This news article discusses the connection between BEPS (Base Erosion and Profit Shifting) Pillar Two and financial close and consolidation processes. While Pillar Two is often seen as a tax department challenge, it also affects finance departments. Close and consolidation processes play a critical role in Pillar Two reporting. The article highlights the need to integrate taxation concepts into these processes to accommodate Pillar Two’s requirements. It emphasizes that financial consolidation is a starting point for Pillar Two implementation and explains how accounting policies, close processes, and consolidated results drive Pillar Two results. The article also emphasizes the importance of tax and finance collaboration and how financial technology can help overcome Pillar Two challenges.
The implementation of BEPS Pillar Two requires the integration of tax concepts into financial close and consolidation processes. Financial consolidation serves as a starting point for Pillar Two, as it determines which entities and ownership interests are within its scope. It also helps identify entities eligible for safe harbor status and those liable for the top-up tax. Furthermore, Pillar Two calculations are derived from consolidated financial statements, making financial consolidation and Pillar Two closely interconnected. This integration presents multinational enterprises (MNEs) with the option to adopt new systems or modify existing ones to gather and process the required data for Pillar Two reporting.
The orchestration of the Pillar Two process involves collaboration between finance and tax teams. Finance teams play a crucial role in determining material data, assessing availability and controls around it, and supporting the interim and year-end close process. Therefore, tax teams rely on finance teams for their expertise in accounting policies and adjustments at entity, jurisdictional, and consolidated levels. Finance teams must also ensure data governance, workflows, security, and control within the close and consolidation system. Going forward, the consolidation process itself will undergo permanent changes to accommodate Pillar Two, including embedding ETR (Effective Tax Rate) calculations and considering tax during the accounting period.
To address the challenges posed by Pillar Two, MNEs can leverage financial technology, specifically financial close and consolidation software. This technology helps map out organizational hierarchies, determine eligibility for safe harbors, identify entities subject to the top-up tax, consolidate tax data, facilitate tax-finance collaboration, and produce financial statements that include the Pillar Two tax burden. By utilizing modernized financial consolidation technology, MNEs can navigate the complexities of Pillar Two and comply with its reporting requirements effectively.
