Managing the legal/tax overlap of BEPS 2.0 Pillar Two: How entity management software can help
If you work in the legal department or entity management, you may be seeing more emails from your colleagues in tax with “BEPS 2.0” and “Pillar Two” in the subject line. They may even include the red “urgent” exclamation point or the word “help!”
If you’re in global tax, you already have these terms on your radar, and you’re hoping for a timely, informed and complete response on this new regulatory requirement connected to the global 15% minimum tax.
Compliance involves complex rules, entity-specific information, current and historical data, details on intercompany transactions, scenario modeling and more.
Here’s what legal and tax departments, along with their corporate secretaries and CFOs, need to know about Base Erosion and Profit Shifting (BEPS) 2.0 and Pillar Two — and how entity management software can help manage these and other international tax regulations.
Many steps, scenarios and data points: A summary of BEPS 2.0 Pillar Two compliance
Participating jurisdictions approved the Organisation for Economic Co-operation and Development (OECD)/G20 rules on BEPS back in 2021. But 2024 is the year they will start their enforcement, and many are already well into this process.
The aim of BEPS 2.0 is to address the challenges posed by multinational enterprises (MNEs) engaging in aggressive tax-planning strategies to shift profits to low-tax jurisdictions and avoid paying their fair share of taxes. BEPS 2.0 focuses on developing a global consensus on allocating taxing rights and ensuring that MNEs are taxed where they generate profits, regardless of their physical presence. It also aims to establish a more transparent and equitable international tax framework to prevent tax avoidance and promote tax certainty.
To ensure compliance, legal and corporate tax teams will need to work closely together to determine:
- Which entities fall within Pillar Two jurisdiction
- If the combined revenues of these entities meet the threshold for BEPS 2.0 Pillar Two reporting
- The effective tax rate (ETR) for each jurisdiction — is it greater than or less than 15%?
From there, your organization will need to:
- “Top up” tax payments for those jurisdictions with ETRs of less than 15%
- File a complex return
The data required for determining any additional “top up” liability is substantial, to say the least. It includes:
- Incorporation, tax jurisdiction and ownership information for each legal entity
- Any changes in ownership, accounting principles or functional currency
- Third-party and intercompany transfers such as mergers, asset sales, business transfers and share transfers
- Dividend and profit distributions, including amounts and dates
- Dates and supporting documentation for all of the above
What’s more, these steps above involve just the basic nuts and bolts of BEPS 2.0 Pillar Two reporting. Forward-looking companies will want to conduct an internal health check across their jurisdictions first, followed by legal entity rationalization as necessary to optimize their tax profile. Any external consultants involved will almost certainly ask for the data above before they can start their work. Regardless of approach, the analysis requires even more staffing, resources and work across your organization, with a particular burden likely falling on corporate secretarial, governance, controllers and tax teams.
The right technology eases the BEPS 2.0 burden
How are you gathering, updating, verifying, storing and presenting all of this information? What about scenario modeling? Over what timeframes? Is your data consistent across jurisdictions? Is it up to date?
Entity management software goes a long way toward answering these and other key questions.
The data required for Pillar Two compliance crosses both entity structures and departments, from legal to financial to HR and beyond. Entity management software corrals this data all into one place, with permission-based access, built-in audit trails and secure storage. The benefits do not stop there. They include the ability to accomplish certain compliance filings electronically, with a time and date stamp, and can alert companies when certain data, such as director information, is out of date.
With a more sophisticated international entity management software, you’ll benefit from specialized features such as group structure visualizations, point-in-time organizational charts and scenario modeling. Throughout the process, templates, alerts, reminders and automated document assembly keep activities on track and on time.
Take the next step in getting your team, colleagues and organization BEPS 2.0 Pillar Two-ready. Download our Diligent entity management buyers guide today.
