The new Pillar 2 global minimum tax regime

What is global minimum tax (GMT)?

Global minimum tax is a two-part response developed and approved by 140 countries to address perceived global profit shifting by MNEs. The two pillars include:

Pillar 1: Potentially changes where multinationals pay taxes by reallocating a share of profits above a 10% profit margin. It applies to companies with more than €20 billion in revenues.

Pillar 2: Puts a minimum tax on in-scope, cross-border transactions equal to 9% — under subject-to-tax rules (STTR) — and imposes a minimum tax on jurisdictions equal to 15% under Global Anti-Base Erosion (GloBE) rules. Applying to companies with revenues over €750 million, it requires them to pay a top-up tax to meet the global minimum tax threshold.

While Pillar 1 will affect around 100 multinational corporations, Pillar 2 will impact approximately 10,000 worldwide. The new rules are expected to raise significant amounts in additional taxation. Estimates are that Pillar 1 will raise between $13 and $36 billion in new annual tax revenues and Pillar 2 will raise $225 billion in new annual tax revenue³.

Why act now?

2023 is the transition period, where countries are still formalizing their rules before the regime takes effect in January 2024. Uncertainties remain about the timing in which countries will apply the new regime, but most are racing to do so to ensure they quickly capture additional annual tax revenues. It is critical to determine the impact, if any, on a company now so that it can properly prepare for what is known now and leave time to address new country regulations as they are implemented.

GMT isn’t just about getting ready to comply; it can impact the timing of some transactions or asset transfers. For instance, it could affect the ROI of planned deals or have implications for cross-jurisdictional joint ventures, as agreements may need to be adjusted to ensure fair distribution of the tax liability between partners. Management may also want tax teams to start reporting the scale of the “top-up taxes” they face sooner rather than later.

This global alignment of corporate taxation will likely result in higher effective tax rates for multinational corporations. It brings unprecedented transparency and reporting requirements that touch a wide variety of tax rules, book tax, cash tax, and cross-border and local country rules. The impact on international tax planning for affected companies is a rise in complexity for determining and reporting country taxes.

Overall, more taxes are likely to need to be paid to more jurisdictions. It is unclear whether an effective disclosure-sharing system will be established among all countries so that companies only need to disclose once in a “parent” jurisdiction or whether multiple disclosures will need to be made to different jurisdictions.

Either way, the disclosure requirements for GMT comprise a GloBE Information Return (GIR), which needs to be filed by either the constituent entity in a jurisdiction or a designated local entity acting on its behalf. There is an alternative whereby the ultimate parent identity (UPE) or a designated filing entity can lodge a return if they are located in a jurisdiction that has a qualifying competent authority agreement in place for that reporting fiscal year. The GloBE Information Return needs to be lodged within 15 months of the GloBE Reporting Year, extended to 18 months in the first fiscal year that the MNE group is within scope.

To date, the OECD has issued a public consultation document on the data points that may be required to populate the GIR. The document indicates that an MNE must collect hundreds of data points for each entity and jurisdiction to populate the GIR.

Corporations need to gather data more frequently and quickly, and tax calculations and filings carried out more regularly — quarterly or even sooner in some cases. Data granularity also increases: for instance, corporates’ tax calculations may need to include data for inter-company transactions or all transactions. Data gathering spans across corporate functions to bring tax data together with data from finance, corporate structure, HR, and other business areas. For example, data such as intragroup financing arrangements and the location and purpose of tangible assets are required to calculate GMT, which requires collecting a huge amount of detailed data.

GMT and its data requirements are raising the burden on corporate tax teams at a time when they are already grappling with significant — and sometimes competing — pressures. A department that continues to be asked to do more with less will want to look for ways to simplify the highly complex challenge of meeting GMT requirements. It is a challenge that will take both advisory and technology support to address. Armed with guidance on both these fronts, tax professionals can help the organization manage risk by adapting more quickly to the continuously evolving regulatory requirements and delivering business intelligence for strategic planning.

Keeping in mind their goal of improving tax department effectiveness and safeguarding against risk, senior tax professionals need to act now by:

• Analyzing what data gathering and reporting requirements they will need to meet
• Modeling to identify critical areas their organization will need to focus on under the new regime
• Conducting risk assessments to identify entities, transactions, and other business operations impacted by the rules
• Deciding how to refine existing processes to build a suitable global compliance infrastructure

Inevitably, this will need to be supported by the right technology and experts who understand a business's nuances.

Why augment your workflows with technology?

Against this backdrop of growing complexity, good governance of data is critical. Data must be accessible, reliable, and meaningful so it can be leveraged to meet reporting requirements in a straightforward and effective manner. The first step is to carry out a data-gap analysis to understand better what data is missing and whether the data you have is provided at the requisite level — and in the correct format. With this analysis in hand, a tax department working with internal resources like finance, IT, HR, and external experts — such as advisory firms — can decide how to fix any gaps. For example, by changing the data source or how data is captured.

Ultimately, there should be a “single source of truth” for all data, with all forms of data — for example, legal entity data, trial balance data, and provision data — contained within one dataset. Data must be consistent across all country reports and internal and public disclosures. Moreover, efforts to embed compliance into data gathering, calculation, and reporting processes must be stringently evaluated. GMT presents both the need and an opportunity to modify tax processes.

Since data is critical to meeting the GMT challenge, it follows that workflows must be fit for purpose. GMT workflows follow the same four basic stages as other tax workflows: loading data, applying tax rules, creating reports, and compliance — both information reporting and filing. Companies already following best-practice principles — for example, by loading separate legal entity trial balances into their tax provision and country-by-country reporting workflows — may find they already have a good starting point for the data they need for Pillar 2 calculations. Others may need to revisit their workflows to see where process improvements are necessary to ensure they meet compliance requirements with minimum disruption or difficulty. Whether standardized practices are already in place or need refreshing, tax workflows are an important area of focus.

All of this can — and should be — anchored in sophisticated technology. This technology should automate processes, bringing the tax department the necessary efficiency, consistency, and accuracy to demystify the complexities of GMT and make them more relevant for the business. Look for technology designed to collate data and identify gaps automatically. It should support performing complex risk assessments and impact analyses. Ensure it can carry out calculations and produce reports at the touch of a button, track compliance dates, and automatically update in real time when there is a rule change.

GMT requires being predictive: technologies should help to forecast the impact of new regulations and provide a way to plan when considering business-specific scenarios. Central to the work is team collaboration across internal and external resources globally. With technology stacks that can be very different, look for vendors that offer application program interfaces (APIs) and connectors that minimize the human time and effort required to meet GMT regime requirements.

Carefully evaluate whether current corporate technological capabilities can efficiently support GMT requirements. Around four in 10 (38%) tax respondents to the Thomson Reuters Institute “2022 state of the corporate tax department” survey reported that technology would be their biggest challenge when it comes to preparing for upcoming governmental changes, up from three in 10 (29%) last year. More than a third (35%) said they would need more efficient automation technology and streamlined processes to keep up with regulatory changes such as GMT.

The Orbitax Global Minimum Tax solution can help

The Orbitax Global Minimum Tax solution (Orbitax GMT) addresses all the Pillar 2 rules, continuously updating regulations in real time for 190 countries. It automates data collection, tax calculations, reporting, and tax form generation — when forms are available. Most importantly, in this time of implementation, when companies are working to determine how the regulations will impact them, the Orbitax GMT solution simplifies data management, performs risk assessments, and facilitates forecasting. Teams collaborating worldwide can build out custom workflows to ensure compliance.

The Orbitax Global Minimum Tax solution integrates with existing systems — preserving existing investments in technology — including ONESOURCE Tax Provision (OTP) from Thomson Reuters, where, as a customer, a significant proportion of the data required for GMT may already exist.

In addition to integrating with OTP, the Orbitax GMT solution is integrated with the Orbitax International Tax Calculator (ITC), allowing for the seamless transfer of calculated subpart F and GILTI amounts from ITC as input in GMT. Covered taxes — as well as the calculated qualified domestic top-up taxes (QDMTT) from GMT — can be included as a credit in the GILTI calculations in ITC. The Orbitax BEPS Action Manager provides the relevant country-by-country (CbC) data for the GMT Safe Harbor calculations.

How it works

Step 1: Importing data

Data can be imported in many ways, for example, via APIs, Microsoft Excel templates, or uploading PDFs or data surveys. The solution then converts this data from its disparate forms and formats into a common format: .QNR. Once consistent, the data can be used across calculation templates in the Global Tax Calculator. If needed, additional custom data fields can be added.

Step 2: Applying tax rules

Tax rules are then applied. Orbitax GMT automatically updates every day with the most up-to-date rules — such as withholding rates — and filing due dates for 190 countries. Custom tax rules can also be created and applied.

The Orbitax Global Minimum Tax solution is designed to accommodate any nuances in local country implementation of the Pillar 2 rules, including tracking and calculating any rule differences, supporting currency conversions, and maintaining different data sets to accommodate inputs made using different data sources — such as global accounting rules versus local accounting rules. It also supports the filing of the Globe Information Return (GIR) in multiple countries. Both Orbitax and Thomson Reuters have a long history of filing in multiple jurisdictions, including DAC6, MDR filings, and e-filings such as CbC.

Step 3: Creating reports

Reports are then automatically created and can be distributed to designated stakeholders at set required times. Based on preset permissions, next-generation workflow technology enables collaboration among internal and external stakeholders worldwide.

Step 4: Form filing

Forms can be manually or auto-filed with the relevant tax authorities and can be tracked once filed to provide stats to other stakeholders. The Orbitax Global Minimum Tax solution connects with 90+ ERP and tax authority systems.

Bonus: Tools and templates

All calculation tools and templates are provided. A planning tool is included to carry out risk assessments that identify entities, transactions, and other business operations impacted by the rules. The planning tool is unique in that it allows a business to calculate growth assumptions, create multi-year forecasts, and plan for “what if” scenarios, law changes, and other impacts. These assumptions and “what ifs” can then be compared against real scenarios to monitor the impact of GMT. Robust data visualization charts help bring the analysis to life, which is very helpful for audiences less familiar with tax regulations that need to understand how GMT will impact the business. 

Conclusion

With the introduction of GMT, the burden of expectations on tax teams will become more complex. As we count down to January 1, 2024, the time to prepare dwindles. 

This “sea change” in global taxation forces multinational businesses to assess where the impact will hit. It requires tax teams to gather, process, and disclose more data — in more detail, more quickly, more often, and to more tax authorities and internal stakeholders — for more tax to be paid. 

Workflows may need to be redesigned or significantly overhauled to give confidence that risks are mitigated and compliance obligations are met. This could represent as much of an opportunity as a threat as processes are reevaluated and made more efficient and consistent. 

Intelligent, automated technology is vital to ensuring that tax departments can do more — far more — with their resources to stay ahead of the game regarding compliance and minimize disruption to the business. 

By streamlining data gathering, automatically applying tax rules, alerting tax professionals to jurisdictional rule changes and key dates, facilitating reporting and information sharing, enabling collaboration, and making risk assessments and forecasting easier, the Orbitax Global Minimum Tax solution has it covered.

Thomson Reuters is the only third-party distributor of the Orbitax Global Minimum Tax solution. 

Learn more about Orbitax Global Minimal Tax

Summary

This white paper puts GMT into context, explaining the key points of the new regime and its impact, namely:

What GMT is

GMT requires multinational companies to meet a global minimum tax rate of 15% by paying a “top-up tax” if income is generated in a jurisdiction where taxes are below the global minimum tax rate.

Why it is being introduced

To make it harder for big companies to avoid tax by shifting profits to lower-tax jurisdictions.

When it is coming into force

GMT will be enforceable in early 2024. 

How it works

Pillar 1 potentially changes where multinationals pay taxes. Pillar 2 requires MNEs to pay a top-up tax to meet the global minimum tax threshold.

Who it affects

Pillar 1 applies to multinationals with more than €20 billion in revenues. Pillar 2 applies to those with revenues over €750 million. 

What its principal implications are

Multinational corporations are set for higher effective tax rates. More taxes are likely to need to be paid to more jurisdictions. International tax planning will increase significantly in complexity.  

How this affects multinational businesses

Tax teams will have to gather data more frequently and quickly. Tax calculations and filings must be carried out more regularly. Data granularity requirements will increase, and data will need to be gathered from more business areas. 

What tax professionals should be thinking about now

Senior tax professionals should: analyze data gathering and reporting requirements, identify key areas their organization will need to focus on, conduct risk assessments, and build a suitable global compliance infrastructure, evaluating the technological capabilities required.

What good data governance looks like:

Data must be accessible, reliable, and meaningful to be leveraged to meet reporting requirements. A “single source of truth” is essential. Data must be consistent across all disclosures. Compliance should be embedded into data gathering, calculation, and reporting processes.

Why automate processes?

Workflows must be fit for purpose; ideally, they should be standardized and automated to deliver efficiency, consistency, and accuracy. This means using sophisticated tech tools that automatically collate data, identify gaps, perform complex risk assessments and impact analyses, carry out calculations, produce reports, track compliance dates, and update rule changes in real time. Technologies should also help to forecast and plan business-specific scenarios. 

How Orbitax Global Minimum Tax solution can help

The Orbitax GMT solution updates regulations in real time for 190 countries; automates data collection, tax calculations, reporting, and tax form generation; simplifies data management; performs risk assessments; facilitates forecasting; and allows for custom workflows to be built. It integrates with existing systems, including ONESOURCE Tax Provision from Thomson Reuters.

How Orbitax Global Minimum Tax solution works

The Orbitax Global Minimum Tax solution imports data, applies tax rules, creates reports, facilitates form filing, provides all calculation tools and templates, and has a planning tool to calculate growth assumptions, create forecasts, and plan for “what if” scenarios, law changes, and other impacts. It also delivers data visualization charts. 

Learn more about global minimum tax and how the Orbitax Global Minimum Tax solution can help your business.

¹Sources: OECD OECD sees revenue gains from new tax pact reaching $250 billion | Reuters and The World Economic Forum New global minimum tax rate signed by over 136 countries. Here's what it means | World Economic Forum (weforum.org)

²Source: The “2022 state of the corporate tax department,” Thomson Reuters Institute

³Source: OECD https://www.oecd.org/newsroom/revenue-impact-of-international-tax-reform-better-than-expected.htm