Podcast transcript: Impact of BEPS Pillar Two model rules on taxpayer system technologies

Tony Merlo

Hello everyone and thank you for joining this edition of the EY Oceania BEPS 2.0 podcast series, where we discuss the latest developments and our subject-matter professionals from around the EY organization provide their practical insights.

My name is Tony Merlo and I'm the Tax Policy Leader for Oceania at Ernst & Young in Australia.

Joining me today is Caroline Wright, who heads up EY Australia’s Tax Technology and Transformation practice in Melbourne. For those that are not aware, this part of the practice focuses on improving the efficiency and effectiveness of tax functions through technology and process transformation.

So very keen to hear from Caroline today about some of the critical issues to be navigated in operationalizing the new minimum tax rules.

So let's get right into it. Caroline, from a practical perspective, how should companies be approaching Pillar Two right now?

Caroline Wright

Thanks Tony. So, being a new compliance requirement, we know that you'll need to understand the tax and organizational implications and consider how to embed these into your systems and processes. Now, whilst we don't know the exact timing of the go-live for the new rules, we do know that the earliest time that they'll become a reality is in 2023, and we also know that there will be a lot of practical implications that need to be thought through, such as there's 60 to 100 data points to identify, which is quite a lot.

And if you then work through a potential project timeline, it quickly becomes clear that the time to start working on this is now.

Merlo

You're right, Caroline.

The timelines are very tight when you look at it from a project management perspective, but also there is still a lot of uncertainty around the rules themselves.

How are you seeing businesses deal with this?

Wright

But as we know that whilst the rules have become more certain since December 2021, late last year, there is still a way to go to understand how this will be operationalized in each jurisdiction, and we know that the ATO are working through this now.

So there are still some potential changes to come, but those who are on the front foot here are following what I'd call an agile four-step process.
So that involves modeling, diagnosing, complying, and then a report and resolve piece.

They're building their models, starting to understand the data required, how to pull together the consolidation. So for example, is it likely to be a top down or on a business unit by business unit basis, so more of a bottom up type fashion?

And as the rules change, they're making adjustments to both the models and the process, so the models need to be built in such a way that not only are the rules visible, but can be updated and refined as they continue to evolve and change.

Merlo

So what are the biggest implementation challenges organizations are facing with the new rules?

Wright

So we've been working with quite a few clients already, Tony, and what we're seeing is two main challenges.

The first one is where to get the data, and the second one is the overlay of the technology landscape – the systems and processes.

So what we've been doing is undertaking what we call a number of ‘proof of concept’ exercises, to formulate a road map for how they can comply with the new rules. And in each case what we're seeing, as I mentioned earlier, the first main challenge is where to get the data.

Now the good news is that tax functions will already have some of the data in their provision calculations and their tax returns, and their country-by-country reporting calculations, which is a good starting point. And the challenge we're seeing, though, is that these calculations also require data that has often not previously been needed by tax people. So they need to work out where they're going to get it from, which systems it lives in, and how it can be automated, and how to surround it with a robust process so that the data can be trusted on an ongoing basis, which is really important.

Examples of this sort of data might include data around employee numbers, or tax file status of employees, which traditionally might not have been required for your tax compliance, and this might involve the tax people involving other parts of the organization, such as HR or legal, to obtain the data. And where the data doesn't exist, working with them to form a plan on how to source it.

Now, even where the data does exist and is owned by the tax functions such as your tax provision or your tax return information, it may not be just a case of lifting and shifting that data for BEPS purposes, because there will be some differences in the rules and the way that you calculate things.

So you need to look at it from both a tax technical and a systems lens.

Now the second challenge is really that overlay of the organization’s technology landscape, and as we all know, organizations are all at different stages in their automation journey and they all have a wide variety of technology tools with varying levels of integration.

Particular challenges arise for those who aren't very automated and still use spreadsheets, and those with multiple source systems, such as many ERPs. And often they've also got things like different charts of accounts, and when you're consolidating, that becomes a problem. And sometimes there's different reporting tools in different jurisdictions, so you'll need to decide, if you're going to run a centralized process, what the right tool should be.

And the other one that we're seeing is those who are already in the midst of a transformation journey. And unfortunately, you can't ever say or have any choice in when a new compliance change is mandated. So for those people it's working out what a practical solution might look like.

So it really is another good reason also to start automating your processes if you haven't gone on that journey yet, especially in relation to your tax provisioning calculations, which will form a significant part of the BEPS calculation.

Merlo

I agree, Caroline, data systems and processes are a common pain point for business. What should our listeners be prioritizing right now?

Wright

Look, I think it's a three-pronged approach.

Ensuring that you consider both the tax technical and the tax planning aspects, along with the process piece to ensure that you set up for success.

Start to get a practical understanding of how the rules apply.

Commence your modeling exercise.

And then understand any planning opportunities and organizational changes which might arise from this.

Look at undertaking a proof-of-concept exercise like I've talked about with our team, to assess your current state in relation to the data, processes and technology.

And as mentioned earlier, one of the most time-consuming pieces of this will be that data piece: identifying whether you have the data, where it lives, and who owns it.

Also do some pre-planning to ensure that you've got the budget and resources to implement any system changes. We always see this as something good to do to be prepared.

And as doing that, also think about any business cases that you might need to put up. But I think the message that I'd like to leave you with, Tony, is that overall, I think when you look at the timeline, you should be starting to think about this now, because the next year will go quickly.

Merlo

Thanks Caroline, a lot to think about and certainly explains why we're seeing so many businesses taking a deeper dive into how they're impacted by the rules and what they need to do to comply.

But there's so much more to come, not just from the OECD, but also from individual countries as they proceed to implement the model rules in practice. We’ll continue to explore these and other developments with our subject matter professionals in future sessions.

In the meantime, thanks Caroline for your thoughtful insights, and thank you all for joining us. Until next time, take care.