demonstrate the strategic value of tax accounting to others in the organization.