Tackling Data Challenges from BEPS 2.0
A recent EY survey finds finance professionals see readiness for the new regulations as one of their top priorities
A recent EY survey finds finance professionals see readiness for the new regulations as one of their top priorities
Amid the economic downturn, driven in large part by the pandemic and the war in Ukraine, CFOs have had an unenviable task of managing cash and costs to circumvent the impact of financial uncertainty.
In tandem, the CFOs have been juggling their long-term priorities like the transformation of their finance functions, while keeping an eye on the regulatory developments that could potentially impact the way they operate.
One such regulatory development is the upcoming Organisation for Economic Co-operation and Development’s (OECD) framework on Base Erosion Profit Shifting (BEPS) 2.0.
BEPS 2.0 aims to ensure multinational corporations pay taxes in jurisdictions where they operate (even without a physical presence) and to establish a global minimum tax framework, so they pay a fair share of tax.
The forthcoming regulation, due to be implemented later this year or early next year, depending on jurisdictions, means that organisations will have to establish new processes to calculate taxes, evaluate their impact on their financial statements and report to relevant tax authorities globally, which will have different local regimes firms will have to adhere to.
While complying with any new regulations can be challenging, for BEPS 2.0 in particular, Laura Mair, EY UK&I partner and tax markets leader, says the challenges for multinational organisations are two-pronged: different local tax regimes and data.
She says: “The rules require calculations on a tax base that is consistent but will be without doubt different to every country’s current individual tax regime. So, it is a new calculation, and it requires significant amounts of data, some of which don’t currently sit within a finance or tax functions remit. And so, the challenge might be one on tax paid.
“But the second and very large part of the challenge is how do functions get ready to access that data, assess any gaps they might have, and comply with the rules?”
According to an EY survey of 1,600 tax and finance professionals, 90% of respondents expect to experience a moderate or significant impact from BEPS 2.0.
But while CFOs expect BEPS 2.0 to have an impact on their operations, the survey finds that less than half (30%) of respondents have completed the impact assessment. In the UK, the figure is 42%, while in mainland Europe it stands at 33%.
Commenting on the impact assessment completion rate, Mair says: “BEPS 2.0 is not as simple as paying tax at a certain rate. The rules are very complex. And they have been in flux for a long time, which explains the different levels of readiness and where organisations are.
“Organisations are living with a state of flux, and then the data requirements are so unprecedented that quite a lot of companies are adopting a wait-and-see approach.”
Another EY survey found that stakeholders’ expectations during difficult economic times have pushed CFOs into diverting funding away from long-term priorities to meet short-term targets.
However, tackling the new BEPS 2.0 regime is now an issue for the present rather than the future.
“People are obviously dealing with what is urgent, and what needs to be dealt with next are there rules that are now coming,” Mair says. While Mair acknowledges that there is a lack of clarity on why the UK is marginally ahead of the rest of the world on impact assessments, she suggests that the introduction of draft legislation in July and approaching implementation date could bring greater clarity on the final bill and boost the UK’s preparedness.
“In the UK, we have an initial draft legislation, and we are in this sort of countdown as to when we think the rules will come in. So, I think a lot of it will come to when is the domestic legislation implemented. Maybe that makes the UK slightly further ahead.”
While understanding local tax regimes will be crucial in preparing for BEPS 2.0, CFOs must tackle the data challenges to ensure their organisations are ready for the new regime.
An EY analysis on BEPS 2.0 concluded that organisations will be required to capture between 150 to 200 data points covering financial, tax, HR and corporate to complete BEPS 2.0 reporting.
Some of the required data includes financial accounts data (revenues, profits, excluding dividends), tax data (CFC regime, uncertain tax positions), factual data (entity classifications, purpose of tangible assets), and other data (immovable property, Pillar Two elections, M&A transactions).
However, the report notes that not all necessary data may be directly available, with the current IT landscape unlikely to have the variety of required data saved in one place.
According to Mair, organisations are one different step of the journey, and much of it is a result of their data quality and technology.
“These two things are really fundamental to how prepared some organisations are,” she adds.
Finance leaders are largely aware that they need to transform their functions if they are to keep up with the complex regulatory environment.
To meet the data challenges borne out of new regulations, firms are looking to transform their operating model, with 96% of the survey respondents saying they are transforming to deliver more strategic value and influence decision-making.
Co-sourcing tax and finance operations has been increasingly popular, with 95% of respondents saying they are more likely than not to co-source their key functions to third-party vendors or some combination with in-house capabilities.
Currently, respondents say they spend 72% of their time on routine compliance work, dedicating only 28% to high-value work such as data analysis, tax planning, managing tax controversy, general strategy, communications and risk management.
The lack of appropriate talent and r decreasing resources further adds to the challenges, making rendering co-sourcing a particularly viable solution.
Mair says: “Finance and tax functions are continually being asked to do more with the same or fewer resources. So, there is only so far you can stretch that before you look to other solutions to be more efficient. There is also a question of having the right people with the right skills to do the right job.”
“The advantage of co-sourcing is that it can provide a very large pool of different technical talents globally as well as technology that can either reduce repetitive tasks or automate them, which would be very expensive and not worthwhile for every company to invest in.”