Chief Tax Officer Insights | July 2023

Recognizing the extensive operational updates needed to meet new compliance requirements, Pillar Two readiness is top of mind for CTOs of multinational organizations. Acting now is crucial to ensure that your information systems can meet the data demands for performing the computations and reporting required under Pillar Two.

Dealing with data

CTOs foresee Pillar Two compliance as more of an operational burden than a financial risk. The rules for calculating ETRs on a jurisdictional basis are highly complex and require new sources of financial data. As such, CTOs are rethinking approaches to data sourcing, process automation, and integration of tax into scenario evaluation and strategic planning.

Modeling is an important first step on the path to implementation, giving CTOs insights on jurisdictions that may be at risk of being subject to the Pillar Two top-up tax and expose information or system gaps that may need to be fixed as part of preparing for Pillar Two. Companies with disparate data streams are especially challenged and will need to develop a comprehensive data strategy to evaluate system changes before implementation deadlines.

CTOs are also turning to customized enterprise planning tools (ERP) such as SAP to plug data gaps to accommodate the granularity of the GloBE calculations while staying focused on material matters.

There may be some temporary relief for CTOs dealing with the massive data burden brought on by Pillar Two compliance requirements through the application of the transitional safe harbor rules, which CTOs are hoping will become permanent. These rules allow companies to perform simplified computations using information that is generally contained in their financial statements and county-by-country reports, though both need to meet a defined “qualified” standard. Groups must test whether they are eligible for the safe harbor annually in each jurisdiction in which they operate; where they do, they are able to avoid performing a more comprehensive ETR computation in 2024, 2025, and 2026. Importantly, modeling may still highlight some jurisdictions where the multinational does not meet the transitional safe harbor rule and would still need to be prepared to perform a comprehensive ETR computation.

CTOs say a good approach to understanding the cost of compliance is to start with transitional safe harbor calculations using qualified country-by-country (CbC) data. Based on these estimates, CTOs can improve tax risk assessment by achieving a holistic view of what is needed on a by-country basis.

A leadership challenge

Strong, clear leadership from tax, with close collaboration with key stakeholders across the business, is essential to navigating the uncertainty and complexity of Pillar Two changes. Indeed, the primary solution to addressing Pillar Two compliance is better technology. The modern systems and tools for managing complex data sets and performing complex calculations for reporting are crucial enablers of tax transformations being driven by Pillar Two and other regulations.

In particular, artificial intelligence (AI) can be used to analyze large volumes of data to identify patterns and trends that can help tax departments make more informed decisions. According to a KPMG survey of 500 business executives, Tax Reimagined 2023: Perspectives from the C-suite¹, more than half (59 percent) already use emerging AI technology in their tax or finance department to make workflows more efficient and to reduce the strain on existing talent. And of the 41 percent who aren’t yet using AI, nearly all are interested in doing so.

The challenge is that AI systems are often big-ticket items that require C-suite buy-in and support for investment. As such, early engagement with senior leadership is crucial given the potentially significant cost of Pillar Two compliance. The CFO and other senior leaders are necessary allies for CTOs seeking timely budget and resource allocation. CTOs also may benefit from including the controllers’ team in Pillar Two discussions, as it has the expertise, information, and resources to help tax meet increasingly diverse and demanding reporting requirements.

Although executive communication is also important,

CTOs may have a difficult time getting attention from leaders about these changes, especially in organizations where there is no material tax impact and Pillar Two is viewed as largely a compliance exercise.

CTOs say executive communication about Pillar Two impacts is a balancing act of ensuring the appropriate budget is available to comply while not overselling the compliance burden. Several executives expressed caution about asking for too much compliance investment, particularly if provisions like safe harbor that reduce workload are extended.

Others say the key to success is finding the right opportunity to communicate, citing several topics that are most likely to drive engagement on Pillar Two.

For example, focusing on potential outcomes of cross- border rules can help executive leadership understand the challenges that tax will need to deal with as countries enact the Pillar Two rules. In addition, CTOs can highlight the increase in compliance spending that is anticipated in the coming years because of the new tax reforms.

A role for third-parties

Given the novelty and complexity of the model rules, and in light of the challenge associated with deviations that may arise as jurisdictions translate model rules into domestic law, Pillar Two is raising questions—and propelling changes—about staffing decisions and use of advisers. Based on the scope of compliance and administrative work, organizations are scrambling to strike the right balance between make-and-buy decisions. However, there is little consensus about the optimal approach.

Many CTOs are leaning on the expertise of large accounting firms to assist with reporting obligations, particularly CbC reporting and ETR calculation.

According to the KPMG 2023 Tax Reimagined survey, Tax Reimagined 2023: Perspectives from the C-suite², 94 percent of corporate executives say they are more willing to outsource or co-sourcing their tax function this year compared to last year.

The increased information requirements of Pillar Two compliance is also increasing the appetite for various sourcing options. The data burden requires greater reliance on data systems and automation tools—and stronger technical capabilities—than many departments have in house. KPMG’s research finds that nearly all C-suite leaders (99 percent) would consider an alternative tax function sourcing model to leverage the tech expertise, tools and skills of a third- party provider to combat their challenges to recruit professionals with technology-savvy skills.

Others feel a hybrid solution—licensing a tool from a third party and using it in-house for modeling, scenario analysis, and tax planning—is the best model.