How will you meet your Pillar Two data challenge?

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6 minute read

A tech-powered proof of concept can strengthen Pillar Two tax calculations

Multinational enterprise (MNE) groups are moving at different speeds in preparation for their first Pillar Two test. Most are focused on estimating top-up taxes to report in their consolidated financial statements, prioritizing materiality over accuracy. As a result, they may inadvertently take shortcuts in their data collection and calculations.

For example, some MNEs manually collect historical source data as-is, rather than using current-year data, to model whether they’ll meet one of the transitional safe harbour criteria. This reliance on historical data increases the risk of errors.

Other MNE groups are creating an enhanced chart of account and entity hierarchy in their enterprise resource planning (ERP) system. They’re also tactically applying automated data extraction tools and transforming the data into a format that can be ingested by their calculation engine. This is a good start. But many of these mechanisms fall short of a reliable compliance solution. Additionally, these mechanisms don’t address other disclosure requirements, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) and Canada’s T1134 information return relating to foreign affiliates.

Clearly, data collection remains one of the biggest challenges in MNE groups’ Pillar Two readiness. Without complete data, MNE groups may struggle to prepare sufficiently detailed and accurate calculations that withstand audit scrutiny and reduce exposure to penalties and interest. They may also miss opportunities to understand the full tax implications of business changes and transactions.

Are your Pillar Two estimates audit-ready?

Consider your ability to answer these questions from your financial statement auditor:

What is your Pillar Two implementation plan? Who is leading the efforts and who is involved?
What applications, tools or calculation engines were used to estimate Pillar Two taxes? What internal controls and procedures were implemented?
Do you expect to rely on available safe harbours? If so, how have you evaluated whether the country-by-country reporting used for the safe harbour calculations is a qualified report as defined under the Pillar Two model rules?

The Pillar Two data challenge

Pillar Two requires MNE groups with consolidated annual revenues of €750 million or higher to gather up to 280 distinct data points for every constituent entity.

We’ve found that most companies only maintain about half of this granular information in their ERP system. In many cases, the data in an MNE’s ERP system isn’t what’s needed for their Pillar Two calculations. For example, the ERP system may not include financial statements on a constituent entity basis. In other cases, those financial statements may not be maintained in the ultimate parent entity’s financial accounting standards.

Often, data is sourced from ERP systems, integrated with non-ERP data and, in some cases, complemented with new data. Many MNE groups can benefit from automating this data accumulation process—as well as the actual calculations.

Working alone, tax teams can struggle to gather the necessary data to perform these complex Pillar Two calculations. But by mobilizing a cross-disciplinary team with senior resources from tax, finance, legal and IT to create a Pillar Two data strategy, MNE groups can meet their compliance obligations with greater accuracy and efficiency.

Gather. Transform. Calculate. Analyze and report.

Book a demo to learn how PwC’s Pillar Two Engine can streamline your preparations.

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Steps to scaling your Pillar Two data strategy

Starting with a proof of concept is a powerful way to build confidence in your Pillar Two data strategy. Calculating Pillar Two’s impact for a jurisdiction in which you cannot rely on safe harbour provisions helps pinpoint data-collection challenges early on. It also lets you measure the time saved through automation before scaling the proof of concept across your enterprise.

As you build out your Pillar Two data strategy, it’s valuable to assess your current capabilities. Do you have the human and technical resources available to meet your new compliance requirements? Will you need to hire additional employees and invest in new technologies? Are there more cost-effective alternatives that accelerate your outcomes?

A service provider that meets you where you are can provide strategic advice, technical expertise and advanced technology that align with your broader business goals. This may include in-source and co-source solutions, such as establishing and automating the data accumulation process. There are also opportunities to use tax managed services to create capacity, improve processes and unlock business value by giving you access to top talent and technology. This lets you continuously evolve your tax function while proactively managing current and emerging tax risks, such as Pillar Two.

So, how can you take a tech-powered approach to Pillar Two compliance?

Our Pillar Two Data Input Catalog identifies approximately 280 data points per constituent entity needed to calculate the Pillar Two tax exposure under the income inclusion rule, qualified domestic minimum top-up tax and undertaxed payments rule. But it’s unlikely all data points are required for each constituent entity.

Using logic-based questionnaires can significantly reduce the number of required data points. For example, a dynamic questionnaire can hide or reveal more detailed questions about pension adjustments or stock-based compensation based on your responses.

While you can build these questionnaires inside or outside your ERP system, it’s important to keep the underlying information up to date. Tools powered by generative artificial intelligence (GenAI) can read publicly available Pillar Two legislation to pinpoint country-by-country legislative requirements.

Once you’ve narrowed in on the relevant data points for your MNE group, the next step is to determine where the information is located. Does it already exist in your ERP system? Is it in other Excel workbooks? Do you need to request it from other teams?

At first glance, it’s easy to assume you have the necessary data. But certain amounts—such as any derecognition of deferred tax assets, for example—often aggregate information from multiple entities. Disaggregating it for Pillar Two may require supporting spreadsheets or even building legal entity statements into your ERP system.

Managing the sheer volume of disaggregated data typically requires advanced technology. GenAI-powered tools can help gather, prepare and transform data into the format required by a Pillar Two calculation engine. Additionally, these tools read and capture information from complex and frequently updated organizational charts. This process extracts data with greater speed and precision.

Eventually, your MNE group may advance to maintaining a third set of books in its ERP system. At that point, you can flow your data directly into a calculation engine. But it’s more likely you will initially combine data from inside and outside your ERP system in a central data storage system, or data lake.

You may ultimately choose to build this data lake within your ERP systems. We’ve worked with our ecosystem of Alliances to develop solutions that can help you get more value from your existing data infrastructure investments by reconfiguring your systems to better gather, organize and catalogue the information needed for your Pillar Two calculations.

Each participating country must adopt its own Pillar Two rules through domestic legislation. This means your MNE group must comply with complex Pillar Two requirements that can deviate between countries.

We developed PwC’s Pillar Two Engine to help overcome these challenges. Built on Beacon graph technology, our centralized, rules-based engine supports the inconsistent and unique adoption of Pillar Two rules around the world. It also provides compliance and tax provision-grade calculations. This can save time and reduce risk by automatically incorporating Pillar Two rules into your calculations, creating easy-to-follow working papers and an audit trail for the purposes of tax authority or financial statement audits.

Assessing the outcomes of your Pillar Two calculations can help pinpoint opportunities and pitfalls. For example, if you’re planning to introduce intragroup debt into your structure, you must consider whether a high tax counterparty provides credit to a low tax entity. This helps you determine the potential application of the Pillar Two intragroup financing arrangements rule, which can deny deductions in low tax entities. By understanding these implications, you can structure intercorporate transactions in ways that enable the right tax outcomes.

Enhance the value of your Pillar Two efforts

A tech-powered Pillar Two data strategy gives you better visibility into your calculations. This is particularly important if your MNE group takes a decentralized approach to its Pillar Two calculations, as it gives the ultimate parent entity timely access and oversight, allowing you to recognize issues early and remedy any gaps.

It also helps you gain more value from your Pillar Two efforts. An effective data strategy creates new possibilities to streamline your broader tax provision and compliance processes as well as meet other reporting requirements. You can also gain real-time visibility into your global tax footprint, creating opportunities to better forecast the tax implications of business decisions and manage your effective tax rate—all while fostering a more scalable and sustainable approach to global tax compliance.

Considerations to assess your Pillar Two readiness

Do you know where the data needed for Pillar Two sits within your MNE group?
How much of your Pillar Two data is collected manually?
How much work is needed to cleanse and transform the data needed for Pillar Two?
What’s your level of comfort with the Pillar Two legislation affecting your MNE group?

What’s your level of comfort with your MNE group’s systems and processes for Pillar Two calculations and compliance?
Is your MNE group’s Pillar Two reporting sufficiently transparent for you to understand the results?

What technologies do your finance and tax teams use to collect and calculate Pillar Two data?
Do these technologies provide traceability and transparency that let users view the details behind the calculation?
How are your ERP systems and tax provision platforms configured to provide access to the required data points for Pillar Two calculations and compliance?

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Curious to know more? Get in touch to see how you can automate your Pillar Two reporting requirements using our tech-enabled approach.

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