The Base Erosion and Profit Shifting Protocol (BEPS) 2.0 Pillar 2 – the new global minimum tax regulations for multinational enterprises – is set to take effect in the European Union and other countries on January 1, 2024. Experts in the SAP tax department are busy working on its implementation. With the considerable changes it entails, programs need adapting and data sources reorganizing.
What may sound complicated to outsiders is being celebrated by finance ministers worldwide as a milestone in achieving fair taxation, as the new global taxation rules are expected to dramatically change the international tax landscape and increase the fairness of tax systems.
The majority of countries can look forward to higher tax revenues. It is estimated that, worldwide, between US$100 billion and $240 billion every year is lost in tax revenue as a result of – until now – legal tax avoidance techniques such as base erosion and profit shifting. However, for the companies affected by BEPS 2.0 and for tax experts, this new set of rules brings with it a lot of work.
Reducing Tax Avoidance and Tackling Tax Havens
BEPS 2.0 aims to ensure that large multinational enterprises and, in the EU, large-scale purely domestic groups operating in a single market pay a minimum effective corporate tax rate. The project is being driven jointly by the Organization for Economic Cooperation and Development (OECD) and the G20 countries; 141 states were involved in the discussions and the rules were negotiated over several years.
BEPS 2.0 consists of two pillars. Pillar one covers a new system of allocating tax rights over multinationals. In line with the rules, these rights will be reassigned from the country in which the company is located to market jurisdictions where profits are earned without the company being physically present there.
Fifteen Percent Minimum Tax Rate Worldwide
Pillar two introduces a minimum tax rate of 15% for large multinational groups with global revenues of more than €750 million. Any companies that do not comply with these rules risk facing sanctions. It is this second pillar in particular that requires companies to make numerous adjustments.
“The new rules mean that we as SAP have to decide how we can leverage our solutions to help companies gather all the necessary data,” says Irina Sheftelevich, senior customer advisor of Performance Management, Sustainability, Planning, and Analytics at SAP. “Our software enables our customers to conform to the complex set of regulations and implement them in a transparent manner.”
Collecting the Right Data
With SAP Profitability and Performance Management, SAP offers an application companies can use for multiple use cases such as allocating costs and revenues, calculating transfer prices, and calculating current and deferred income tax, also under the new regulation of BEPS 2.0 Pillar 2. The application collects data and information models from other SAP and third-party solutions and compiles it in a data model that helps ensure compliant tax accounting and tax management. Fully integrated with SAP S/4HANA, the application can be deployed both in the cloud and on premise. In the application, tax experts can adjust the logic by configuration, harmonizing the E2E process across multiple countries and tax jurisdictions, even after go-live, enabling an optimized tax structure.
SAP Profitability and Performance Management can connect in real time with the relevant data sources such as SAP S/4HANA, SAP Business Warehouse, or SAP Datasphere. Likewise, it can also connect to systems for employee data, tax data, and other financial data. Once the data has been integrated, the focus is on modeling and creating tax calculations and simulations: What if we have losses instead of profits? Which impact has adjusted transfer prices to our effective tax rate? How can we keep our tax burden to a minimum while complying with the new rules on the minimum tax rate?
“In implementing BEPS 2.0 we must use our solutions to identify and integrate the right data, put the new rules into practice, and ultimately create the necessary reports end to end. It’s a complex process that can only be modeled and managed in an intelligent way with the help of technology such as SAP Profitability and Performance Management,” says Sheftelevich.
Data Requirements for the Global Minimum Tax
Some of the data required for the global minimum tax calculations might have to be calculated specifically for this purpose, according to a whitepaper by EY and SAP. “Here, financial and non-financial, structured and non-structured, and transactional and aggregated data is needed,” says Sheftelevich. “The hardest part is understanding which data the customer needs and where exactly in their systems it is stored.” It’s about combining “business knowledge, technology, and internal efficiency.”
With 2024 fast approaching, not much time is left to achieve this, even if many are speculating that the timeline may be extended. No one should count on such a delay, says Sheftelevich. “Our customers and partners are under considerable time pressure. Transitional safe harbor rules haven’t changed that.”
Complexity Requires Quick Action
What’s more, countries can adapt certain rules to suit their circumstances. “The complexity, data, and time pressure involved make this a huge challenge. A great deal of flexibility will be needed for potential adjustments. Not all the rules have been published yet, and some aspects still need clarification,” adds Sheftelevich.
As the driving force behind the project, the OECD has issued examples that apply to all countries. “That’s why we are providing a solution that on the one hand takes into account all the basic rules and that on the other hand is agile enough to deal with changes and the specific requirements of individual companies and countries,” says Sheftelevich. The rules on the minimum tax are part of pillar two. Whether there will be further pillars is yet to be seen.
Teaming Up with Tax Advisors and SAP Partners
SAP is discussing all the necessary requirements to meet the new rules with its customers, and in doing so has enlisted the help of the world’s top four accounting firms. Teams from SAP are working with national and international tax offices, tax accountants, and tax technology consultants to help companies understand the complex new rules and assess the possible effects.
To make sure everything is completed in time, the programs and content packages that have been optimized for BEPS 2.0 are being rolled out worldwide in collaboration with SAP partners. And consultants are working with these partners to develop a plan so that the affected companies are ready when the rules take effect.
“Companies must act now to ensure they are ready for 2024,” advises Sheftelevich. “Customers are extremely interested. Whenever we organize information events on BEPS 2.0, they always get booked up very quickly.”
Thomas Boerner is product owner of SAP Profitability and Performance Management.