OECD BEPS2.0: More than a hot topic!

 

BEPS2.0, one of the most trending words in the Tax Technology nowadays, is far more complex than its abbreviation. Though I am not a tax expert, but the hype intrigued me to know more about this new change (Base-Erosion and Profit Shifting). For past 7months I have been involved in the Base-Erosion and Profit Shifting sample content for SAP Profitability and Performance Management. I might not be the go-to person when it comes to the tax expertise, but I can surely provide you with some valuable details around BEPS2.0.

Everything is going digital and crossing the borders, but this expansion of the Multinational Enterprises is a big headache for the governments. Why? Because of the taxation and as you are aware taxation is a major source of revenue for the government. For this reason, taxation is under supervision and process needs to be continuously monitored to be compliant with tax regulations. On the contrary, Multinational Enterprises (MNE) engage in various tax planning and optimization activities with the goal to minimize their overall tax liabilities. In order to deal with existing and new challenges and to make the international tax environment more transparent, the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Inclusive Framework was introduced with the goal to address existing gaps and mismatches in the tax regulations of different countries via continuous harmonization of the tax regulations across multiple jurisdictions. BEPS 2.0 seeks to make tax regimes less of a deciding factor for multinationals deciding which jurisdictions to trade or invest in.

Let’s deep dive in BEPS2.0 together.

What is new in the BEPS2.0?

In January 2019 the OECD released a policy note proposing the new two-pillar approach to supersede the previously defined OECD action plan for BEPS. This policy note introduced the new BEPS framework, also known as the “BEPS 2.0” project, which comprises the following two pillars:

  • Pillar One that relates to new nexus and profit allocation rules
  • Pillar Two that relates to new global minimum tax rules

Pillar One intends to reallocate profits and related taxing rights from certain jurisdictions where MNEs have physical substance to other jurisdictions where MNEs have a market presence. It is commonly referred to as a significant reallocation of profits to market countries for the world’s “largest and most profitable companies”. Pillar One will apply to MNEs with a global turnover in excess of €20 billion and profitability in excess of 10%.

Pillar Two introduces the Model Global Anti-Base Erosion (GLoBE) rules, that propose to implement a Global Minimum Tax of 15% in each jurisdiction where a MNE operates. The minimum tax rate in Pillar Two will only apply to MNEs with a consolidated annual revenue of more than €750 million. It is an international coordinated system of taxation intended to ensure large multinational enterprise (MNE) groups to pay a minimum level of tax on the income arising in each of the jurisdictions, where they operate.

Ideal scenario is to implement Pillar 1 and Pillar 2 concurrently, but Pillar 1 is not a pre-requisite for Pillar 2 implementation. Right now, everyone is eyeing on Pillar 2 as it covers a larger target audience and thus, we have tried to cover Pillar 2 first in this blog.

To know more about the Pillar 2 approach, we first need to understand the main steps involved in it.

5-step approach

  1. Constituent Entities Within Scope
  • Identify MNE Groups within scope
  • Identify Constituent Entities
  • Remove any Excluded Entities
  • Identify location of each Constituent Entity
  1. GloBE Income or Loss

Determine income of each entity / permanent establishment based on the group financial reporting and Pillar 2 specific adjustments

  1. Covered Taxes

Determine (deferred) taxes attributable to the income per country for the purpose of calculating the effective tax rate in step 4

  1. Effective Tax Rate and Top-up Tax
    • Rate of all Constituent Entities located in the same jurisdiction
    • Determine Substance based income exclusion
    • Determine resulting Top-up Tax in case the ETR is lower than 15%
  2. IIR (Income Inclusion Rule) and UTPR (Under Taxed Payment Rule)

Impose Top-up Tax under IIR or UTPR in accordance with agreed rule order. UTPR is the backstop rule for IIR.

As this one is the first of many blogs, I don’t want to make it complex. It would be great to know the main calculations involved in the BEPS2.0 before drilling down to the complex part of each step.

To summarize why we should go for SAP PaPM to implement BEPS2.0 Pillar 2:

  • Detailed quantitative analysis and summary reports reduces compliance burden ensuring regulatory requirements are met
  • Provide What-if Simulation feature to analyze and evaluate impact of substance-based income exclusion in the Top-up Tax, resulting in better risk assessment and management
  • Efficient data gathering (from heterogeneous sources) help organizations understand, evaluate, and communicate timely response to BEPS 2.0
  • It supports Country-by-Country Reporting (CbCR) that enables a standardized system of reporting, on tax jurisdiction by-jurisdiction basis
  • Electing and restricting the election for a specific tenure, as defined under the OECD timelines

In the upcoming blogs I will put some light on how SAP Profitability and Performance Management has the one-stop solution for the MNEs.

Stay Tuned!

Meanwhile you can follow SAP Profitability and Performance Management Topic page(https://community.sap.com/topics/profitability-and-performance-management) and post/answer questions at (https://answers.sap.com/tags/73555000100800000092).