Multinational companies are bracing for the impacts from the 15% minimum global corporate tax initiative and the Organization for Economic Cooperation and Development’s (OECD) broader global reform framework to potentially extend well beyond taxes to shape data collection, operating models and even transaction strategies, according to tax experts at EY.
The minimum tax is at the center of the so-called Pillar 2 piece of the OECD's base erosion and profit sharing project, an international framework launched to combat tax avoidance and shut down tax havens. In October, 137 countries reached a multilateral agreement to overhaul global tax rules.
The subsequent momentum behind the global minimum tax initiative has been steady, with the European Union (EU), the U.K., Switzerland and Canada moving ahead with concrete proposals to adopt the global minimum even as the timing for implementation remains uncertain in the wake of the EU indicating it would be difficult to implement before 2024, said Marna Ricker, EY Americas vice chair for Tax Services, during a recent EY webinar on the coming changes in global taxation. At the same time, the House of Representatives in November approved the 15% minimum global tax as part of the Biden administration's Build Back Better plan.
Still, what is clear is that BEPS will potentially be very significant and disruptive for large companies going forward, the experts said. “Companies are starting to realize that their existing global structures and their supply chains and operating models might not be the most efficient structures and models in a post Pillar-2 world,” said Jason Yen, principal in EY’s international tax and transaction services group and a former U.S. delegate to the OECD. “This is coming as somewhat of a surprise and it’s not an easy thing to grapple with.”
The new tax regime will apply to companies with annual revenue exceeding 750 million euros ($850 million) and generate about $150 billion in additional annual global tax revenue, according to the OECD. The tax system will also reallocate $125 billion of profits from 100 of the world’s largest multinational companies to countries worldwide.
As a result, multinationals will likely be staffing up to address the complex new tax system. Nearly half (40%) of businesses recently surveyed by EY said they had considered adding headcount, outsourcing tax department operations and investing in new technology to meet BEPS 2.0 compliance requirements. And EY’s clients are estimating that the new BEPS tax framework will require 200 unique data sets for a multinational to stay in compliance.
“In talking with clients it’s highlighting the significant resources that companies are going to need to make to comply with these rules,” said Craig Hillier, EY Americas International Tax and Transaction Services leader.
One thing that is catching companies off guard is a misperception of the initiative. Much of the discussion around Pillar 2 was about going after companies with low taxes operating in low tax jurisdictions, Yen said. But even companies who are not in those locations are subject to the rules and will have to do the work to prove that they’re in compliance, he said.
Pulling the data necessary for compliance will require the tax, finance and human resources teams work together, he said. For instance, one of the data points that must be tracked for Pillar 2 is payroll which typically isn’t something that tax departments handle, so it will require changes to the IT system to set up. Then, too, there’s simply new data that must be developed and it must be confirmed to be accurate and clean, he said.
“These companies have to develop new data collection systems. This means new government controls and they probably have to hire and then train new people to understand all these new rules that are still frankly in the process of being developed,” Yen said.
Looking forward, companies are also starting to consider the Pillar 2 rules in current transactions. "Notwithstanding the fact that Pillar 2 rules are not in effect right now … we’re already seeing this rule have an impact on companies that are analyzing what transactions they’re undertaking," Yen said.