The OECD’s Pillar Two is here - many jurisdictions have locally enacted legislation that became effective on January 1, 2024. Pillar Two generally applies to multinational companies (MNCs) with revenue of at least EUR €750M, and while the global legislative process and further OECD guidance will continue to evolve, it requires MNCs to evaluate their potential global minimum tax expense under Pillar Two through a data intensive calculation process. This presents a significant operational challenge that may result in both cash and book tax expense increases for some companies. Additionally, readiness for the increased tax compliance complexity is top of mind for many companies, and proper preparation can ease the burden.
Act now! The FASB and IASB have spoken - Pillar Two must be accounted for on a period-cost basis under US GAAP and IFRS principles, which means that calendar-year companies exposed to Pillar Two are required to estimate and disclose any Pillar Two top-up tax obligations for interim and annual reporting periods beginning in 2024 Q1 for US GAAP or 2024 interim IFRS financial statements. Additional disclosures may be required for local Statutory reporting purposes in 2024 as well. It’s time to align with your financial statement auditor and lay the foundation for data, technology, and process changes in response to Pillar Two.
Time is ticking!
Below are key steps we recommend companies take immediately to be prepared for necessary Pillar Two estimates and related disclosures in 2024, and to lay the groundwork for meeting compliance obligations:
Current State Assessment
- Review your legal entity org chart
- Take inventory of your Constituent Entities (CEs) and determine the relevant Pillar Two jurisdiction for each CE
- Determine which jurisdictions in your structure have adopted an IIR or QDMTT for 2024, which should ringfence potential Pillar Two exposure for 2024
- Evaluate your Country-by-country Report (CbCR) in accordance with all available guidance to ensure it’s “qualified”
- Get comfortable with the CbCR process and identify enhancements, as necessary, paying particular attention to the December 2023 OECD administrative guidance
- Determine which jurisdictions meet one of the CbCR Transitional Safe Harbors
3. Scope material jurisdictions for full GloBE computation
- If a jurisdiction is immaterial - document process and assumptions for determination
- If a jurisdiction is material - perform data-mapping exercise for full GloBE computation
- Evaluate 280+ data points required for full GloBE computations to determine relevance and materiality
- Identify source system(s) and owner(s) of data
- Evaluate ability to access and utilize data
- Map to and run GloBE computation
Once you have completed these items, you should be in a better position to understand the Pillar Two impact at a jurisdictional level, and will have laid the foundation for any remediation efforts or process changes to implement for interim and annual financial reporting and ultimately compliance.
Execution
If you haven’t already, establish your processes and calculations that will fulfill Pillar Two requirements in the coming years. Taking the following actions should put you on a strong footing:
- Develop your detailed process steps for forecasting interim Pillar Two Tax, AETR, and year-end budgets, which should include documenting nuanced technical matters and how they specifically apply to your facts.
- Implement technology or workpaper strategy and develop an approach and supporting technology for data collection and mapping.
- Develop processes and controls documentation for how you scoped and calculated your Pillar Two liability (or lack thereof), and how you are monitoring legislative activity globally, and
- Perform mock closes or dry runs of Pillar Two calculations for your CEs in implementing jurisdictions.
Discuss these action items with your financial statement auditor before year-end, or during interim periods as relevant, to ensure alignment. Get their input on the operational, data, system, process, and computational frameworks you've established. Your plan will evolve, but starting strong is crucial for managing the workload of Pillar Two in 2024. Stay ahead of the game and set yourself up for success!
