Get ready for Pillar Two, have the first mover advantage to stay ahead

For governments, being the first mover has advantage in preserving its rights to tax the in-scope companies under the OECD Model Rules. It is important for revenue authorities to adopt Pillar Two as close to the Model Rules as possible to ensure the local Pillar Two legislation passes the peer review by the Inclusive Framework members. It is also expected that the tax authorities will provide further clarity in resolving future disputes on a multilateral basis as need be. Financial Accounting Standards regulators have also responded to the Pillar Two developments where draft guidance has been issued to promote transparency and clarity on financial accounting disclosure requirements.

In circumstances where governments offer concessionary tax regimes as part of their foreign direct investment strategy, we expect governments would establish unique local responses to realign their concessionary tax design to maintain its attractiveness to foreign investments. This is particularly true for Asia Pacific since many territories here are offering tax incentives that drive effective tax rates below 15%.

In general, Pillar Two would likely negate the benefits of the legacy tax holiday design. Singapore, Thailand and Malaysia, to name a few, may feel this impact. It follows that global companies are seeking support from governments in another form. These global companies would obviously favour any form of cash grants from governments considering the rapid rising operating costs in certain Asia Pacific jurisdictions. If a tax credit route is chosen, the challenge remains that the scheme must satisfy the conditions and features of refundable credits under the Model Rules to yield a favourable treatment in computing the jurisdictional GloBE ETR. It remains to be seen how governments would embed the Pillar Two rules in their fiscal policy design whilst achieving their intended Foreign Direct Investment strategy.

For multinational companies within scope, to ensure readiness for Pillar Two, there is a need to consider a three-pronged approach:

• Understand and evaluate the current rules and implementation framework. Financial reporting and disclosures are baseline statutory requirements that large corporations (especially the listed companies) must meet on a recurring and consistent basis. Companies must understand the developing local Pillar Two rules in the context of their business and industry, existing legal ownership structures, merger and acquisition activities and certain financial accounting components to determine two key components of the jurisdiction GloBE ETR, i.e. “Globe Income” and “Covered Tax”. The rules also contain multiple elections, which could mitigate certain negative impacts to overall Pillar Two calculations. In addition, the temporary safe harbour could offer companies a relief on Pillar Two compliance and top up tax liability.
  
  When assessing the overall impact from the rules, companies may take the opportunity to revisit their group structure, supply chain model, intellectual property holdings and financing arrangements - to evaluate whether the current operating model remains viable and optimal.
  
• Understand data requirements and build data and overall operating governance. Pillar Two compliance demands enormous efforts in data collection – about over 230 data points per legal entity within a Pillar Two reportable group. Companies should put in place a systems-based tech-led approach to achieve data accuracy as well as capturing the data universe in computing its top-up tax liability. Same data could be used in various parts of the Pillar Two calculations. It is therefore imperative for companies to design or adopt a technology platform that is able to preserve the single source of truth in computing the Pillar Two outcome.
  
  To achieve operational readiness for Pillar Two reporting, it is important to identify responsible functions leading each actionable workstream in the process design. It is also critical to nominate a Pillar Two champion to take charge of the end-to-end project and stakeholder management.
  
• Model out the Pillar Two impact including performing safe harbour analysis with a multi-functional team. Pillar Two compliance should not be seen as a single function responsibility. The in-house tax department should lead the change in raising awareness within the organisation, and seek collaboration from the key functions (such as finance, IT, legal, HR, etc.). The common challenges companies will face are a gap in resources to lead such a game-changing initiative. Upskilling and recruiting the right talent are vital for success. The person at the helm must be able to address the questions and challenges across people, process, data and technology. A Pillar Two champion(s) who appreciates and comprehends the underlying tax law, and the purpose and drivers behind Pillar Two is a must. In addition to tax capabilities, accounting skills are essential as Pillar Two calculations rely on a fair bit of the accounting-based adjustments and concepts.