BEPS 2.0: time to wake up and change the spreadsheets

Has there been a more challenging – or, depending on your point of view, a more exciting – era in the world of international tax than the one multinational entities (MNEs) are living through at present? A unique combination of evolving tax regimes, disruption to global trade triggered by the COVID pandemic and Russia’s invasion of Ukraine, a strengthening focus on the ESG agenda, and rapid technological development is necessitating change.

Against this backdrop, organisations are facing a race against time to implement the BEPS 2.0 pillar two proposals. The measures are intended to have effect in respect of in-scope groups’ accounting periods beginning on, or after, December 31 2023.

The OECD’s BEPS recommendations will introduce substantial complexities into tax forecasting and reporting processes, with significant implications for corporate structuring and transfer pricing decisions. Organisations that have relied upon spreadsheets to support their tax forecasting and reporting processes will soon face new challenges that may be difficult to manage.

However, the possibility for MNEs to reset their approach to tax planning and forecasting by investing in high-performance software is creating exciting opportunities for tax teams and professionals to add significant value to their organisations.

The question is, are MNEs ready to respond to the challenges by embracing all the opportunities that change will bring?

The OECD’s BEPS actions aim to modernise global taxation in the context of an increasingly digitalised economy. Just as the rapid adoption of remote work has given rise to debates about jurisdictional nexus with respect to personal income taxes, the sharp rise in the digital delivery of products and services has raised questions as to how, and where, corporations should be taxed.

With BEPS 2.0, the OECD has moved beyond its initial concept of digital products and services, and broadened the initiative in an attempt to create a more level playing field for global taxation. BEPS 2.0 makes it far more difficult for corporations to benefit from shifting their profits to low-tax countries.

Although the OECD has no legal jurisdiction over its member nations, those countries are expected to adopt the recommendations under BEPS 2.0 pillar two as law. The guidelines will apply to companies with €750 million (approximately $810 million) or more in annual revenues, with pillar two aiming to establish an effective global minimum tax rate of 15%.

For affected companies, preparing for, and complying with, BEPS 2.0 will be a monumental task. Technology will play an essential role in helping companies to transition smoothly and minimise the impact on their overall tax liabilities.

The implications of BEPS 2.0 for corporate structure, transfer pricing, statutory reporting, and general tax forecasting and reporting are significant. Corporate finance teams must act now to gather information, assess the potential impact, and put into motion any necessary changes to their tax strategy.

Gathering information is a key first step. Tax reporting is built on complex models that account for a myriad of rules and scenarios that balance risk exposure with tax liability and other business considerations. The mere task of collating information from multiple companies and tax jurisdictions can be overwhelming.

As divergent accounting standards continue to evolve, such as the US Generally Accepted Accounting Principles and the International Financial Reporting Standards, it can even be complicated to produce income statements or pro forma statements that align with the requirements under each set of rules. Once that information has been collected, it needs to be understood within the full context of the BEPS 2.0 Inclusive Framework.

For companies that have spent years building up financial models with which to weigh the potential advantages of various tax strategies, there will be several changes for reporting and forecasting.

Transfer pricing strategies will undoubtedly grow more complex as a result of BEPS 2.0, especially with regard to intangible property and digital products such as software and technology services. At the same time, regulatory scrutiny of transfer pricing practices is likely to increase. Documentation requirements have grown in recent years, and that trend is only likely to continue.

A further challenge is looming after the initial adoption of the BEPS 2.0 Inclusive Framework: BEPS 2.0 is unlikely to remain stable.

Because it is a relatively new standard that radically changes global taxation, BEPS 2.0 will almost certainly undergo further changes. For corporate financial leaders, that means more modifications to the tools, processes, and financial models on which they rely for strategic tax reporting.

Government programmes will also impact decisions with respect to corporate activity in low-tax countries. Green energy initiatives, economic stimulus programmes, and similar incentives add yet another layer to the planning rubric.

Historically, governments have attracted businesses to their territories by offering lower statutory tax rates. Because that opportunity has been diminished, governments will likely introduce other initiatives to attract businesses, which must be monitored by tax teams.

This multi-layered environment of financial standards, government regulations, and incentive programmes, combined with the radical changes set forth by BEPS 2.0, add up to a mountain of tax forecasting and reporting complexity. When you consider the inevitable changes that will follow the initial adoption of the BEPS Inclusive Framework, that complexity grows even further.

Companies must therefore move quickly to put appropriate models in place to:

• Forecast the impacts and be able to calculate tax accruals;

• Make statements regarding the impact of BEPS 2.0 in corporate financial statements; and

• Be able to file tax returns successfully.

Put simply, tax and transfer pricing software is designed to solve the problems faced by teams who are still managing processes such as forecasting and preparing year-end tax results using manual methods or spreadsheets.

These problems could include:

• Failing to comply with regulatory deadlines for tax returns and attracting fines or risking reputational damage;

• Putting unnecessary pressure on tax teams to complete forecasts and returns;

• Making mistakes in reports or calculations; and

• Imposing last-minute changes on regional operations that can affect remuneration levels for valued employees.

Such problems occur because data relating to tax is not standardised across the business, or is gathered at the last minute from regional operations. Problems can also arise if financial data needs to be re-entered manually before it can be used as the basis for calculating tax results, or because data is not returned to the tax team at the level of granularity they need; for example, data used by the rest of the business is based on business units, whereas tax needs data at the legal entity level.

To secure the most value from new technologies, such as artificial intelligence and analysis, data needs to be in a standard format that machines can read and robots can manage with minimum input from humans.

Another impact of digitalisation is that the corporate finance function has transformed, and will continue to change, its use of technology. Today’s CFO role encompasses much more than finance, and is likely to include oversight of initiatives such as IT system selection, sustainability strategies, and data custodian services.

The fact that so many finance teams have taken the lead on the automation of day-to-day finance processes means that they have created the room and resources to move beyond a basic balancing of the books.

While investment in ERP, process automation and analytics has long been a must-have for MNEs, a similar level of commitment has not always been so evident for tax planning, reporting and compliance activities, nor for monitoring transfer pricing.

However, the collision of changes in the CFO’s role with the global tax reform initiatives outlined above means more pressure is coming from the office of the CFO to implement systems that can help tax teams to create data that is needed to:

• Reduce risk in the tax filing process, whether that is fiscal or reputational;

• Improve financial reporting and forecasts;

• Standardise all financial information to enable real-time reporting and access; and

• Support advanced analytics.

Investing in tax and transfer pricing software may be the first stage in adopting a more strategic approach to tax planning and reporting. By providing more accurate and timely forecasts and reports, the tax team can add huge value to decision makers. This not only helps the organisation to prepare for changes in tax regimes, but also provides a more meaningful career path for tax professionals.

In a 2018 paper entitled “Artificial intelligence and the future of accountancy”, the Institute of Chartered Accountants in England and Wales (ICAEW) said that opportunities are opening up for finance professionals willing to learn new skills. “Accounting roles are already changing in response to new capabilities in data analytics,” it stated. “Indeed, accountants are well placed to work effectively with data analytics, as they combine high levels of numeracy with strong business awareness. These trends will accelerate with AI.”

The adoption of AI and automation will even introduce new roles to the finance profession. “For example, accountants will need to be involved in training or testing models, or auditing algorithms,” the ICAEW added. “They may need to get involved in projects to help frame the problems and integrate results into business processes. Other accountants may be more directly involved in managing the inputs or outputs, such as exception-handling or preparing data.”

To ensure their businesses keep up, seasoned tax professionals already in the workforce should look to bring these capabilities into their organisations by adapting their people, processes, and technology.

Meanwhile, tax teams are having to cope with:

• Greater uncertainty;

• Bigger changes in goods and material costs and availability;

• Remote or flexible working arrangements; and

• Increased scrutiny from their CFO, auditors, and tax authorities.

The benefits of implementing robust tax software extend beyond preparing reports and returns in time. Organisations that have already taken action report that they have been able to modernise their tax departments and processes. They have cut out unnecessary stages and established centralised/standardised data pools, thereby reducing the pressure on tax teams, regional managers, and senior leaders.

Instead of having multiple reports for different stakeholders in the tax ecosystem, MNEs can ensure that there is only one version of the truth, which can be viewed through different lenses depending on the task in hand. Tax software also enables a more strategic approach towards forecasting and planning, one that is predicated on concepts such as transparency and real-time reporting.

How can MNEs stay ahead of the curve when the future is so uncertain? The answer is to move as quickly as possible away from manual and spreadsheet-based methods of collecting data from multiple sources, in multiple formats, to an agile, yet standardised and automated, approach using a robust, and tried and tested software platform.

This can only be achieved by introducing change within the tax team and in how it interacts with the rest of the business.

Attracting the best tax professionals to an organisation will depend on being able to provide access to new technologies, rather than outmoded manual processes.

Having the right platform in place also releases tax teams’ time to be spent on more valuable efforts, such as:

• Identifying trends within tax data;

• Considering the implications of different scenarios; and

• Feeding insights into tax planning and forecasting.

With increased complexity in regulation, taxation and reporting around the globe, technology is helping corporate leaders to keep up with these growing demands.

During periods of rapid, radical change, however, technology is not just helpful – it is indispensable.

Any new tools and processes that corporate tax teams implement must be flexible enough to accommodate a wave of potential changes. BEPS 2.0 must be factored into decision processes. Tax reporting and transfer pricing technology, likewise, must incorporate the new framework and be capable of modelling financial scenarios that consider a range of factors, including different financial forecasts and new initiatives in key jurisdictions.

Insightsoftware, which has been working with tax professionals in mid-size and large corporations since 1994, has developed a Longview Tax product that aims to improve tax forecasting and reporting by replacing disconnected systems, manual spreadsheets, and error-prone communication with a single source of truth, purpose-built for centralised tax forecasting, provisioning and reporting, analytics, and comprehensive tax management.

Over the past year, the international tax experts at insightsoftware have met top global certified public accountant firms and large multinational customers to understand the implications of BEPS 2.0 for clients.

As BEPS pillar two looms on the horizon, it is vital to centre tax reporting and transfer pricing strategies around an agile, sustainable, and unified view of the entire organisation.

In many organisations, finance leaders are unable to see their group company’s effective tax rate until it is too late for them to do anything about understanding and managing it. When BEPS comes into effect, that lack of visibility will become even more of a liability. Companies that want to understand their options should put systems in place as soon as possible to reap the benefits of smart corporate tax strategies in the years to come.

If your company is considering the impact of BEPS and you would like to learn how to ease the burden of tax reporting and forecasting, and transfer pricing management, you can contact insightsoftware to arrange a free demo of Longview Tax and Transfer Pricing.

To read the original insightsoftware white papers on which this article is based, please click on the below:

• The Implications of Automating Tax Management in an Era of Global Change; and

• The Role of Technology in Adopting BEPS 2.0.