BEPS Pillar Two: Understanding data requirements and managing data

BEPS Pillar Two is a new compliance obligation and with this change comes both challenges and opportunities. So why is it posing such a significant challenge to corporates and why is it different to the other types of tax reform we have seen in the past?

Outside of the vastness in scale of the application of the rules and the complexity of their nature, one of the key challenges is the requirement to complete the calculations at various levels within a group and across borders.

If you look at the broad structure of the OECD Model calculation, it requires the following:

• Data collection at an entity level
• Effective tax rate calculations at each jurisdiction level
• Calculation of top-up-tax at the jurisdiction level and the allocation of that tax back down to the entities
• Payment of the tax at the group entity level, pending individual jurisdiction legislation

Before we can even get to the calculation of the numbers, we need to get across the data points, and that is where most organisations are currently at with their BEPS Pillar Two journey.

In the recent Wolters Kluwer BEPS Pillar Two Readiness Survey (Q4/23), the primary challenge identified by respondents in terms of their BEPS Journey was understanding the data requirements (37.63%). And once an understanding is achieved the challenge is the sourcing of the data – particularly where tax are not the primary holders or guardians of that data. This was also highlighted in the Wolters Kluwer’s survey where 77.42% of respondents had concerns and anticipated difficulties in obtaining the necessary data and information required.

Mel Kaddatz, Head of Consulting at Wolters Kluwer recently came together with Caroline Wright, Associate Partner at EY, to discuss the challenges they have seen in market when working with clients and teams on their BEPS Pillar Two strategies. Read on to discover their insights on BEPS Pillar Two market readiness and a practical pathway in getting started with assessing and managing data for transformation and compliance.

Challenges with collecting entity and provision information

EY has observed a major challenge in collecting the extensive and varied new data required for Pillar Two calculations. Compliance entails gathering potentially hundreds of new data points regularly for tax provision and filing obligations. This raises concerns about effectively aggregating this information. Key sources include entity lists, consolidated trial balances, CbCR reports, and global tax provision calculations, with some data possibly residing outside the tax team.

For Pillar Two compliance, identifying group entities is crucial, yet many organisations lack a centralized source for entity data. EY finds that disparate core systems contribute to this fragmentation. Wolters Kluwer addresses this challenge by integrating Pillar Two requirements into existing entity attribute fields and ensuring comprehensive data alignment. Standardising data and templates streamline both Pillar Two and CBCR reporting, recognizing their interconnectedness.

EY are seeing challenges around provision calculations not having enough granularity for Pillar Two reporting, particularly for deferred taxes. Organisations using different software solutions in different jurisdictions exacerbates challenges with different calculations, currencies, and mapping data. Wolters Kluwer agree this is a primary data challenge coming up. For this reason, flexibility in importing provision data into a platform is crucial. Whilst ideally, clients would be using CCH Integrator to prepare their provision workbooks – in which case relevant data points can be linked through, the platform also has the flexibility to ingest data from a variety of data sources, including Excel.

“One of the key things to mention here is that the introduction of BEPS Pillar Two has really opened an opportunity for tax teams to look at their internal processes for provision and have a “weighted push” for the tax team to be able to invest in automation through software,” said Mel Kaddatz, Head of Consulting at Wolters Kluwer

The importance of CbCR data for safe harbour calculations

It can be difficult to tie the CbCR data back to the consolidated financial statements. This will be important to handle, particularly if you get questions from the tax office, so clients are looking to build in this reconciliation as an automated process so you can easily understand any differences.

“For the safe harbour, you need to ensure you pass the test for 3 years, so you will want to model a couple of periods using CbCR data to see if the data gives similar results or variances and this can sometimes be difficult to obtain,” said Caroline Wright, Associate Partner at EY.

Wolters Kluwer have seen in some instances that there is a strong requirement by organisations to align entities for reporting across CbCR and Pillar Two as there currently may be a different “level” at which the CbCR calculations are being included. It is important for organisations to assess where this data is coming from, ie; entity GL level data, or consolidated reporting system data, as there could be some real benefits in aligning to make the CBCR process more efficient and ensure more timely and accurate Pillar Two modelling.

Challenges with financial information and trial balance data for Pillar Two

The main challenges with automating any calculations:

1. The organisation uses multiple ERPs or ledgers with different charts of accounts – which leads to more data mapping.
2.  It does not have sufficient granularity to pull out certain data to map it automatically for Pillar 2 reporting.
3. The Trial balance is in the wrong currency and requires manual conversion.
4. Adjustment entities contain a variety of different types of consolidation adjustments which need to be unpicked for Pillar 2 reporting purposes.

The good news is there are solutions for all these points built into the CCH Integrator platform, resulting in accuracy and consistency of data.

Gaining certainty over final disclosures

While the main calculation for Pillar Two is fairly well defined, the final forms are not available yet and will depend on how jurisdictions choose to administer the tax and whether they implement a qualifying domestic minimum tax. So even once the minimum set of data is collected to model the impact of the tax, there may still need to be additional data required by the local regulator for disclosure purposes.

From a technology perspective, Wolters Kluwer are developing the CCH Integrator solution for disclosures in line with GIR. They are also working closely with clients and tax authorities to continue to align with changing requirements. The flexibility of the technology platform the BEPS Pillar Two Module is built on allows for efficient updates and releases as required.

Overcoming analysis paralysis when it comes to BEPS Pillar Two data

Some organisations look at the list of data points and don’t know where to start. Many of the data points are quite technical and they don’t know how to interpret them or what to ask for from other teams. And being tax people, they like to go into the detail – so in the end they become overwhelmed and don’t get started.

EY’s recommended approach is to start with the minimum data you need to perform the core end to end modelling calculation which tends to be around 60 data points per entity, make assumptions where there are gaps and then expand gradually refine the data set as you get more clarity on what is needed and the level of materiality.

“In such a complex area we really wanted to try and make the process as simple as possible in terms of the calculation model and to guide the users through the process as much as possible,” said Kaddatz. The key has been finding the balance between prescribing the calculation model and allowing the user to always have clear transparency on where that data has come from. Having that control within the system makes the preparation and review much more seamless. Given multiple iterations and modelling may be required, a clear and concise calculation model and version control will be key.

Operational challenges to consider with BEPS Pillar Two data

1. Decide what your operating model will be to perform this work. Consider whether the work will be carried out in-house, outsourced or a combination. Whichever way you go, you cannot get away from the data collection activity, so this will be a must have.
2. Getting teams up to speed with technical aspects, practicalities, and understanding how the calculations come together for BEPS Pillar Two.
3. Engaging with non-tax stakeholders. Consider timelines for educating teams and communicating requirements ahead of implementation.
4. Considering automating and scaling the process with technology. Identity what your requirements will be and timelines to implement across all locations.

What should you be considering for a BEPS Pillar Two technology solution?

• Does the package have a Pillar Two calculation offering and is it developed and maintained on the same platform as provision and CBCR?
• Where you are already using software for provision and CBCR, what are the outputs, and could the Pillar Two solution easily ingest those data sources?
• How does the calculation and allocation engine work? Does it allow for a bottom-up approach to reflect the data points at the entity level, Safe Harbour test analysis at the jurisdiction level and then overall GLoBE return reporting requirements.
• Does the system cater for flexible data input – i.e., linking from provision and CBCR calculations already being prepared, uploading from disparate sources, facilitating intuitive input from users, etc.
• Can it help with your data sourcing from other areas of the business?
• Is there a clear data origin that can easily be traced from the Pillar Two solution?  Transparency will be essential as you navigate through the calculation and modelling process, as it is expected that multiple iterations will be necessary.
• Do you have the capability to manage user access?
• How will the system be maintained by the vendor going forward as legislation and reporting requirements are continued to be defined?
• Will the reporting extracts meet C-suite reporting needs?
• Are you able to report by legal entity, jurisdiction, and group?

What should you be doing to prepare for BEPS Pillar Two right now?

1. Take a Pillar Two impact assessment to understand the impact on your organisation. This is a good exercise to undertake to help you build a business case for the roll out of Pillar Two.
   • Modelling – agree on a few key jurisdictions to focus on and model out the core end to end calculation to see how the numbers are coming out and identify any issues or opportunities.
   • Data collection – understand the key data points required for the end-to-end calculation and how much of this data you currently have.
   • Reach out to EY to know more.
2. Look at your CbCR process to ensure it meets the requirements for the safe harbour and that you can get the information you need to feed into the Pillar Two provision calculations.
3. Start thinking about your operating model for Pillar Two and separate out your short term and long-term strategy as it’s likely you’ll need some time to reach the desired end point in terms of the ideal operating model.
4. Look at software options to assist and fit your organisational requirements and boost tax governance and efficiency.  As part of this think not only about Pillar Two but also CbCR and Tax Provisioning. Don’t miss a great opportunity here!