The first reporting requirements for Pillar Two become effective on January 1, 2024. For CFOs in the technology, media and telecommunications (TMT) industry, the digital nature of your business can create special tax considerations.
The Organisation for Economic Co-operation and Development (OECD) framework now requires large multinational enterprises to pay a minimum level of tax on income generated in each jurisdiction where they operate. With the tax rate set at 15% and based on financial reporting results, the law goes into effect for tax years beginning January 2024, with certain forward-looking disclosures required for 2023 financial statements.
Recognizing that many companies have already done some level of assessment and preparation, it might be helpful to keep a few things in perspective as the effective date approaches. When it comes to Pillar Two readiness, you need to know how to communicate impacts across the C-suite, board of directors and audit committee. Because fairness in taxation is a matter of public record and will be under scrutiny, your business and brand are at stake.
The following steps can help TMT companies navigate this new fiscal landscape with confidence and strategic foresight.
Your TMT Pillar Two preparation checklist
Extensive digital footprints across multiple jurisdictions, complex structures, low tax rates, foreign entrepreneurs and cost-sharing arrangements add up to significant operational and financial Pillar Two impacts for TMT.
Pillar Two rules require maintaining separate books and records for each jurisdiction and preparing financial reports on a recurring basis at entity levels that weren’t always necessary before. TMT leaders will need to navigate various financial reporting standards, the interaction between the existing US Global Intangible Low-Taxed Income (GILTI) regime, the recently enacted US "book" minimum tax and Pillar Two. It’s time to fast-track your planning so you can meet new reporting requirements and plan for your enterprise’s potential tax liabilities.
To get ready for Pillar Two, CFOs should collaborate with their tax, accounting and finance function leaders to upskill staff, organize data, model the impact of new tax rules and plan for change.
Use modeling to calculate Pillar Two impacts
Are you prepared to communicate Pillar Two impacts and requirements to your board and senior management? Using modeling technology can help you pull together the right analyses to illustrate projected impacts. Modeling can bolster strategic planning, and help avoid duplicative taxes and therefore should play a critical role in readying your enterprise for Pillar Two. You’ll need to calculate the impact of interactions between the rules, Foreign-Derived Intangible Income (FDII), GILTI, foreign tax credit and transfer pricing models –– a key consideration for TMT, given complex structures and foreign entrepreneurs –– and be able to model the impact on financial statements and earnings per share.
Tech-enabled services that use global tax management platforms to improve accuracy and consistency in tax analysis and reporting can also help you navigate Pillar Two. For example, PwC’s Pillar Two Engine (powered by Beacon, a PwC digital platform), can simplify your international tax modeling and Pillar Two reporting. This tool can calculate the impact of Pillar Two on your business and track changes in the rules so you can stay current and integrate with other tax planning. For TMT companies with migrated intellectual property (IP) and cost-sharing arrangements, the Pillar Two Engine can simplify the complexities, making Pillar Two compliance smoother and more manageable. The Pillar Two Engine is currently available as a service, and the licensed version will be available July 1, 2024.
Learn more about Beacon.
Strengthen your resources to tackle Pillar Two challenges
Rallying resources across finance, reporting, controllers, IT systems, human resources and other stakeholders may be necessary to help your organization meet evolving requirements and calculate top-up taxes. Pillar Two compliance may involve implementing new processes and systems to maintain separate books and records for each jurisdiction and prepare entity-level financial reports. You’ll need a holistic data strategy to manage over 200 data points, intra-data relationships and rules ordering. And many of the data points may not be readily available in current systems because Pillar Two is so new.
Updating your systems to confirm compliance is also crucial. While 64% of tax leaders say they’re focusing on requisite data feeds and systems to handle all aspects of Pillar Two, actions speak louder than plans. Support your tax function with hands-on learning to adjust to new tax tech –– such as automations to extract, cleanse and organize data –– and conduct quantitative analyses. Many companies will need to reflect the impact on their financial statements and may have to make estimated tax payments starting in the first quarter of 2024.
You’ll also need to identify gap areas related to people, process, data and technology. Consider formal training sessions and workshops that use your company’s data. Enlist external support and guidance if you’re short on resources.
64% of tax leaders say they are focusing on requisite data feeds and systems to handle all aspects of Pillar Two
Bolster your data preparation processes
Pillar Two readiness is complex, but the right data preparation can help streamline your journey. To gauge the potential impact of Pillar Two on your operations, financial reporting and tax liabilities, start by analyzing your current tax structure. Pinpoint entities that may fall under the rules and estimate potential tax liability. Your books and records need to accurately allocate costs and transactions to each entity. When it comes to reflecting local books and records under the appropriate financial standards, professionals may need to make modifications — and resist the temptation to take shortcuts.
You also need to prepare country-by-country reports that outline the tax and financial information for each jurisdiction. Financial statement preparation, including the recording of consolidation, elimination and intercompany transactions, will be critical in producing the baseline financials Pillar Two requires.
The data inputs for these processes are disparate and can be daunting — resources like PwC’s data input catalog can help. Data workshop sessions can help you make necessary data adjustments to confirm your data is Pillar Two compliant. Once you have a firm handle on your enterprise’s data, review transitional safe harbor rules. If you meet the requirements, your business might be excluded from Pillar Two taxation in certain jurisdictions. PwC’s safe harbor calculation tool can speed up this process and give you immediate insight into where you will — and will not — pay tax.
Build your strategic Pillar Two roadmap through integrated global structuring
As the Pillar Two tax law implementation approaches, your role as a TMT CFO will become more strategic. Integrated global structuring is a key strategy as you consider the impact of Pillar Two on your foreign entrepreneurial structures, cost-sharing arrangements, IP strategies, transaction flows and other tax structuring. This also extends to the effect of Pillar Two on your US tax calculations, financial statements, stock price guidance and reputational risk.
A crucial aspect of this structuring involves legal entity and IP alignment. You may need to unwind or relocate your IP structures, foreign entrepreneurs and cost-sharing arrangements to mitigate Pillar Two taxes. Changing legal entity and IP alignment could have repercussions on other taxes.
We can collaborate with you in an integrated global structuring session to evaluate potential legal structure modifications and walk you through the process.
How PwC can help your TMT org get ready for Pillar Two
PwC offers a suite of resources, solutions and services to help your organization get Pillar Two ready, including Beacon, a platform that can calculate the impact of Pillar Two and integrate with other tax structuring, the PwC transitional safe harbor tool, integrated global structuring sessions and an in-depth data input catalog. These tools and services, coupled with PwC's deep industry knowledge, can help TMT companies prepare for and successfully navigate the Pillar Two tax rules.
With the timing, complexity and evolving requirements, there’s a lot for your organization to do. At PwC, we understand the challenges you face and have the industry knowledge and experience to help you navigate through them.
