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Prepared for the next phase of BEPS?
The OECD’s Base Erosion and Profit Shifting Project (BEPS) aims to secure and sustain the international tax system and increase tax equity among traditional and digital businesses. While many countries around the globe have implemented these rules for 2024, others are in the legislative process. At the same time, the interpretation of this framework is evolving. Despite this uncertainty, international businesses in all industries that meet the respective thresholds are affected and need to act now. Are you prepared?
This page provides an overview of BEPS 2.0 and what it means for your business.
Are you ready for a new global Tax System?
Under an OECD Inclusive Framework, 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. As per the OECD, Pillar 1 still lacks the acceptance of a sufficient number of countries, i.e. its implementation date is unknown. At the same time, 35 countries are implementing Pillar 2 in 2024 and over 60 countries in 2025. In addition, the transition rules capture certain transactions occurring on or after 30 November 2021.
'The OECD's proposed global minimum tax of 15% is a real game changer for affected international groups with consolidated revenues of EUR 750m and more. It defines a new tax basis and extends existing local tax legislation.'
The OECD programme of work on the tax challenges arising from the digitalisation of the economy
What is it and why does it affect not only digital companies but all industries?
The digitalisation of the economy has social and economic impacts in many areas, including taxation and, in particular, the current international tax system. This system was designed in an era when companies provided services and goods mainly through physical presence locally or internationally. With the emergence of purely digital companies and subsequent digitalisation of goods and services companies alike, it has been widely recognised that the current international tax system is no longer fit for purpose.
In order to adapt existing tax systems, members of the OECD/G20 Inclusive Framework (IF) on BEPS are looking at a comprehensive, consensus-based solution to what has been considered the two main challenges arising from the digitalisation of the economy.
- First, as digitalisation allows businesses to operate without a physical presence, the existing nexus-based system that allocates taxation rights among countries based on physical presence is no longer considered effective.
- Second, new technologies are thought to facilitate tax avoidance through the shifting of profits from high tax to no or low tax jurisdictions.
The OECD IF considers that addressing these challenges through a coordinated international response is key to maintaining a functioning international tax system and avoiding unilateral measures by individual countries.
What is covered and what is the timeline proposed by the OECD?
Pillar 1: Reallocation of taxation rights
The OECD IF is undertaking work under a Pillar 1 approach and will:
- analyse issues around the physical presence of a business.
- look at the question of what will be taxed and where.
- aim to determine the allocation of profits to countries where users/customers are located.
- introduce a fixed minimum return for baseline marketing and distribution activities with a wide scope of applicability
Pillar 2: Global Anti-Base Erosion (GloBE) proposal
Pillar 2 introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue over €750m are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. In order to implement this, a set of rules has been designed:
- a domestic top-up tax rule that countries can implement that subjects domestic income to a minimum tax.
- an income inclusion rule that subjects foreign income of the group to a minimum tax.
- an undertaxed payment rule that subject foreign income of the group to a minimum tax if it is not already subject to an income inclusion rule.
- a subject-to-tax rule that complements the undertaxed payment rule in certain cases.
How can you prepare?
Impact simulation and analysis
With the help of our proprietary PwC technology tools & dashboards you can simulate Pillar 1 & 2 impact and analyse the potential impact on your organisation. Contact us for more information and guidance on how our tools & advice can help prepare you for BEPS 2.0 reality.
- Simulate the potential impact of Pillar 1 (Amount A and Amount B) using various parameters
- Quantify potential impact from a profit reallocation (Pillar 1) and effective tax rate perspective (Pillar 2)
- Verify which group jurisdictions or entities are likely to be most affected by the new proposals
- Prepare multiple scenarios and evaluate potential need to act or prepare
What’s involved in getting your company ready?
Pillar 2 has a monumental impact on your tax department’s end-to-end operations. You need to ensure you have the data required to forecast and model in the interim, as well as the data needed to maintain reporting and compliance requirements once the new rules are enacted.
It’s not just your tax function that will be impacted. Key stakeholder groups including controllership and financial planning & analysis will also be affected. Such a broad BEPS 2.0 readiness initiative stretches your resources to or beyond their limits. The person in charge needs to respond to questions and challenges across four broad categories: people, process, data and technology.
If you’re within scope, you’re going to have to understand, evaluate and model the impacts of Pillar 2 across the organisation. This includes assessing the additional data and reporting/compliance requirements, evaluating your existing technology ecosystem and capabilities, setting up processes and controls, preparing and training resources, and managing stakeholder expectations.
Are you Pillar 2 ready?
At PwC we’re geared up to helping you evaluate how Pillar 2 might impact your organisation and assessing what’s required for provisioning and compliance readiness. Given the changes to the law anticipated in many countries, we can help you work out how to access the financial data necessary for provisioning and compliance, identify gaps in the data needed for reporting, and re-evaluate your operations.
Modelling, visualisation and reporting:
The technology angle
The new compliance and reporting requirements introduced by Pillar 2 are based on novel calculation methodologies. The data points used for existing reporting and those required for Pillar 2 only overlap to a certain extent. So reality is that a lot of new/additional data points are needed going forward to automate the Pillar 2 processes to the best extent. We advise doing an assessment to confirm whether required data points can be extracted from source systems or whether you’ll need change requests to capture the data required. In addition, we offer our state-of-the-art Data Gathering Suite to support you in data management for Pillar 2 purposes.
For the calculation, different approaches can be taken: in- or outsourcing, calculation within the existing ERP or consolidation system, or the usage of a tax engine. Which approach is the right one for a given multinational group depends on its tax and technology strategies.
For insourcing, we advise clients in the selection of the most suitable provider and support them in the implementation – both from a tax as well as an IT technical perspective.
For outsourcing, we offer PwC’s Pillar 2 Engine, a structured model for assessing the impact of Pillar 2. Not only is it flexible to allow for a variety of data structures and sources; it also prioritises the key adjustments/elections. The modelling provides compliance and provision grade calculations as well as data visualisation to identify key territories where there is a risk of a Pillar 2 top-up tax.
Our engine draws on a centralised database with a vetted calculation engine in consultation with PwC Global technical and policy leaders. The database is dynamically updated for rule changes and new legislation in each jurisdiction.
Get in touch with our experts
https://pages.pwc.ch/core-contact-page?form_id=7014L00000016uTQAQ&lang=en&embed=true
