All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Taxpayers suggest consolidated statement tweaks to fit GloBE rules

Industry tax leaders suggest industry-specific teaks for consolidated financial statements

Tax professionals widely agree with the OECD on using consolidated financial statements to determine effective tax rates under the pillar two global anti-base erosion (GloBE) proposal.

Although businesses believe consolidated statements offer a number of benefits, some taxpayers are sceptical about using these for tax purposes without considering industry differences. They say the statements may not reflect deductions or deferred assets that have a material impact on a company’s estimated global profits.

Capital industry tax heads said their accounting deductions and deferred assets have a larger material impact on operating margins and over longer timelines than in other industries. This can place heavier tax burdens on companies with oil and gas or mining operations under the GloBE proposal.

“Deferred taxes have to be taken into consideration for capital intensive industries and have a material impact of billions of dollars,” said Ann-Maree Wolff, global head of tax at Rio Tinto at the OECD consultation meeting on pillar two in Paris on December 9.

Taxpayers from other industries agreed to use consolidated financial statements, but stressed the need for exemptions to avoid unexpectedly triggering taxation under the GloBE proposal.

The French Banking Federation wrote to the OECD on December 2. It said: “Specific situations leading to lower the effective income tax rate should be subject to consideration in order to avoid any unjustified triggering of GloBE rules.”

Specific situations such as the use of tax loss carry forwards and dividend exception regimes that lower the tax rate under routine circumstances may trigger taxes under the GloBE proposal.

Positives in using consolidated statements in pillar two

Despite shortcomings in utilising consolidated financial statements to formulate an appropriate tax picture for companies, tax professionals accept it may be the best standard for consensus because of the wide acceptance of international financial reporting standards (IFRS) across countries.

“Consolidated financial statements provide rough estimates on global profitability,” explained Bart Le Blanc, partner at Norton Rose Fulbright in the Netherlands. “It may not be the best approach on a tax basis, but we [tax professionals] don’t want the complexity of going through another system,” he added.

Key challenges in determining an effective approach include domestic accounting differences and timing differences in recognising an item for income or expense.

“There are many technical issues that would need to be considered if such a rule were adopted,” said representatives from the Alliance for Competitive Taxation (ACT), which represents more than 40 multinational companies, including Google. “Either multi-year averaging or carryover of excess tax could be effective in addressing reporting time differences if a sufficiently long period for averaging or carryover were allowed,” they added.

The blending approach suggested in pillar two to smooth out challenges such as accounting differences across jurisdictions and group subsidiaries was accepted by many tax professionals, including taxpayers, in their comments shared with the OECD.

Barbara Angus, global tax policy leader at EY, said relying on the accounting standard in the parent company jurisdiction and global blending of corporate taxes may be the only viable approach to utilising consolidated financial statements. This approach can determine industry tax thresholds to target with a global minimum tax under the GloBE proposal.

However, it is increasingly difficult to match global group income to the group’s subsidiaries because of varied jurisdictional accounting standards. This can challenge the effectiveness of advancing the GloBE proposal using consolidated financial accounts.

“Given the burden that would be associated with identifying and tracking any required adjustments, and the fact that consistency within a taxpayer group is more important than consistency across taxpayers, we believe there should be no requirement to make adjustments to the accounting standard used in preparing the consolidated global financial statements in an attempt to reconcile any differences between the financial accounting standards,” explained Angus.

ERP concerns to using consolidated statements

While taxpayers agree that using consolidated financial statements is a good first step in spite of the limitations, the difficult next step to fall on taxpayers may be in finding a way to concatenate their information across their ERP systems.

“Other than using the consolidated financial statements [it will be difficult to deliver a consistent tax picture]. The data is split between hundreds of ERP systems across entities for Siemens,” said Georg Gebberth, director of global tax policy at Siemens.

Tax professionals told ITR that utilising consolidated financial statements and blending to unify the international tax system for a global minimum tax under the GloBE proposal can work, but many are waiting for an impact assessment to determine what difficulties explicitly come up for companies.

ERP system considerations may just be one early concern ahead of changing global tax rules to fit the digital economy framework. The OECD is expected to release more details on their progress with pillar one and pillar two in January 2020.

More from across our site

But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
12th annual awards announce winners
Businesses need to improve on data management to ensure tax departments become much more integrated, according to Microsoft’s chief digital officer at a KPMG event.
Businesses must ensure any alternative benchmark rate is included in their TP studies and approved by tax authorities, as Libor for the US ends in exactly a year.
Tax directors warn that a lack of adequate planning for VAT rule changes could leave businesses exposed to regulatory errors and costly fines.
Tax professionals have urged suppliers of goods from Great Britain to Northern Ireland to pause any plans to restructure their supply chains following the NI Protocol Bill.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree