Strategic CAOs can help prepare their organization for Pillar 2
During this time of the year, many Chief Accounting Officers (“CAOs”) are heavily focused on ensuring the organization delivers high-quality financial information to investors through earnings releases and related investor material and the annual audited financial statements, including those filing
a Form 10-K.
However, CAOs of multi-national companies may already need to be looking forward as the Organization for Economic Cooperation and Development (“OECD”) has recently added an additional requirement for financial reporting to the mix of an already complex set of demands on the CAO’s organization (along with the Tax department). In December of 2022, the European Union reached a unanimous agreement to implement the EU Minimum Tax Directive (Pillar 2) which is part of the OECD’s Base Erosion and Profit Shifting project. Many other jurisdictions are also expected to implement the Pillar 2 rules this year.
The Pillar 2 rules seek to implement what in effect is a minimum tax rate of 15% (applied on a country-by-country basis) for Multi-National Enterprises (an enterprise with one legal entity outside of its home jurisdiction) with total average revenue of greater than 750 million euros (approximately $810 USD at prevailing exchange rates) in 2 out of the last 4 years1. At least some aspects of these rules will take effect as soon as fiscal 2024. Thus, a large group of entities in the United States will be subject to some level of Pillar 2 compliance activities.
Why is this relevant to CAOs of multi-national enterprises, both public and private? Because the Pillar 2 Rules generally rely on the parent entity’s consolidated financial statements with adjustments, and in particular the information by the legal entity that is used in preparing those consolidated financial statements, in order to determine the denominator in the calculation of the Effective Tax Rate as compared to the Minimum Tax Rate of 15%. The numerator of the Effective Tax Rate calculation i.e., tax expense, also heavily relies on financial accounting concepts, including current and deferred tax expense.
The complexity arises from the numerous adjustments that are to be made to the GAAP financial statement amounts, along with other voluntary elections that can be made to further smooth the results period-to-period to reduce volatility from matters such as accounting for certain assets and liabilities at Fair Value, and not recognizing the impact of pushing the impact of purchase accounting down to an acquired legal entity’s general ledger.
Strategic CAOs should take the opportunity once they have completed their year-end responsibilities to:
Tax planning and compliance has always been an area where Strategic CAOs have been instrumental in helping organizations achieve their financial objectives. With the onset of Pillar 2, CAOs can further help their organizations successfully manage the impact of this initiative through cross-collaboration with Tax and trusted advisors, leveraging the CAOs intimate knowledge of financial reporting requirements, supporting systems and tools, and related data insights.
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Additionally, visit BEPS Pillar One and Pillar Two webpage for insights from KPMG leaders on the potential impact of proposed tax reform in this ever-changing global economy.