Using CbCR data as a Pillar 2 GloBE starting point
Designed to ensure that multinational enterprises (MNEs) pay a global minimum tax (GMT) of 15% in each jurisdiction where they operate and generate income, the Pillar 2 global anti-base erosion (GloBE) rules are now a reality for in-scope MNEs and very large groups with €750m consolidated global turnover.
With some MNEs facing assessments as early as 2024, timescales are tight and data is a particular issue. While MNEs have not yet reported fully on Pillar 2 GloBE, we can only estimate the number of data collection points required based on what’s currently in the rules. These estimates range from 600 to over 1,000 data point requirements using information that is either not currently collected, not easily accessible or not known at all.
With the full calculations very complex and the cost of implementation in terms of time, compliance, and extracting the relevant data onerous, knowing where to start is vital.
What’s a good starting point?
It’s Forvis Mazars’ view that a cost-effective starting point is first to assess CbC reporting, which is crucial for using transitional safe harbour provisions that avoid the need for full calculations in the initial reporting phase. As a first step, MNEs should check that there is a separate report for each jurisdiction where operations exist. Secondly, has the report been tested to ensure its fit for purpose in terms of the accuracy of calculations made and the information it holds? Following this, look at any data adjustments that need to be made for GloBE reporting, which is particularly important when looking at safe harbour qualification.
Once a CbCR impact analysis has been undertaken, MNEs will have a clear map of where GloBE data liabilities lie in terms of completing less complex (green) or full data (red) calculation exercises. Once there is a clear picture, MNEs can focus on dealing with red jurisdictions and where to spend money on reaching the required compliance level. Remember, regulators will not be expecting 100% reporting accuracy initially. It’s about ensuring that GloBE reporting offers a good reflection of liabilities in the initial years. Importantly, knowing you are going in the right direction will be a good sign for the tax authorities.
How will businesses be impacted?
There is little doubt that MNEs in specific sectors, such as financial services and insurance, may find that operations in terms of the tax function are more impacted by Pillar 2 GloBE than other sectors, such as manufacturing. However, it’s essential to keep in mind that size, not sector, is the determinant as the threshold for Pillar 2 GloBE compliance focuses on companies with global revenue above €750m. In theory, alongside MNEs, it also puts large privately owned businesses (POBs) in scope as well as growth companies currently just below the €750m global revenue threshold but likely to breach the threshold in the future.
Another important consideration is that Pillar 2 GloBE rules not only increase the tax compliance burden but put many other aspects of the business model under pressure. This would include potential tech transformation initiatives or organisational restructuring to deal with parent entities requiring additional tax information from subsidiaries and vice versa to ensure top-up taxes are paid to the correct jurisdictions. Furthermore, in the initial stages of Pillar 2 GloBE reporting, additional calculations impacting the audit will require more time and expertise to complete.
Dealing with uncertainty
The Pillar 2 GloBE rules take into account a three-year data collection window before reporting starts in 2026. However, much of how reporting progresses will rely on which jurisdictions follow this timeframe or how they implement the rules. Currently, most countries are taking a watch-and-wait approach to see how plans evolve. This puts MNEs in a tricky situation whereby they may have to follow different reporting timeframes and rules in the initial reporting years. While there is a strong hope that most jurisdictions will move forward together and adopt a common approach by 2026, uncertainty remains a challenge.
In addition, while transitional safe harbour provisions give MNEs initial breathing space on Pillar 2 GloBE calculations, it doesn’t remove the need for full GLoBE calculations; it simply delays them. Putting in place the required changes needed to develop the capacity to undertake a complete and complex data exercise is critical to addressing uncertainty down the line.
Using CbCR data as a Pillar 2 GloBE starting point not only gives MNEs a clearer picture of how they can reach required compliance levels but also gives greater confidence in the accuracy of data currently held.