BEPS (Base Erosion and Profit Shifting) - managing the impact on your business

• Undertaking an impact assessment to areas assess the scope of application of the Pillar Two rules for the group and identify the potential impact on compliance requirements and cash tax.
• Assisting with safe harbour review, including the transitional CBCR safe harbour and whether a CBCR report constitutes a qualifying CBCR report for the purposes of a particular territory for Pillar Two purposes (for further details), to define the scope of your compliance obligation.
• Supporting with modelling ETR and cash tax impact, using our own model or helping to build your own.
• Assisting with addressing specific accounting complexities or providing assurance over work already undertaken by your organisation.

• Identifying the need for remedial action (if required) to avoid any potential risk of double taxation, including restructuring and simplification of the legal and operating structure.
• Identifying legal and operational restructuring opportunities to address cash tax impact.
• Supporting with implementation of any identified strategies, including analysis of local and Pillar Two tax impact.
• Tracking of local implementation and interpretation of the Pillar Two rules.
• Supporting with data mapping and gap assessment.
• Assessing available elections and modelling outcomes.

• Assessing the impact of compliance and designing a roadmap to implement a plan for Pillar Two compliance.
• Supporting with required registrations for Pillar Two purposes.
• Preparing and filing of a Global Information Return (GIR) and the other Pillar Two related returns and notifications in relevant jurisdictions.
• Determining governance, processes, controls, and data gathering for Pillar Two readiness and compliance.
• Supporting with global compliance and reporting (full outsourcing, co-sourcing, review).
• Supporting with preparation and filing of CBCR (for further details).
• Assessing technology solutions and supporting implementation.
• Ongoing governance and monitoring.
• Determining financial statement disclosure requirements and defining group policies.
• Preparing quarterly safe harbour and Pillar Two computations based on full year forecasting for financial statement reporting and use in wider business planning.
• Communicating with the board of directors and stakeholders. Preparation of board presentations on the impact of Pillar Two, to keep your organisation informed.
• Providing education or training for your tax teams, accounting teams and other stakeholders.

On 5 October 2015, the OECD issued final reports for the 15 anti-BEPS (base erosion and profit shifting) actions that will fundamentally change the course of international taxation.

The BEPS framework has been implemented globally, with the UK being one of the many countries legislating to bring components of the framework into force. Whilst now an aging initiative, its impacts continue to be felt and must be considered in any international tax planning strategy.

In 2021, 137 countries in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) (subsequently increased to 145) reached a landmark agreement on a further approach to reform the international tax framework in response to the increasing challenges relating to taxation of the digital economy, an in particular the increasing ability for businesses to access markets remotely, creating tension in a framework built on the concept of "tax by physical presence", and the so-called "race to the bottom" on corporate tax rates as countries compete for inward investments.

The OECD has coordinated the multilateral consensus approach with the framework designed to ensure that multinational enterprises (MNEs) pay a fair share of tax where they operate and that they pay a minimum corporate tax through a two-pillar approach.

Pillar One is intended to address the challenges posed by remote access to markets in an increasingly digital economy and has two parts. The first part (Amount A) is designed to realign taxing rights with where value is perceived to be created, with rules intended to ensure that a portion of a group’s revenues are taxed in the jurisdiction where goods or services are used or consumed. Amount A will only apply to groups with worldwide revenues more than €20 billion that also realise a profit margin of at least 10%, with 25% of the profits exceeding the 10% threshold reallocated to market jurisdictions. This is expected to apply to approximately 100 businesses globally, although global implementation efforts have experienced various challenges.

The second part (Amount B) is intended as a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline sales and marketing activities. Amount B is intended to reduce transfer pricing disputes and compliance costs, and will be relevant for all businesses operating internationally, irrespective of size. Whilst Amount B is not free from international disagreement and implementation challenges, it is possible that it may move forward without Amount A.

Pillar Two imposes a minimum effective rate of tax on profits of multinational enterprises, in each jurisdiction in which they operate. The Pillar Two framework applies to multinational groups, including all constituent entities in those groups, with global revenues above €750 million.

The framework imposes a top-up tax on profits arising in jurisdictions where the effective tax rate, as determined under a complex set of principles, is below 15%.

For UK tax purposes, the Pillar Two rules are included within Finance Act (no.2) Act 2023 and are in effect for accounting periods beginning on or after 31 December 2023.

Another consequence of the evolution of the digital economy and digitised businesses is the proliferation of taxes levied by individual countries on digital rather than physical presence, i.e., digital service taxes (DSTs), over the past several years. Many countries view DSTs as a mechanism to raise revenue.

Part of the OECD’s two-pillar approach is the removal of all unilateral DSTs and similar measures and a commitment by countries not to introduce such measures in the future. Certain multilateral agreements have been reached on transitional measures to repeal DSTs and mechanisms to address double taxation issues that could arise under Pillar One and existing DSTs, however ongoing delays to Pillar One are creating tension in application of these measures. As a result, some territories are progressing with legislating for and bringing into force DSTs, and this is an area that businesses trading internationally will need to monitor carefully.