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Pillar two: the need for simplification

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Pillar two will change the international tax system forever. Here Christian Kaeser, global head of tax at Siemens, looks at how businesses and tax administrations can simplify pillar two compliance.

One of the most anticipated discussions at the International Fiscal Association’s 74th Congress in Berlin was the OECD panel chaired by Porus Kaka, senior advocate at Field Court Tax Chambers. The spotlight was on Pascal Saint-Amans, head of the OECD’s tax policy centre, and Achim Pross, the OECD’s head of international tax cooperation.

This was no surprise given the fact that the roughly 1,500 attendees wanted to hear news about the two pillars from the horse’s mouth. But the biggest news of the day was the fact that Saint-Amans will be leaving the OECD.

The key takeaway was the increasing recognition that the two pillars will be introducing a new level of complexity into the international tax system. This made it clear that taxpayers and tax administrations need a way to simplify the pillar two rules.

In the follow-up panel to the OECD seminar the discussion focused on the issue of capacity-building and ways to simplify or ‘de-stress’ compliance, especially with pillar two.

‘De-stress’ compliance

Tax authorities in developed and developing countries are faced with severe administrative issues. Assessing and auditing pillar two tax returns will require not only deep understanding of the respective domestic tax systems and international tax matters.

It needs to be complemented by expertise in international accounting standards because the pillar two calculation is rooted in book income, according to accounting standards. This includes the complex sphere of deferred taxes. Finally, the specific mechanisms of pillar two needs to be understood and applied.

Taking into account that massive amount of data points from enterprise, resource, planning (ERP) systems and pre-systems need to be compiled, manipulated and analysed for any tax administration an understanding of the respective system landscape of its taxpayers seems to be a must, too. This will require investment in resources and capacities.

It seems like a gargantuan task if tax administrations start to build up these capacities on their own. The much better approach seems to be a cooperation between all parties impacted by pillar two: policymakers, tax administrations and taxpayers.

Taxpayers know international accounting standards (at least, they better should know them) and their respective ERP systems. Tax administrations need to get up to speed about these issues rather fast and policymakers should have an interest to get direct feedback on what works out nicely and where real problems are hiding.

Taxpayers might be tempted to refrain from any capacity-building exercises. Although it’s important to build a trusted relationship with the tax authority, the benefits of capacity-building may seem remote since businesses will need to improve resourcing.

At the same time, taxpayers filing pillar two returns for the first time are the first party involved to be face these rules. This combines international accounting rules, domestic rules and the pillar two specifics.

These complexities relate to the interpretation of the rules, as well as to the factual exercise of compiling, manipulating and analysing the data required to apply pillar two.

The obstacles and difficulties in complying with the rules may vary from taxpayer to taxpayer. However, all taxpayers are concerned about not being able to reach 100% compliance. This is due to the complexity of the rules.

Taxpayers are rightly afraid of the potential penalties that might result from non-compliance. But these concerns may be overcome in favour of mutually beneficial cooperation on pillar two.

The feedback matrix

When filing the first pillar two return taxpayers could be offered the option to fill out a ‘feedback matrix’ on the application of the pillar two rules. Such a matrix is in essence comparable to an information return and should:

· Ideally not be obligatory but discretionary, because if a taxpayer is able to file the pillar two return with ease there should be no additional burden by any information return. Plus, the feedback matrix should allow for some relief and not create more concerns;

· Cover all the pillar two rules to get holistic feedback – but, it is up to the taxpayer if they want to give feedback to each aspect of pillar two;

· Allow for a ‘traffic light’ rating system (e.g. green, yellow, red), so that taxpayers in scope of pillar two could specify whether a rule is easy, difficult or close to impossible to apply. With such a high-level rating policymakers get an easy to access overview of the complexity of these rules, or to say, a pillar two complexity landscape. Plus, individual feedback can be tested against the overall feedback to check for outliers;

· Allow for feedback, so that taxpayers can describe in detail what the respective problem in applying a specific rule was, how they tried to overcome the issue and, if they believe, the result was an accurate pillar two return. This should be the core element from a taxpayer perspective, because this disclosure would justify any potential relief for the taxpayer disclosing the issue;

· Describe which resources were required to comply with the specific rules. This should allow policymakers to get an overview of the administrative cost of compliance;

· Describe whether the application of the rule could be automised or needed to be handled manually. This might serve as an indication for best practices.

Other topics, such as a field for general feedback, could be included, too.

Taxpayers filing the feedback matrix as an attachment to their pillar two return should get penalty relief. This would be in cases where errors are being uncovered within the tax assessment or tax audit process.

The feedback matrix would serve a similar purpose as taxpayers disclosing their deviating interpretation of a tax rule to the tax authorities when filing a tax return. In most jurisdictions, this kind of disclosure shields against penalties and criminal charges.

The difference with the feedback matrix is that the issues disclosed would mostly relate to practical and factual difficulties of applying the rules.

This would allow for broad-based feedback and the creation of a holistic landscape of the difficulties in applying the pillar two rules. This could be help improve and simplify pillar two and its application.

Greater transparency could help build the necessary trust for all parties involved, particularly the difficulties taxpayers are ‘battling’ with the new rules. These new rules are a challenge for all parties involved, businesses, tax administrations and policymakers.

Christian Kaeser is the global head of tax at Siemens and the president of the German branch of the International Fiscal Association.

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