BEPS 2.0

Tax challenges arising from the digitalisation of the economy

Prepared for the next phase of BEPS?

The OECD’s Base Erosion and Profit Shifting Project (BEPS) aims to secure and sustain the international tax system and increase tax equity among traditional and digital businesses. The rules are currently still being developed and it is difficult to predict the outcome of that process. However, whatever the outcomes of the programme and the concrete proposals on the reallocation of taxing rights and global anti-base erosion will be, international businesses in all industries that meet the respective thresholds are likely to be affected. Are you prepared?

This page provides an overview about BEPS 2.0 and what it means for your business.

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The OECD Programme of Work on the Tax Challenges Arising from the Digitalisation of the Economy

What is it and why does it affect not only digital companies but all industries?

What is it and why does it affect not only digital companies but all industries?

The digitalisation of the economy has social and economic impacts in many areas, including taxation and, in particular, the current international tax system. This system was designed in an era when companies provided services and goods mainly through physical presence locally or internationally. With the emergence of purely digital companies and subsequent digitalisation of goods and services companies alike, it has been widely recognised that the current international tax system is no longer fit for purpose.

In order to adapt existing tax systems, members of the OECD/G20 Inclusive Framework (IF) on BEPS are looking at a comprehensive, consensus-based solution to what has been considered the two main challenges arising from the digitalisation of the economy.

  • First, as digitalisation allows businesses to operate without a physical presence, the existing nexus-based system that allocates taxation rights among countries based on physical presence is no longer considered effective.
  • Second, new technologies are thought to facilitate tax avoidance through the shifting of profits from high tax to no or low tax jurisdictions.


The OECD IF considers that addressing these challenges through a coordinated international response is key to maintaining a functioning international tax system and avoiding unilateral measures by individual countries.


What is covered and what is the timeline proposed by the OECD?


BEPS Pillar 1 and 2

Pillar 1: Reallocation of taxation rights 

The OECD IF is undertaking work under a Pillar 1 approach and will:

  • analyse issues around the physical presence of a business.
  • look at the question of what will be taxed and where.
  • aim to determine the allocation of profits to countries where users/customers are located.
  • introduce a fixed minimum return for baseline marketing and distribution activities with a wide scope of applicability

Pillar 2: Global Anti-Base Erosion (GloBE) proposal

The work that the OECD IF is undertaking under a Pillar 2 approach would be based on a set of four rules:

  • an income inclusion rule that would subject foreign income to a minimum tax.
  • an undertaxed payment rule that would deny deductions or introduce source-based taxation under certain conditions.
  • a switchover rule from exemption to credit method under certain circumstances.
  • a subject-to-tax rule that would complement the undertaxed payment rule in certain cases.

How can you prepare?

Impact Simulation & Analysis

With the help of our proprietary PwC technology tools & dashboards you can simulate Pillar 1 & 2 impact and analyse the potential impact on your organisation. Contact us for more information and guidance on how our tools & advice can help prepare you for BEPS 2.0 reality. 

  • Simulate the potential impact of Pillar 1 (Amount A and Amount B) using various parameters
  • Quantify potential impact from a profit reallocation (Pillar 1) and effective tax rate perspective (Pillar 2)
  • Verify which group jurisdictions or entities are likely to be most affected by the new proposals
  • Prepare multiple scenarios and evaluate potential need to act or prepare

Are you ready for a new global Tax System?

Under an OECD Inclusive Framework, 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalization of the economy. Pillar 2 introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue over €750m are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

According to the initial timeline released by the OECD, these rules would become effective in 2023, except for the UTPR which would become effective in 2024. While EU Member States are working diligently to reach agreement on the rules, some countries, e.g., the UK and South Korea, have drafted domestic legislation, while others have initiated public consultations. Many countries have stated the need to push back the effective dates to 2024. Given the enormity of the task ahead this is expected and welcome. However, many multinationals already are subject to Pillar 2, since the transition rules capture certain transactions occurring on or after 30 November 2021.

 

 

 

What’s involved in getting your company ready?

Pillar 2 will have a monumental impact on your tax department’s end-to-end operations. You’ll need to ensure you have the data required to forecast and model in the interim, as well as the data needed to maintain reporting and compliance requirements once the new rules are enacted. 

It’s not just your tax function that will be impacted. Key stakeholder groups including controllership and financial planning & analysis will also be affected. Such a broad BEPS 2.0 readiness initiative could potentially stretch your resources to or beyond their limits. The person in charge needs to respond to questions and challenges across four broad categories: people, process, data and technology.

If you’re within scope, you’re going to have to understand, evaluate and model the impacts of Pillar 2 across the organisation. This includes assessing the additional data and reporting/compliance requirements, evaluating your existing technology ecosystem and capabilities, setting up processes and controls, preparing and training resources, and managing stakeholder expectations.

Are you Pillar 2 ready?

At PwC we’re geared up to helping you evaluate how Pillar 2 might impact your organisation and assessing what’s required for readiness. Given the changes to the law anticipated in many countries, we can help you work out how to access the financial data necessary for compliance, identify gaps in the data needed for reporting, and re-evaluate your operations.

Assess

We help assess and model the likely financial and operational consequences of Pillar 2, including:

  • Data accessibility, quality, gaps and remediation.
  • Modeling to understand both Pillar 2 financial impact and process impact on key jurisdictions.
  • Assessment of whether it may be beneficial to make operational or structural changes.
  • Stakeholder alignment and impacts on the operating model.

Report

We can enhance your reporting and data analytics capabilities, including:

  • Detailed modeling to provide the data for financial disclosures.
  • Validating deferred balances ahead of the first Pillar 2 reporting period.
  • Updating ERP/CPM processes and cloud data solutions.
  • Reviewing the tax reporting process and use of technology to automate / streamline.
  • Consulting on tax accounting treatment, review of disclosures.

Comply

We help you meet your ongoing reporting and compliance obligations, including:

  • Support the development and configuration of modeling and compliance solutions using your existing systems or your internally developed solution.
  • Utilize PwC’s Pillar 2 Engine to help reduce the time and cost associated with your future reporting and compliance obligations.
  • Documentation of Pillar 2 related processes and controls to align with tax governance frameworks.

Modelling, visualisation and reporting: The technology angle

The new compliance and reporting requirements introduced by Pillar 2 are based on new calculation methodologies. The data points used for existing reporting and those required for Pillar 2 overlap to some extent. We advise doing an assessment to confirm whether required data points can be extracted from source systems or whether you’ll need change requests to capture the data required.

For the calculation, different approaches can be taken: in- or outsourcing, calculation within the existing ERP or consolidation system, or the usage of a tax engine. Which approach is the right one for a given multinational group depends on its tax and technology strategies.

  • For insourcing, we advise clients in the selection of the most suitable provider and support them in the implementation – both from a tax as well as an IT technical perspective.
  • For outsourcing, we offer PwC’s Pillar 2 Engine, a structured model for assessing the impact of Pillar 2. Not only is it flexible to allow for a variety of data structures and sources; it also prioritises the key adjustments/elections. The modelling provides compliance and provision grade calculations as well as data visualisation to identify key territories where there is a risk of an OECD Pillar 2 tax charge. 

Our engine draws on a centralised database with a vetted calculation engine in consultation with PwC Global technical and policy leaders. The database is dynamically updated for rule changes and new legislation in each jurisdiction.

 

 

 

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Dominik Birrer

Partner Tax, PwC Switzerland

+41 58 792 43 22

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David McDonald

Partner and Leader FSTP PwC Europe, Zurich, PwC Switzerland

+41 75 413 19 10

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