The global minimum tax project has reached a critical phase. Like businesses, governments should be focusing on the practical aspects of applying and administering the new rules
The G20-led project on addressing the tax challenges of the digitalisation of the economy is entering a critical phase as jurisdictions work to enact Pillar Two global minimum taxes even while technical and administrative aspects of the new system are still being hammered out in the Inclusive Framework. There is much businesses need to do to be ready to comply with widespread implementation, and much preparation ahead for tax administrations as well.
Smooth implementation of Pillar Two is in the interest of both businesses and governments and is an urgent matter given that many countries are working to have global minimum tax rules in place by the end of the year. Businesses are trying to understand the new compliance obligations following the rules and working through the complex computations to determine where they may have top-up taxes due beginning in 2024. In addition, businesses are monitoring how the introduction of minimum tax rules may be accompanied by other changes in the design of corporate income taxes in the countries where they operate.
There’s a gap between businesses recognising that global minimum taxes are on the horizon and fully understanding how Pillar Two will affect their global operations. According to the 2023 EY Tax and Finance Operations survey, while 90% of businesses expect to experience at least a moderate impact from Pillar Two, just 30% have completed an impact assessment. This is concerning given the first global minimum taxes are set to take effect in less than six months.
These new tax rules are coming as many businesses and governments undertake dramatic transformations of their tax departments and tax administration functions respectively. These transformations offer opportunities for businesses and governments to embed the obligations and responsibilities associated with Pillar Two into their processes.
For businesses, complying with global minimum taxes is the latest in a plethora of factors driving them to modernise operating models that harness new technology, new data capabilities and new processes, including financial reporting controls experience. Additionally, businesses are tasked with finding (or training) the right people who have the rare combination of tax technical, financial reporting and data skills; such talent is in short supply.
For governments undertaking their own transformations, it will be critical that tax administrations evaluate the processes they need to deal with all of the new data they will soon be receiving from taxpayers as part of the global information return that shows the computation of the Pillar Two Effective Tax Rate for their operations in each country and calculates the applicable top-up tax, if any, to bring the ETR in each country up to the 15% minimum level. And it’s not just global tax reform that will supply that data – tax functions are also working overtime to help their organisations meet environmental, social and governance requirements and objectives, including the EU’s Carbon Border Adjustment Mechanism. Tax administrators will want to be ready to make effective use of all the additional data that will be available to them.
The more governments can do to provide clarity about how their own global minimum tax rules will work, the better for everyone. This includes being transparent about what form their rules will take and when they’ll be effective. It also will be important for governments to consider how Pillar Two will affect policy tools traditionally used to encourage particular corporate behaviours, including improving sustainability.
For their part, tax administrators need to be sure they’re only collecting what is properly due without causing double taxation. More than half of companies polled in the 2023 EY Tax Risk and Controversy survey say they anticipate more tax controversy in the next two years, and they identified cross-border tax reforms as the leading source of risk. Clearly, tax controversy is burdensome for all involved – businesses and tax administrators – and should be avoided. Having clear and coordinated rules is essential to reducing the risk of controversy and double taxation. And having resources and mechanisms in place to efficiently and effectively resolve controversies that do arise is equally important.
The global minimum tax project is now more than four years in the making. The collective action by governments on this issue has been unprecedented and has ushered in a new era for the global tax system. It will take businesses time and resources to operate effectively within the new parameters. Tax administrations will need new capabilities to handle the data they will receive. And governments must do whatever they can to smooth the transition as businesses prepare to comply with the new rules and tax agencies prepare to administer them quickly, consistently and efficiently.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.