Pillar 2 Global Minimum Tax: Reporting infrastructure

Navigating the new Pillar 2 landscape

Expanding regulations, transparency, and fairness in the tax system are nothing new. Tax and finance professionals must keep up with an ever-growing list of stringent requirements around disclosure designed to boost the amount of tax companies pay.

The Organization for Economic Co-operation and Development (OECD) released the Pillar 2 model rules, known as the Global Anti-Base Erosion (GloBE) Rules or the global minimum tax (GMT), which will take effect starting in 2024. This new tax regime is expected to add complexity exponentially to companies operating internationally.

Comprising 38 member countries, the OECD has long served as a reliable advisor to the Group of 20 (G20) nations. It has provided guidance and influenced tax policies that affect global regulations. For instance, in 2016, the OECD and G20 collaborated to develop a 15-point action plan called the Inclusive Framework to tackle base erosion and profit shifting (BEPS).

The GMT rules provide a system of taxation intended to ensure large multinational enterprise (MNE) groups pay a minimum level of tax on the income generated in each of the jurisdictions where they operate.

To date, over 135 countries have agreed to implement the GMT rules, and 55 countries — including those in the European Union, the UK, Japan, South Korea, and Canada — have begun the process of incorporating these rules into their legislation.

The general provisions of GMT rules require that a “top-up” tax be calculated and applied at the jurisdictional level where an MNE is subject to an effective tax rate below 15%. The details of the calculations are complex and can be iterative, flowing down to each local country based on the regulations defined by each jurisdiction. For tax departments in global companies, the impact is significant.

Pillar 2 is the most complex international tax rule that has ever been enacted, and it is critical that multinational enterprises act now. The regime is disruptive and accelerates the urgency with which tax and finance departments must drive digital transformation, automating both functions to allow more time to develop scenarios, benchmarks, and predictive analytics.

The rising tax burden demands more calculations and increasing compliance and reporting requirements. However, this is only one facet of the new regime that places pressure on organizations. The extensive data collection requirements, including detailed information on employee roles and corporate structure, are even more challenging.

This white paper will explore the critical requirements of the Pillar 2 regime and help ensure your organization meets the compliance challenges that tax teams now face. We offer practical ways to leverage data and enhance current tax workflows while using minimal resources to meet the reporting requirements. This essential insight helps CFOs, tax executives, and their teams ensure compliance.

Pillar 2 compounds the concerns about regulatory oversight

As reported in the 2023 State of the Corporate Tax Department report by the Thomson Reuters Institute, tax reform continues to be a significant strategic challenge for corporate tax departments today. Overall, more than two-thirds (68%) of corporate tax professionals surveyed said they expect to face remarkable changes in regulatory requirements enacted by governments within the next two years. Furthermore, 62% said they anticipate that their business will expand into new jurisdictions.

Pillar 2 is a prominent concern. At the same time, leveraging technology and automation capabilities to improve tax department efficiencies and hiring additional tax talent are top strategic priorities.

The goal for Pillar 2 is for major economies to discourage global companies from shifting profits — and tax revenues — to low-tax countries, regardless of where they make their sales. The digitalization and globalization of the world economy have exacerbated this issue. The increased focus on data intensifies pressures on already burdened tax teams to supply governments and internal company departments with critical tax information more quickly and accurately.

What is global minimum tax (GMT)?

The OECD model rules provide for a two-part response to address perceived global profit shifting by MNEs. The result is a system of taxation intended to ensure large multinational enterprise groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate.

Pillar 1 focuses on where multinationals pay taxes. Entities with at least €20 billion of consolidated revenue and net profits of more than 10% must pay tax in the locations where their customers are based.

Pillar 2 is a new global top-up tax regime designed by the OECD, referred to as the global minimum tax. It seeks to set a global minimum effective tax rate of 15% for multinationals with a revenue of more than €750 million.

Where Pillar 2 determines a top-up tax rate, Pillar 1 seeks to address the basis over which the tax rate gets calculated, and it proposes to allocate the profits to jurisdictions where their final customers are located instead of the jurisdiction where the production takes place. These rules would only apply to the largest multinationals.

The GMT is estimated to reduce global low-taxed profit by about 80% and, due to reduced profit-shifting incentives, shifted profit is estimated to fall by roughly half, according to an OECD report released in January 2024. Furthermore, GMT is estimated to raise additional corporate income tax (CIT) revenues of $155 billion to $192 billion globally each year, or between 6.5% and 8.1% of global CIT revenues, with one-third of these gains stemming from reduced profit shifting

Why act now?

For many countries, GMT became effective January 1, 2024. While the rules in each of these countries are similar, they are not always the same as the OECD model rules — this no doubt adds to the complexity. The differences in how countries adopt the tax rules can significantly impact an entity’s tax liability. It is critical for entities to act now and determine the impact, if any.

GMT is not just about tax compliance. It can also impact the timing of some transactions or asset transfers. For instance, it could affect the return on investment (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 request tax teams to report the scale of the “top-up taxes” they now face.

This global alignment of corporate taxation will likely result in higher effective tax rates for international companies. It introduces 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 increases the complexity of both determining and reporting taxes in different countries. Additionally, the GMT is likely to trigger a global reorganization of many MNEs as they seek the most tax-efficient countries to allocate their revenue and profits.

Overall, it is likely that more taxes will need to be paid to additional jurisdictions. As to be expected with a global tax system, uncertainties remain. Specifically, uncertainties exist on how these rules will be implemented in countries that have not yet enacted their legislation. Additionally, each individual country will define the specific forms and filing requirements. Despite the unknowns, sufficient clarity exists to report the impact on tax provision calculations and prepare for the initial tax compliance filings in 2026.

In July 2023, the OECD released a standard template for the GloBE Information Return (GIR). The GIR 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 entity (UPE) or a designated filing entity can lodge a return if they are 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 populate the GIR, an MNE will potentially need to collect hundreds of data points for each entity and jurisdiction. While all the data points are not relevant to all MNEs, the number of data points can expand based on the number of jurisdictions.

Additionally, MNEs may encounter numerous data points not currently available in their systems. Without the appropriate tools and technology, the process of collecting this data can be burdensome.

Data will need to be gathered more frequently and quickly — and tax calculations carried out more regularly — such as for inclusion in quarterly tax provisions. The level of detail in the data will also increase; for instance, corporate tax calculations may need to include data for inter-company transactions or all transactions. Data gathering spans corporate functions, bringing tax data together with data from finance, corporate structure, HR, and other business areas. For instance, data such as intragroup financing arrangements and the location and purpose of tangible assets — necessary for calculating GMT — require entities to collect substantial amounts of detailed data.

GMT and its data requirements are increasing the burden on corporate tax teams at a time when they are already dealing with significant and sometimes competing pressures. A department consistently asked to achieve more with fewer resources must find ways to simplify the highly complex task of meeting GMT requirements. It is a challenge that will take both advisory and technological support to address. With guidance in both areas, tax professionals can help organizations manage risks by swiftly adapting to ever-changing regulatory requirements and providing business intelligence for strategic planning.

To enhance the effectiveness of the tax department and mitigate risk, senior tax professionals must take immediate action by:

Analyzing data collection and reporting requirements that they need to meet
Using models to identify key 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
Exploring ways to improve current processes to establish an appropriate global compliance infrastructure
Developing a detailed plan that outlines the steps needed to ensure compliance, including technological upgrades, process re-engineering, and staff training
Ensuring both internal and external stakeholders remain informed of the changes, ensuring the organization is mitigating concerns and taking a unified approach to compliance

Inevitably, the right technology and experts who understand the nuances of your business and specialize in compliance with GMT must support this. Tax departments will want to include the appropriate business stakeholders to evaluate the data, processes, and technology needed.

"Transitional safe harbors”

In recognition that the shift to Pillar 2 significantly increases compliance burdens for many MNEs, the OECD introduced two transitional safe harbors: Transitional CbCR Safe Harbor and Transitional UTPR Safe Harbor.

The purpose of the Transitional Country-by-Country Reporting (CbCR) Safe Harbor is to provide temporary relief for multinational enterprise groups during the initial years of implementing the Global Anti-Base Erosion (GloBE) rules. This safe harbor simplifies the GloBE calculation by allowing MNEs to use a “simplified effective tax rate” (ETR) test based on their financial statements without requiring detailed GloBE adjustments.

The Transitional CbCR Safe Harbor provides up to three fiscal years of compliance relief for fiscal years beginning on or before December 31, 2026, but not including a fiscal year that ends after June 30, 2028. The safe harbor will expire after that time.

Meanwhile, the Transitional UTPR Safe Harbor offers transitional relief in the UPE jurisdiction during the first two years the GloBE rules are in effect, allowing jurisdictions with a corporate income tax rate of at least 20% to have an Undertaxed Profits Rule (UTPR) top-up tax amount of zero for fiscal years beginning on or before December 31, 2025, and ending before December 31, 2026.

While these two transitional safe harbors may offer some MNEs temporary relief from the full extent of Pillar 2 compliance, it is critical that MNEs monitor the situation annually or even quarterly. Entities may find that a jurisdiction has fallen out of the safe harbor or that the country-by-country reporting calculations they’ve employed are now in need of adjustments.

In addition, companies may find that they need to review the basis for CbCR calculations used in past years to confirm that they comply with the rules for qualified financial statements, as required to support the CbCR Safe Harbor requirements for Pillar 2.

The rules are complex throughout the application of GMT calculations, and companies must consult with their tax advisors as needed to confirm that the underlying data is consistent with the requirements prescribed by the OECD and local country regulations.

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 for entities to leverage it to meet reporting requirements in a straightforward and effective way.

The first step is to carry out a data gap analysis to better understand what data is missing, whether the data you have provided is at the requisite level, and then determine whether it is in the proper format. With this analysis in hand, a tax department working with internal resources like finance, IT, and HR — as well as external experts, such as advisory firms — can decide how to fix any gaps, for example, by changing the data source or how they capture the data.

Ultimately, there should be a “single source of truth” for all data, with all forms — legal entity data, trial balance data, and provision data — contained within one dataset. Data must be consistent across all country reports and within 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 opportunity to modify tax processes.

Since data is critical to meeting the challenge of GMT, workflows must be fit for purpose.

GMT workflows follow the same four basic stages as other tax workflows:

Identifying and loading the relevant data
Applying tax rules to calculations
Creating reports that confirm the results of calculations, including providing the support needed for review and audit
Fulfilling compliance obligations for information reporting and tax filings

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 that they already have a good starting point for the data they need for GMT calculations. Others may need to revisit their workflows to see where process improvements are necessary to ensure that they can meet compliance requirements with minimum disruption or difficulty. Whether standardized practices are already in place or need to start afresh, tax workflows are an important area of focus.

All of this can — and should be — anchored in sophisticated technology that automates processes, bringing the tax department the necessary efficiency, consistency, and accuracy to de-mystify the complexities of GMT and make them more relevant for the business. Without a sophisticated tax technology solution in place, it is extremely difficult for an MNE to comply with the GMT requirements.

Look for technology that automatically collates data, is flexible enough to consume various data formats, and can effectively identify gaps. 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 provide timely updates when there are published rule changes.

GMT requires being predictive; technologies should help 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.

When assessing technology solutions, consider the tasks that technology can perform more quickly and efficiently than humans, such as calculations, aggregations, ordering of calculations, consistent application of tax rules, repetitive tasks, and standardization. Doing so will help your tax teams meet tight deadlines associated with processes such as tax provision.

Furthermore, look for technology that can provide the local rules and calculations needed and help you with populating forms and reports. This tech can help you specially address the following challenges:

Track and update local enactment of rules in each country's calculator for compliance.
Coordinate sophisticated ordering rules to determine which jurisdiction applies their Pillar 2 rules to specific entities within a multinational enterprise, helping to avoid double taxation and integrate with other tax rules.

Assessing whether current corporate technological capabilities can efficiently support GMT requirements is crucial. The Thomson Reuters Institute 2024 Corporate Tax Department Technology Report reveals that, overall, tax departments are generally dissatisfied with their use of AI and new technologies, with respondents nearly split between not satisfied (47%) and somewhat satisfied (47%).

Additionally, numerous departments have yet to adopt new technologies. Only 9% of respondents reported that their department has incorporated AI into their daily operations, while about half (47%) mentioned that less than a quarter of their department’s processes are automated. There is also uncertainty about whether departments track the success of their new technology implementations, as only 27% of departments measure success metrics related to technology.

Based on these findings, technology and automation are clearly a challenge for many entities to keep pace with regulatory changes like GMT.

Orbitax Global Minimum Tax can help

Orbitax Global Minimum Tax (Orbitax GMT) handles all OECD Pillar 2 calculations needed for provision reporting, GIR preparation and transmission, and planning. It uses local country calculators and follows the tax rules of more than 190 countries. Additionally, it automates data collection, tax calculations, reporting, and tax form generation when available.

As part of the cloud-based Orbitax International Tax platform (Orbitax ITP), Orbitax GMT also aids companies in navigating new regulations by simplifying data management, conducting risk assessments, and forecasting. Furthermore, it supports global collaboration, allowing teams to create custom workflows to ensure compliance.

To maintain current technology investments, Orbitax GMT seamlessly integrates with existing systems, including compatibility with ONESOURCE Tax Provision (OTP) from Thomson Reuters, where much of the necessary data for GMT might already be available for customers.

In addition to integrating with OTP, tax teams may integrate Orbitax GMT with the Orbitax country-by-country compliance and reporting solution and the Orbitax International Tax Calculator (ITC). For instance, certain balances from CbCR calculations can be integrated directly into the safe harbor template within Orbitax GMT to help determine the Pillar 2 safe harbor exemptions. Additionally, ITC calculates U.S. International outbound tax — GILTI, BEAT, FDII, Subpart F, Foreign Dividends, and U.S. FTC.

Calculations from ITC can be integrated with Orbitax GMT to facilitate the interaction between the qualified domestic minimum top-up taxes (QDMTT), which exclude the calculation of U.S. Subpart F and GILTI, and the calculation of jurisdictional top-up taxes (IIR and UTPR), which include these calculations.

How it works

Step 1: Importing data

Users can import data in several ways, such as via APIs, Microsoft Excel templates, or uploading PDFs or data surveys. Orbitax GMT 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, they can add additional custom data fields.

Step 2: Applying tax rules

Orbitax GMT then applies the tax rules. It automatically updates every day with the most up-to-date rules — such as withholding rates — and filing due dates for 190 countries. Users can also create and apply custom tax rules.

This 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 various data sources like global accounting rules versus local accounting rules. It also supports the filing of the Globe Information Return in multiple countries. Both Orbitax and Thomson Reuters have a long history of filing in various jurisdictions, including e-filings such as country by country, DAC6, and MDR filings.

Step 3: Creating reports

Orbitax GMT automatically creates reports; users can distribute them to designated stakeholders at required times. Next-generation workflow technology also enables collaboration among internal and external stakeholders worldwide based on pre-set permissions.

Step 4: Filing forms

Users can manually or automatically file forms with the relevant tax authorities and track them once filed to provide stats to other stakeholders. Orbitax GMT connects with 90+ enterprise resource planning (ERP) and tax authority systems.

Bonus: Tools and templates

The platform provides all calculation tools and templates, including a risk assessment planning tool that identifies entities, transactions, and other business operations impacted by the rules. The planning tool is unique because it allows businesses to calculate growth assumptions, create multiyear forecasts, and plan for “what-if” scenarios, law changes, and other impacts.

Users can then compare these assumptions and “what ifs” against real scenarios to monitor the impact of GMT. Robust data visualization charts help bring the analysis to life, which is especially helpful for audiences who are less familiar with tax regulations but need to understand how GMT will impact the business.

Tax teams need the right technology to address the GMT regime

With the introduction of GMT, the burden of expectations on tax teams is now more complex. For many countries, the Pillar 2 rules became effective in 2024, and the “sea change” in global taxation is well underway.

This shift in global taxation forces multinational businesses to assess where the impact will hit. It requires them to gather, process, and disclose more data — in more detail, more quickly, more often, and to more tax authorities, as well as internal stakeholders — for more tax to be paid.

Businesses may need to redesign or significantly overhaul workflows to confidently mitigate risks and meet compliance obligations in a timely manner. They may look to this as an opportunity to reevaluate existing processes and technologies and procure the resources needed to implement updated solutions that can keep up with the ever-changing compliance requirements.

Smart, automated technology is vital to ensuring that tax departments can do more with their current resources to stay ahead of the game in terms of compliance and minimize disruptions to the business.

Orbitax Global Minimum Tax addresses all these needs by streamlining data collection, automatically applying tax rules, alerting tax professionals of changes in jurisdictional rules, including important dates, facilitating reporting and information sharing, enabling collaboration, and enhancing risk assessments and forecasting.

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

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