Amid the maze of global financial regulations is Pillar II reporting — an arduous challenge that multinationals now have to navigate. Domestic tax rules are intricate enough, but the global tax framework introduces a layer of complexity that can be overwhelming. 

And things are about to step up a notch. But fear not — there is a way to simplify things. Read on to learn how centralizing intercompany transactions takes the sting out of the latest compliance challenge.

Understanding the Scope of Pillar II Reporting

Pillar II reporting is the latest attempt by the Organisation for Economic Co-operation and Development (OECD) to prevent base erosion and profit shifting (BEPS). It requires that multinationals pay a minimum amount of tax on profits, regardless of the region in which they’re generated.

Pillar II reporting applies to multinationals — both privately and publicly owned — with consolidated revenue in excess of €750 million (approximately $827 million). Such entities will have to pay a minimum of 15% tax on income generated in low-tax jurisdictions.

There are also rules about top-up tax; if the minimum tax rate has not been met in a given jurisdiction, companies will have to make up for the shortfall. However, the rules stipulating whether or not top-up tax is owed are complicated and there are various exceptions.

Data, Data, Data!

The OECD framework for Pillar II reporting requires comprehensive data collection. Data will need to be collected at the entity level, as well as tax rate calculations at the jurisdictional level (this includes top-up tax, and data on its allocation back to the entities). Other sources companies will need to use include CbCR reports.

According to PwC, much of the data required will be so granular that it will not be ‘readily available’ in any singular system. Instead, it will need to be aggregated from many systems, including ERPs, HR software, tax provision and compliance systems, sales systems, and other subledger systems.

They also note that this data is owned by different stakeholder groups (tax, legal, IT, etc.), further complicating the matter. 

Has Pillar II Reporting Been Enacted in the US Yet?

The OECD has released guidance but cannot establish legal changes in each country, so it’s down to each country to implement the guidance into local legislation.

As such, while Pillar II isn’t currently mandated in the United States, it will affect US-headquartered multinationals operating in other jurisdictions (more than 135 countries chose to participate in these new rules). In many countries where it hasn’t already been implemented, it will be within the next year.

Regions in which it has already been enacted include Japan and South Korea, while countries such as the UK have partially implemented it.

PwC states that reporting entities operating in regions where Pillar II has already been enacted should be estimating tax obligations for interim and annual reporting periods starting in Q1 of 2024. 

What is the Transition Period?

The transition period for Pillar II reporting gives multinationals time to develop the processes needed for information collection and reporting on a constituent entity (CE)-by-CE basis. Here are some key details about the transition period:

• It applies to all fiscal years beginning on or before December 31^st, 2028, but not including a fiscal year that ends after June 30^th, 2030.
• During this period, a simplified jurisdictional reporting framework is available, allowing companies to report on a jurisdictional basis rather than CE by CE.
• The simplified framework does not apply to jurisdictions where a top-up tax liability arises and needs to be allocated on a CE-by-CE basis.
• By the end of the transition period, multinationals are expected to have developed the necessary systems and processes to facilitate CE-by-CE reporting.

Reporting Challenges for Multinationals

Many companies are concerned about their ability to meet the reporting requirements for Pillar II, and rightly so. Here’s why.

Data Integration

A significant hurdle in achieving compliance with Pillar II is data management. As we said above, the comprehensive datasets will need collecting and, by default, data will be spread across numerous systems and be owned by different parties.

In fact, according to Thomson Reuters, a mere 40% of the necessary compliance data resides within the primary ERP systems used by some organizations.

This figure highlights a critical gap in the data ecosystems of many multinationals, where scattered data leads to increased costs and complexities in preparing the necessary reports — Pillar II or otherwise.

Staff have the tedious task of searching through many different systems and repositories in the hopes of finding the data they need, wasting disturbing amounts of time in the process.

Different ERP systems may also store data in different ways, giving rise to issues with file incompatibilities or duplicate-or-missing data.

In PwC’s Pillar Two Data Input Catalog, it’s recommended that one of the first steps to take in preparation for the new rules is to identify the data requirements and develop a comprehensive data strategy.

High Costs of Compliance

The financial strain of compliance can be substantial. Gathering, validating, and reporting the data required is a monumental task in the best of cases — even when it’s more organized than in the example above. No matter what, it’s a resource-intensive process that can detract (in time and cost) from other vital business activities.

The Solution: Centralizing Intercompany Transactions

An effective strategy to streamline compliance is to centralize the management of intercompany transactions within one platform.  

As mentioned, many companies use numerous, separate ERP systems, and by centralizing all IC processes — regardless of the number of ERPs — a company can significantly ease the burden of data collection and analysis; they can access the data they need without having to sift through endless separate sources, hoping for the best.

Centralization provides a unified view of all transactions, enables standardization of the reporting process, enhances accuracy, and reduces the chances of errors.

It also enables more efficient review of controls, reduces the need for repetitive audits across subsidiaries, and enhances the overall audit trail for better transparency and accountability.

Pillar II aside, another general benefit is that having all data accessible in one place makes it easier to gain critical insights that drive better strategic decisions about cash flow, pricing strategies, and so on.

How Virtual Trader Centralizes Financial Data and Makes Compliance Easier

Trusted by Fortune 100 companies, Virtual Trader is designed to address the very challenges discussed above. As well as automating IC transactions, it replaces outdated ad-hoc processes and provides the centralization and standardization that all multinationals need.

No matter how many ERP systems are in use throughout an organization, our solution integrates seamlessly with them all — streamlining the process of compiling, analyzing, and accounting for the changes required for Pillar II compliance.

In essence, it provides a single source of truth for financial data, making it easy to handle any external enquiries.  

Conclusion

While the journey toward full compliance with Pillar II reporting may seem daunting, the centralization of intercompany transactions — made possible by advanced solutions like Virtual Trader — can significantly alleviate the challenges involved.

MNEs can then ensure they not only comply with current regulations but are also prepared for future changes in the global tax regime.

Are you ready to create a robust framework for compliance? Then contact us today to request a demo.