Bracing for impact as OECD's global minimum tax regulation looms

The OECD’s historic 15% minimum global corporate tax rate is set to take effect starting in 2023, marking a new era for multinational taxation. Despite a complex multi-year negotiation, 139 countries have backed the plan to curb tax avoidance and limit the incentives for profit shifting to tax havens.

For finance executives at large multinationals, thorough preparation in the coming months is key to modelling the impact, optimising structures, enhancing reporting, disclosing expected effects, and ultimately remaining compliant.

The new rules target multinational enterprises (MNEs) surpassing the €750 million threshold for annual consolidated revenues in at least two of the prior four years. Rather than applying domestic-only companies, implementation focuses on common international structures involving:

• Tax havens and low tax jurisdictions
• Territorial tax regimes
• Preferential IP boxes, notional interest deductions, tax holidays, and incentives
• Financing and IP centralization hubs

For global businesses nearing the revenue threshold, proactive tracking is advised to anticipate crossing into scope within the next few years based on growth trajectories. Transactional activity related to mergers, acquisitions, and divestments may also inadvertently bring new group entities and structures under the rules. M&A due diligence processes should now assess target entities’ unrecognized exposure.

Modeling Jurisdictional Effective Tax Rates

For in-scope businesses, a vital initial step is using global entity-level data to model current effective tax rates (ETRs) in each tax jurisdiction. By comparing resulting rates to the 15% minimum, multinationals can quantify the potential additional “top-up tax” liability based on current structures and policies.

Teams should then use multiple reallocation scenarios to simulate possible restructurings in shifting functions, risks, assets and profits between jurisdictions and estimate the impact on ETRs.

This modelling and analysis highlights high exposure entities and jurisdictions, informs strategy, philosophies can quantifies the benefits of potential pre-emptive mitigating actions before go-live in 2024.

Evaluating Structural Shifts

With clarity on specific problem areas from modelling, businesses can explore structural changes to optimize and sustainably reduce risks. Common areas of focus include:

• Collapsing certain intermediate holding companies in tax havens and low tax countries
• Consolidating IP assets in Ireland, Singapore, Caribbean hubs to headquarters
• Repatriating offshore profit pools to parent country jurisdictions
• Realigning transfer pricing policies on financing arrangements and IP royalties
• Reassigning certain high value functions and risks to higher tax locations

However, the feasibility and benefits of adjustments should be systematically assessed against potential disruption, one-time restructuring costs, increased friction for future financing and flexibility, heightened scrutiny risks and other qualitative factors.

Updating Global Reporting Systems

To accurately track granular profitability, tax liability and effective tax rates across all entities and countries, robust global reporting systems are essential, but often lacking.

Implementing centralised, automated software solutions to aggregate comprehensive data provides the technical capability to identify exposure, model scenarios, and maintain compliance as regulatory obligations expand. The required data points span beyond tax filings to include full country-by-country financial and operational statistics.

For groups currently relying on manual processes, upgrading capabilities is critical well in advance of 2024 effective dates, both to inform strategy and tackle the operational requirements for consistent yearly reporting and top-up tax calculations. The integration of multiple IT systems, reconciliation of differing accounting guidelines globally, and consolidation of fragmented data flows present immense challenges to overcome.

What Financial Statement Disclosures are Required?

In a notable requirement, multinationals within scope must quantify and disclose the expected effects of the minimum tax in their financial statements ended 31 December 2023, despite initial implementation in 2024. This demands urgent preliminary impact assessments over the next 12 months.

Groups can choose to evaluate scenarios both assuming full compliance based on current structures, as well as optimally realigned scenarios that could be feasibly pursued before effective dates. The scale of potential adjustments highlighted will indicate whether proactive mitigating steps should be prioritized.

Even for groups expecting minimal exposure based on high consolidated rates, thorough analysis may be advisable to validate this position.

Beyond calculating baseline liabilities, UK groups face new registration, reporting, assessment, and payment obligations. An annual information return will be required within 15 months of each year-end to disclose top-up taxes, extendable to 18 months in the first enactment year.

Corresponding tax payments also follow staged timelines potentially over 18 months. Both local UK sub-groups of overseas parents, as well as UK parented multinationals now contend with this sweeping reform. Many still lack the global tax data transparency, assessment capabilities and compliance management infrastructure to readily adapt.

Powerful Ripple Effects Across

All Sectors The reality is that a sizable majority of multinationals will be impacted from the 2024 effective date based on the €750 million revenue threshold. Furthermore, commercial implications and prescriptive effects will flow through supply chains.

Large enterprises subject to the rules may steer procurement, manufacturing, research and technology investments into certain jurisdictions to optimise tax efficiency under the new constraints. This could reshape globalised industries.

Smaller domestic companies will also feel tangible impacts, potentially gaining business from larger competitors offshoring less while also facing tax base erosion with less foreign investor incentives offered by their governments to attract capital.

The mixture of multifaceted second and third order effects for both multinational corporations and national economies remains highly uncertain. But what is clear is that the cross-border tax landscape will irrevocably change within two years.

For any finance team navigating these regulatory upheavals amid continued pandemic volatility and inflation instability, establishing a dedicated OECD specialist team is prudent.

Combining corporate tax, international tax, transfer pricing, tax technology, and accounting expertise equips large groups to assess current state tax leakage, model optimal structuring, tackle software and data challenges, disclose future adjustments, and ultimately steer compliance as the sweeping global minimum tax era dawns. Minimizing disruption requires harnessing both strategic and operational capabilities from across the tax function.