Canadian federal budget adds urgency for companies to accelerate Pillar Two readiness

This spring’s federal budget highlighted the final countdown for multinational enterprises operating in Canada to prepare for unprecedented changes to the global tax system.

In its budget, the federal government reaffirmed its plans to introduce legislation that implements the OECD’s Pillar Two provisions, which include a minimum global tax rate. The government says the first set of charging rules will come into effect for fiscal years of multinational enterprises that start on or after December 31, 2023. A backstop rule (undertaxed profits rule, or UTPR) would be effective for fiscal years that begin on or after December 31, 2024.

This is more than a mere update to Canada’s tax code. It’s a new system based in part on accounting principles. This means affected companies must do more than adjust existing processes. They need to develop new approaches and engage different stakeholders to gather the necessary data.

We’ve examined the data challenges, calculation complexities and anticipated divergence in Pillar Two rules around the world. Preparing for Pillar Two is a monumental undertaking for many companies requiring extensive assessments of your data, technology capabilities, processes and controls, and workforce capabilities.

This spring’s federal budget, combined with recent developments around the world, reaffirmed that Canadian companies face a rapidly approaching deadline to meet new data requirements and compliance obligations.

The immediate implications of the OECD’s Pillar Two for Canadian companies

Pillar Two is part of an international framework to address the tax equity challenges stemming from the digitalization of the global economy. It applies to multinational entities with annual global revenues of at least €750 million and includes a 15% minimum effective tax rate on income arising in low-tax jurisdictions.

The new rules will have an immediate impact. Affected companies will likely be required to disclose certain implications of Pillar Two on their organization in the notes of their 2023 financial statements.

More broadly, determining how to calculate any additional taxes owing will be a challenge in itself. And the global nature of Pillar Two means affected companies will also have to work out where those taxes need to be paid—and which entity within their organization needs to pay it.

Understanding the data requirements of Pillar Two is a crucial part of preparing for these upcoming changes. A gap analysis that includes the following questions can help you plan your next moves:

What data do I have now? The information you’ll need to comply with Pillar Two might already exist for other purposes.
Where does the necessary data reside? The impact of Pillar Two extends beyond the tax department. Other stakeholder groups, including controllership, financial planning and analysis, legal, IT and human resources will have to work together to produce the necessary data.
What information do you still need? And what’s your plan to fill in those data gaps?

Strengthening your Pillar Two readiness

PwC recently developed and published a comprehensive Pillar Two Data Input Catalog to facilitate companies’ Pillar Two readiness.

This can form the foundation of your data strategy, help you assess your operational preparedness and determine a modelling approach. The report also provides insights into the work that lies ahead for your organization and can help you anticipate the unique challenges your company will face.