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Why Tax Data Mapping for Pillar Two is Crucial

Contents

General Approach to Managing Pillar Two

The Pillar Two GloBE Rules will add a further burden on MNEs. However, if correct data extraction, cleansing and transformation systems are established the burden can be significantly reduced after the initial set up. Before all this is the tax data mapping assessment. This is the crux of an effective approach to implementing a system to manage Pillar Two.
 
MNE’s already have many different international tax reporting obligations aside from jurisdictional tax return submission, including CbC reporting (including EU public CbC reporting from June 2024), local and master files for transfer pricing and DAC 7 (from 2023).
 
Pillar Two includes an additional reporting obligation but in any well designed data management system data processes that are already in place (eg for CbC reporting) can be utilised for Pillar Two. 
 
Of course, the challenge with Pillar Two is that it essentially creates a separate, additional tax regime for MNEs.
 
Income for instance will be determined for financial reporting purposes, for tax purposes and also for Pillar Two purposes. Each is subject to separate rules. Therefore data extracted for Pillar Two purposes will be subject to a specific Pillar Two data transformation process that will then enable the calculation of the jurisdictional effective tax rate. 
 
The basic process for MNE’s will be: 
Tax Data Mapping Assessment
Data Extraction
Data Transformation
Data Storage
Pillar Two ETR Calculation
Each of these consist of a number of steps.
 
After this if the MNE has a jurisdictional ETR below 15%, further calculation is then required calculate the top-up tax. This will require additional data sources at this point (eg tangible assets and payroll for the substance-based income exclusion) which would be available from the data storage solution. 

Data Extraction, Transformation and Storage for Pillar Two

Data extraction for Pillar two will require extracting data so that the tax department has the required information to calculate the Pillar Two calculation.
 
There will be overlap with already existing data points that the MNE currently collects for financial accounting or tax purposes, but the requirements of Pillar Two will impact on what needs to be sourced.  
 
Data will need to be extracted from Enterprise Resource Planning Systems and Enterprise Performance Management Systems, but additionally information from the domestic tax computation and group structure information will be required (eg to determine tax residency or the allocation of income/tax between a main entity and a permanent establishment). 
 
In general,  the approach will be to undertake a Pillar Two tax data assessment. This will firstly involve identifying the required data points for the Pillar Two GloBE ETR calculation and then mapping these requirements to data sources.  
 
As identified above, an MNE may already have data sources that are used in other tax data assessments (eg CbCR). If this is the case, those data points can be utilised for Pillar Two purposes. Wherever possible exisiting data points should be used to ensure conformity across different tax reports. 
 
Once the data is extracted it is then cleansed and stored for use by the tax department. The methodology will be determined by the MNEs own systems. For instance, under Article 3.2.1(g) of the OECD Model Rules, Pillar Two requires fines and penalties to be added back if they are 50,000 euros or more.
 
Whilst fines and penalties will already be an existing data point for financial accounting and domestic tax purposes, the 50,000 euros threshold likely won’t be. The data mapping could create a separate data point derived from the existing source data point for fines and penalties to specifically carve out a Pillar Two fines add back figure.
 
Or the existing data point could be used and the consideration of whether this is added back or not would be taken in the Pillar Two GloBE ETR calculation.
 
In most cases, the latter approach would be preferred, particularly given the Pillar Two calculation is likely to be an automated process once the Pillar Two tax data assessment is correctly implemented and data is extracted for the required data points. 

Tax Data Mapping Assessment

The tax data mapping assessment is the key (and most challenging) aspect of the practical implementation of the Pillar Two GloBE rules for MNEs.

It is this that determines what information needs to be collected and therefore this is the first step when considering how to manage Pillar Two compliance and reporting. 

A look through the GloBE rules reveals a huge number of data points that will need to be sourced (between 100 and 350 depending on granularity).

The foundation of the Pillar Two GloBE ETR calculation is the financial accounts. Obviously, this will already have all existing data points identified and mapped for financial accounting purposes. This will be in the financial accounting/EPM system and derived from the ERP system.

Pillar Two GloBE-specific requirements will require further data points.

For instance, deferred tax relating to tax credits is specifically excluded from the total adjusted deferred tax figure for Pillar Two purposes under Article 4.4.1(e) of the OECD Model Rules.

Whilst mapping for financial accounting purposes will include the underlying deferred tax entries this may not be grouped into a separate figure to identify the total deferred tax credit amount. As such a new data point for this would need to be established. 

Only once all required data points have been mapped can the underlying system changes to collect the required information be undertaken.

For more information, see 122 Key Data Points for MNEs  Pillar Two Systems Implementation.