With a new presidential administration entering the White House in 2025, tax leaders are preparing for tax policy changes that could affect their business plans. But while potential changes to U.S. tax policy could have a major impact on businesses, tax leaders shouldn’t fail to also plan for foreign tax rules. Tax teams within multinational enterprises (MNEs) should understand and prepare for how international tax policy, like the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two model rules, are complicating tax compliance for their organizations.
Tax leaders recognize the impact Pillar Two may have on their tax strategy.
According to BDO’s Tax Strategist Survey, 87% of tax leaders say Pillar Two represents a challenge to their business in the next 12 months.
To address these challenges, U.S.-based MNEs and companies on a growth trajectory to expand beyond the U.S. or meet the Pillar Two minimum revenue threshold should take steps now to adapt to these evolving international tax rules. They should start by adjusting their technology and compliance processes to incorporate tools that help them calculate their tax liability under the global anti-base erosion (GloBE) rules and meet Pillar Two requirements.
Strengthening Compliance Processes
Tax leaders are contending with complicated requirements, both domestic and foreign, as they seek to maintain compliance across jurisdictions in varying stages of Pillar Two implementation. A U.S.-based MNE, for example, needs to collect and analyze data in a specific way to meet Pillar Two requirements for its operations in the U.K., Europe, and a number of other major markets where Pillar Two is in effect. But it needs to collect and analyze data differently to meet tax requirements like the global intangible low-taxed income (GILTI) tax and the Inflation Reduction Act’s corporate alternative minimum tax (CAMT) in the U.S., where Pillar Two has not yet been adopted. These complex calculations can be challenging for tax teams to manage.
Financial data for reports must be sourced from multiple departments and for all regions where an MNE operates. To meet their obligations, tax departments need to build teams that can work across jurisdictions and company functions to collect this data, to maintain documentation and reporting standards, and to break down existing information silos.
Verifying whether an MNE meets the revenue threshold for Pillar Two’s minimum tax in the jurisdictions in which it operates requires teams to openly share financial data to avoid non-compliance and maintain accountability. Tax functions should establish a data warehouse to standardize and store master data, as well as a process and governance measures to ensure a strong foundational source of truth. This will facilitate the downstream data mapping and automation necessary to calculate global tax liabilities and facilitate efficient information sharing across the organization.
Boosting Compliance Through Tax Tech
Tax teams should integrate more advanced technologies into their tax reporting and compliance systems and train teams to use them. To do this successfully, tax leaders will need to establish a data management strategy, given the volume of data required for international tax calculations. This is where automation becomes key to success.
BDO’s Tax Strategist Survey found that 42% of the most strategic tax leaders, or “Tax Strategists,” say the OECD’s Pillar Two reporting requirements are their top priority for process automation in the next 12 months, compared to just 15% of the less strategic “Tax Tacticians.”
This indicates that while both groups of tax leaders know automation is important for meeting Pillar Two requirements, Tax Tacticians may not yet have the data management capabilities to adopt the necessary solutions.
GloBE calculations are likely too complex for a manual Excel model, so tax leaders should plan to work with a third-party platform or a tax advisor to help them execute their calculations with the right level of automation. Tax teams should begin the process by ensuring that the existing tax technology is able to support the data processing and calculation needs for GloBE compliance. Investing in financial process and automation tools, tax compliance and provision software, and international tax platforms will help grow their capabilities.
Once ready, tax teams will need to develop a technology training and adoption plan to ensure team members globally are able to realize a return on their investment.
Training Tomorrow’s Tax Team
With mounting demands on today’s tax teams, upskilling and training tax departments has become crucial for managing tax compliance.
Over half of tax professionals surveyed in the Tax Strategist Survey say they are increasing training and upskilling budgets in 2024. According to the survey, training and upskilling is the top budget priority after investing in new technology.
To comply with Pillar Two reporting requirements, teams will have to become familiar with new technology, data management processes, automation use and ethics, and proper internal control structures. Tax leaders can use outsourcing or co-sourcing strategies to supplement any skill gaps within their teams and to provide specialized expertise.
According to our survey, 52% of tax leaders plan to increase investment in outsourcing in the next 12 months, with 23% planning to leverage outsourcing or co-sourcing for Pillar Two compliance.
Planning Ahead
Planning for international tax compliance now can save companies from costly noncompliance issues in the future. Tax leaders preparing for Pillar Two compliance need to prioritize investments in technology, developing compliance processes, and in staffing and training their teams.
To support appropriate Pillar Two compliance practices, tax teams may elect to enlist third-party support. External advisors can help tax leaders understand evolving regulations and help keep companies in line with compliance requirements.
Want to know more about how to prepare for Pillar Two compliance? Contact us.