As OECD negotiations with more than 137 countries for a global tax overhaul continues into 2021, taxpayers at ITR’s Digital Economy Summit on September 24 were concerned that different interpretations of pillar one and pillar two could have long-term consequences.
“We think that pillar two could be understood in some jurisdictions as a minimum tax,” said one tax director at a bank operating in the UK. “Some countries will understand pillar two more as a cash flow tax. The way it’s understood by each country could have a significant impact on the effective tax rate,” they added.
To complicate matters, many countries are introducing different types of digital services taxes (DSTs), in case an OECD solution fails, which will likely lead to multiple taxation risks and trade wars.
Facebook and other large businesses in scope of such DSTs and the OECD proposals announced that their data management strategies will have to change. For example, an ERP system’s treatment of accounting data influences jurisdictional blending to set the minimum tax rate under pillar two.
Data management sets the pace for digital transformation
As authorities focus on increasing corporate transparency and finding solutions to tax challenges in the digital economy, businesses need more input from the tax team as many are diversifying their product lines and moving to digital activities to keep entities afloat during the pandemic.
Tax departments are getting more attention within the business, and tax directors said they are more directly engaged in decision making in 2020. They shared their digital transformation strategies to prepare for long-term changes under a global tax reform, including working with limited, reactive tax technology projects when in a multiple ERP environment.
“I would put in the same cloud-based specialist tax provider for each ERP, so we’re standardising across the ERPs and getting as much consistency as possible across the rules applied to data that business intelligence and data analytics plug into. That way, it all feeds back into the tax data,” said one finance director at a fintech company.
Some who are reviewing cases for in-house ERP transformations are focusing on fixing data quality issues with other departments, and improving access across systems. Indirect tax teams already report the largest amount of financial data within most businesses.
Data management is a large part of tax transformation plans for many multinational companies as countries move to more digital, real-time reporting measures such as making tax digital (MTD) in the UK or various standard audit files for tax (SAF-T) formats in Europe.
The role of data is also critical to a successful transition to other systems to support transfer pricing (TP) policy. Some taxpayers expect data-driven insights from authorities looking at country-by-country reporting (CbCR) to lead to a number of audits and subsequent disputes.
There is still an ongoing debate between taxpayers on whether businesses should implement tax engines for data processing or add-on solutions to complement their ERP systems. Tax engines are too costly for many businesses and add-on solutions to the ERP risk more challenging manipulations in the future as tax rules continue to routinely change and increase the compliance burden.
One tax director at a multinational downstream oil company from Singapore said: “The brutal answer to using tax engines was to come up with a single source of tax truth when it comes to providing our data to tax administrations.”
Almost all in-house tax directors at ITR’s Taxation of the Digital Economy Summit 2020 are looking closely at how their data is organised before considering any bolt-on solutions to their ERPs.
Policymakers stress more corporate engagement likely on digital tax matters
While the OECD’s digital tax agenda impacts a range of medium to large businesses, one tax policy advisor at the European Parliament said he found limited engagement from businesses on the digital tax agenda outside of the largest digital companies such as Amazon and Facebook.
“I’ve been working in Parliament for six years. I know there are many companies here that are not the Google, Amazon, Facebook, and Apples of the world,” said the policy advisor. “NGOs come to us, but not SMEs or even bigger digital companies.”
Many of the biggest technology companies have representatives lobbying on the digital tax agenda in Brussels, but this is not necessarily true of many other companies in the sector. “Brussels really needs your voice,” added the advisor. The EU has agreed to wait for the OECD’s digital tax solution expected in mid-2021, and the digital tax plans are open to public comment until December 14.
Taxpayers at the Summit also turned their attention to the EU definitive VAT regime changes expected in 2022, and the influence that the OECD’s digital tax plans can have on the role of platforms in collecting VAT from online sales. Some key rules may be subject to change such as the destination-based principle, which applies VAT in jurisdictions where the consumption of the good exceeds the country’s set threshold.
However, tax directors are not yet focusing on adjusting their systems for the incoming VAT change because there is limited confidence in the EU revising the regime on deadline given high levels of business uncertainty amid the pandemic.
“It will be a nightmare for ERP systems,” said one tax director with a European manufacturer about the incoming EU VAT regime in 2022.
As taxpayers review the OECD’s proposals for global tax reform during the ongoing consultation period that ends in December, many will be forward-planning for the challenges under the novel approaches, including cost-effective system changes.
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