BEPS Pillar 1 and Pillar 2: Shining a Spotlight on Your Group Structure

BEPS 2.0 is top of mind for tax and finance leaders of large, global businesses as they assess the readiness of their groups to navigate this sweeping reform. BEPS stands for Base Erosion and Profit Shifting, but what does it signify? And should you be refocusing on your group structure as a result?

In a shake-up to the international tax system, the Organisation for Economic Co-operation and Development (OECD) has introduced a framework of rules and standards, essentially to mitigate against profit-shifting from high-tax to low-tax territories and ensure that income is taxed at an appropriate rate.

Comprising two Pillars, BEPS has brought strategic tax and group structure planning to the forefront of the boardroom agenda.

Pillar One stipulates that the consolidated profits of a multinational enterprise are allocated and, therefore, taxed, based on the jurisdiction in which actual business activities are carried out (i.e., the location in which goods/services are utilized). With a minimum global revenue threshold of €20 billion (bn)—for now, at least—Pillar One will affect a limited population.

Pillar Two, however, is set to have a much wider-reaching and harder-hitting impact. For multinationals generating consolidated group revenues of €750 million (mn) or more, the OECD is introducing an effective global minimum tax rate of 15%.

More than 140 countries have welcomed this international reform and, while not currently a statutory requirement, the rules and standards are increasingly making their way into local law—with 30 of these countries already having committed to passing legislation to ratify the framework.

What Does This Mean for Affected Businesses?

Businesses that are in scope of the Pillar Two criterion and operate in participating, low-tax nations will see an uplift (to 15%) in their corporate tax liabilities to top up any shortfall.

Businesses will, undoubtedly, face increased complexities, incur higher costs and spend more time and resources in dealing with tax administration and reporting.

As well as increased tax liabilities for corporates globally, the BEPS rules and standards bring with them added compliance and other considerations, including:

• The introduction of new systems and processes to calculate and recalculate tax liabilities in accordance with revised rates
• A catalyst to revisit existing global entity structures—the need to review location of activities and value chains from a tax perspective
• Additional financial statement disclosures in relation to indicators of a potential top-up tax
• Planning and budgeting for multi-stakeholder communications together with the complexities and resourcing that will be required to manage the transition over many years

As BEPS is not enshrined in law, the details are subject to change. There is an expectation that the revenue thresholds under Pillar One and Pillar Two for affected businesses will reduce. This will impact an even wider global population and present difficulties for businesses, particularly those with unwieldly group structures.

Why Should Groups Be Looking at Their Global Entity Structure Now?

The benefits of reviewing and simplifying your entity structure in the context of the emerging tax reforms are not to be underestimated.

Current group structures are more than likely to be suboptimal in a Pillar Two world, so the time is now to undertake a structure review and to avoid crisis tax planning.

Collapsing complex structures can simplify reporting, offer operational efficiencies and reduce the overall tax risk for the group.

Enhanced transparency with fewer subsidiaries comprising a group offers a clear rationale for those companies remaining in the structure and reduces tax compliance obligations, reporting requirements and costs accordingly. In some cases, the initial cost of unwinding or modifying a group structure will be less than the tax at risk under these proposals.

In our experience, both operational and financial payback can be achieved within a short period while simultaneously promoting a commitment to responsible tax practices and strong corporate governance.

Corporate simplification has the added benefit of facilitating the better alignment of a business’ entity structure with its operating model. It enhances the ability of a group to adapt to change—"future proofing” the structure in what is an increasingly complex international tax terrain.