Pillar Two Rules Can Help Kickstart Tax Accounting Improvements

The OECD’s Pillar Two rules mark a significant shift in the global taxation landscape. For tax functions within impacted organizations, it adds additional pressure on the tax provisioning process at year-end due to the additional calculation of Pillar Two top-up taxes required.

For some companies, such as those without a tax provisioning tool or with incomplete data, an already straining system risks breaking under the weight of the requirements.

Pillar Two could kick also start transformations within an organization’s operating model around tax accounting. This may be out of the need to meet the imminent and dynamic compliance and reporting requirements of Pillar Two, a wish to harmonize tax data and processes, or a decision to finally fix a painful tax provision process.

There are several ways to accelerate the journey to an efficient tax accounting operating model—and some pitfalls that can hinder success.

New requirements put more pressure on the tax provisioning process. Many organizations focus now on incorporating Pillar Two provision calculations into their tax reporting process to be ready for the 2024 year-end, or in validating qualified country-by-country reporting data and transitional safe harbors.

Companies already calculate current and deferred tax provisions under a lot of time pressure, and group level review is often done in only a couple of days. Figures are ready just in time for the deadline, and the review process fills any remaining minutes before sign-off is required.

Starting from year-end 2024, organizations will need to cope with the increased workload of Pillar Two without any additional time or resources. Top-up tax provisions and associated disclosures are required. Deferred taxes may also need to be calculated and booked with greater granularity to be considered covered taxes for Pillar Two and to allow ongoing tracking.

Preparing for these challenges requires a critical look at the existing operating models, technology solutions, data management, and team skills.

Factors for success. A successful tax operating model transformation begins with documenting existing systems to identify current pain points and reflect how the new processes will fit in with current operations. This shows how operations are performed and can help validate assumptions and plan a future-state process.

Automating data collection as much as possible will reduce the manual effort required and free up time for the tax team to focus on review, strategic analysis, and planning. Adjusting data as far upstream in the finance process as possible allows the correct data to be available for tax provision calculations.

Each data point should have an assigned responsible person to ensure accuracy, timeliness, and completeness. That person should be aware of the impact on the tax calculations.

Introducing a hard-close process based on estimates before the year-end can speed up year-end reporting and may provide the necessary reprieve to meet deadlines.

Standardizing the submission of local tax data to the group for consolidation and incorporating Pillar Two data points can help ensure consistency and accuracy in tax calculations and allow for more detail. Automating the consolidation further improves efficiency and reduces the risk of error.

Companies will need some form of Pillar Two tool to calculate top-up tax provisions and prepare filings and returns. This might be developed in-house, licensed from an external vendor, or outsourced to a service provider. Any decision must consider an organization’s structural and technical requirements.

The decision should consider the potential to integrate a tax provisioning solution either simultaneously or incrementally, and the tax provision target operating model should be included in the planning phase of the Pillar Two implementation. Whether within the same tool or in a linked solution, being able to pull data efficiently will be key to saving time.

Many tools include features such as scenario modeling, which can highlight the effects of any changes to current or deferred taxes on the Pillar Two calculations. This ensures that any tax efficiency gains don’t result in an unintended increase in top-up taxes owed. Being able to see the impact that a change has elsewhere on the tax figures will be crucial for making informed decisions.

Challenges and setbacks. Tax systems are becoming increasingly connected, which necessitates a collaborative approach between local and group tax, finance, and with service providers. Corporate income tax return calculations, deferred tax provisions, return-to-provision adjustments, and Pillar Two top-up taxes interact so closely with each other that dealing with these in silos can take extra time and increase risk.

Assuming that a chosen software will work out of the box within a short time frame can cause frustration and missed deadlines. Tax teams that don’t have the IT team integrated from the beginning often find themselves facing this problem.

Process optimization can focus too strongly on technology. But technology is only as good as the data it receives and the users who operate it. If end-users aren’t included in the planning and implementation of a new system, or aren’t provided with adequate training and documentation, they are unlikely to buy in.

Ultimately, Pillar Two can be used as a catalyst for improvement and can help the tax function to future-proof its processes and relieve the strain, provided the right approach is taken.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brandi Caruso heads Deloitte’s Swiss tax accounting team, responsible for clients with significant operations globally, and is lead tax audit partner for Swiss and globally led audit engagements under US GAAP and IFRS.

Sarah Rathgeb leads tax operating model improvement and tax technology projects for international and Swiss groups, specializing in process optimization and automation.

Robert Junge is part of Deloitte Switzerland’s tax and technology team, with focus on OECD BEPS Pillar Two and other emerging tax issues.

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