Kash: Welcome, Demi, Craig and Kevin. Thanks for joining me today. You've all been heavily involved in what many thought would never come to pass, which is actually the completion of the first year of BEPS Pillar Two compliance cycle.
That's been a monumental task in terms of the actual completion of GloBE Information Return and local domestic filings. And there's certainly some learnings in terms of what we've done and what tax leaders have experienced in groups.
If I could start with a question, what would be the key lessons for tax leaders in terms of how they've dealt with the first year? What are the things that they need to retain and what do they need to change and evolve going forwards?
Craig: For me, one of the biggest takeaways has been the need to approach Pillar Two as a global programme. As you said, for many groups this has been filings in up to 30 countries. But this is all based on the common standards set by the OECD.
And in my experience, the groups that handled this most effectively were those that had a clear global methodology. They drove that from the centre, but they had the right level of local input that was needed for those local filings.
Kevin: And I think that was really important. The local input, especially although Pillar Two being a global regime, what we saw practically from a filing perspective, is multiple different filing formats, mechanisms, different legal requirements needed to support the actual filing process. So there was consistency in the calculations, but the actual mechanics of filing was highly jurisdictional-specific.
Demi: There is a large part of the process can be globally standardised, like the data source. Because a lot of the groups use the Group GAAP Accounts and the data coming from similar accounting treatments. This is done once and it can be mapped out to the whole group.
There is also the treatment specifically on technical issues across different transactions that are affecting many, many different jurisdictions within the group. And also the election points, which a lot of the groups actually, at least from my perspective, left really late.
They have to reinvent the wheel and have to look at the different elections over and over across different parts of the group, which is really inefficient.
Kash: So definitely some key benefits there. What were the other key benefits of having a global standardised approach, as opposed to just dealing with this in local filings?
Craig: I think we had the efficiency and the consistency from that global approach. So lots of efficiencies from collecting data once, doing the calculations once as far as possible, consistency and the technical positions that were being adopted - you don't want to have 20 different local country teams reaching a different view on how to treat an item. So actually groups having that consistent technical understanding of the rules.
Then I think really importantly was the visibility. We had lots of different deadlines, registration requirements, filing requirements, and for us to help our clients know when to step in and escalate and take action, that central view and control was really important.
Kash: That's really interesting. So global standard approach with local input to make sure that the nuance is reflected. We heard quite a bit there about data, Kevin. What does that reveal about groups’ data and systems processes?
Kevin: I think as was mentioned, we got there. Data was collected, calculations were performed and returns were filed. So for year one that's obviously the ambition and a great achievement.
I think it's fair to say there was a lot more manual effort than groups would perhaps prefer in their future state process going forward. I think what we need to think about or what groups need to think about going forwards is how do we take for year one what was quite a manual, quite an intensive process, and turn it into something that is an automated systemisable, auditable to support the increasing complexity of the calculations that we'll see over the next few years, as we think about the tapering away of the transitional safe harbours, further failures in jurisdictions that perhaps become more material than we saw across a lot of groups for year one.
Kash: That's interesting. And tax authorities, of course, have been getting to grips with the data and technology aspects. How do we think that's going to evolve and how should groups prepare for that as well?
Kevin: Well, we've already seen some tax authorities engage with taxpayers in the UK and globally in respect of filings that were made only in June. So questions already being asked in respect of in particular, the process that has been undertaken by groups in the production of these calculations and returns. So not necessarily inquiring into the numbers yet, but actually just wanting to understand the preparation and the approach the groups have taken to actually produce the calculations and the filings. And I think we'll see that more frequently over the next 6 to 12 months as well.
Demi: Definitely, because from a UK overall tax landscape perspective, everything is being pushed towards digitalised. Therefore, I mean the Pillar Two filing is purely software-based. So you cannot simply upload a file at your will. So you will expect to see HMRC will be looking at large data-analysis, peer comparison. That was the whole purpose of having a digitalised filing.
Kevin: It sounds groups need to absolutely be thinking about a structured approach to how they handle data, thinking ahead to potential audit and review from tax authorities.
Craig: Kash, I'm already seeing that. I've got a live example now with Switzerland, where the tax authority has looked at the submissions and is challenging whether the country-by-country report is indeed qualifying, which is key to those transitional safe harbours, and asking for that data reconciliation.
And I guess in the UK, we know that will be part of HMRC’s business risk review process. And that often starts from kind of source system through to tax filings. And I expect the HMRC will want taxpayers to be able to talk them through that end-to-end process and to make that sustainable in the long term. They need to move from the manual interventions that we've seen to something that is repeatable and scalable. That is going to be key.
Kash: So, that overall standard approach to data management, it is potentially quite different to how groups have handled their compliance previously given its global nature. So if I can turn to you, Demi, what does good governance look like and how can groups actually factor that into their go-forward processes?
Demi: It's a really good question, because for the first year, I mean, a lot of people notice that there's a workaround, there's a hot fix. People generally got the return done.
But this is really sort of a test of resilience of people who are actually involved rather than an actual process that is sustainable. So going forward, as a good governance, we need to have, as for groups that is in the process for year two, will need to have a BAU reporting process. Just like you're doing the corporate tax or VAT returns that it can't actually be an ad hoc project anymore. So this would require very clear definitions of responsibilities, roles; a distinction between the group functions, the local teams as well as external advisors, because a lot of groups relied on external advisor support to go through the process.
More importantly, as opposed to dealing with any external challenge, whether it's from the auditors or from the tax authority, maybe even just from your internal management, you need to have a very visible sort of review and approval chain and evidence to show how you actually manage the process.
Kevin: I think groups should also consider, in the long-term, the role technology can play in supporting the sort of governance and controls in respect of the Pillar Two process. So for example, how are returns being reviewed? How is that being documented? How has that been evidenced? Could that be done on a technology platform like KPMG's Digital Gateway, for example, within the calculation engine? How are positions being evidenced? And how can all of this be packaged together into a single comprehensive summary in case of that external challenge?
Craig: I think communication within the organisation weaves through all of this.
One of the challenges a lot of my clients had this year was taking that global approach, and the group tax team being clear on what's happening, but I guess local finance teams and local advisors consistently talking and asking questions about Pillar Two, and there was a lot of noise in the system around how it was all happening. So taking those learnings and having the clear roles and responsibilities and technology, but actually communicating that with the wider business so that they understand and it avoids that duplication of effort.
Kash: So if I was to summarise it would be: if it matters to the Pillar Two calculations and tax obligations and tax payable, there needs to be a clear evidential trail and capturing of the basis of those decisions right, and whether that's retained centrally or in local countries.
Well, the OECD and the policy setters like to keep us all on our toes. What do we think the key developments are going to be over the next 6 to 12 months that groups and tax leaders need to be on top of?
Craig: We're very much not in a steady-state position yet for Pillar Two. So I think global horizon scanning for groups is going to be key over the next 6 to 12 months in particular.
And there's two aspects to that. One is on the compliance. We're still seeing more and more jurisdictions implementing these rules, and so they need to monitor that, assess for registrations, filing processes under deadlines remains a key priority going through this next 12-month period.
And then, as you said from a technical perspective, these rules are continuing to develop and will change how businesses respond through their compliance processes. And just a couple of examples of where we're seeing change. We've got the side-by-side agreement that will be in for 2026, which will impact US groups in particular, but broader than that, for all groups, where the parent is in a jurisdiction that hasn't implemented, they've got the new Undertaxed Profits Rule to deal with, which will be quite significant this year.
We will see the phasing out of those transitional safe harbours, which so many of our clients have relied on to simplify the compliance and move to a much more involved, permanent, safe harbour. And that's going to have a big data impact that I'm sure Kevin will pick up in a second.
And then finally, there's still a lot of uncertainty around how the rules work technically. We're seeing continuous OECD guidance and tax authority guidance released. So it’s really important, I think for groups to be assessing that just in an ongoing basis and understanding the impact for them.
Kevin: I think there's a question there of how the groups operationalise this. Do you engage in external advisor to support you with that global horizon scanning that Craig mentioned? Do you leverage AI to support that?
But also more importantly from Craig's point there, what skills and people do you need within your tax function to support not just the management of that horizon scanning, but also those increasing needs for data and the complexity of the calculations, because that's going to require potentially more people or a different skillset than we saw historically.
Demi: Looking back to the points we touched on earlier, you need to centralise the monitoring process for all of the changes, all of the development, all the new requirements that's coming in.
And secondly, you need to have very visible governance to manage and control in order to deal with increasing tax authority and auditor, even internally, the challenge and scrutiny.
Kash: It’s been interesting that that governments haven't collected as much in year one on Pillar Two tax revenues as perhaps they had originally anticipated.
So I think groups also probably need to think about actually how much tax are they going to pay going forward. Is their burden under Pillar Two going to increase?
So, to bring us to a close, I'm going to ask each of you to give me one key action that tax leaders should focus on for the next 30 days. And let's start with you, Kevin.
Kevin: Set a data management strategy now to automate, resolve manual workarounds and improve control.
Demi: Strong governance and the BAU process. Have a single trail of evidence for responsibilities, reviews, approvals and all the documented evidence to support the positions.
Craig: Get started now. The scale and complexity caught many off guard for year one. So now is the time to get started for the year two cycle.
Kash: Thank you, Craig. So the key lessons, if I were to summarise them, were that groups need to take everything they've learned in year one and turn that into a controlled, globally-structured and future-ready process. So thank you for your insights all of you. Super interesting. Thanks, Demi, Kevin and Craig.
