Episode Transcript
[00:00:00] Speaker A: Foreign.
And welcome to our podcast series A and M Tax Talks Tax Policy Updates where we bring you insights into the latest developments in global tax policy and controversy Controversy matters I'm Jordan Gill, joined by Joey Kwok. I have focused the last 11 years of my career on specialising in international tax matters both in the UK and the Middle East. Upon the release of the first rendition of the model rules in 2021, I sought to pivot my international tax specialism to incorporate operate the evolving Pillar 2 framework. From that point I've looked to support my multinational clients to navigate the complexities and challenges that Pillar two brings alongside building on my core experience in international tax, local corporate tax law and technical tax accounting considerations which form core pillars of the globe Model Rules. Joey
[00:00:51] Speaker B: sure, this is Joey, based in Hong Kong office. I started off doing international tax from Hong Kong, then second to Singapore, moved to London for more complex mature exploration of international EU related tax matters. Focused throughout on financial services transactions before moving in house to Citibank to lead the Europe tax governance as well as reorganization, M and A, all sorts of like evolving tax related projects and transactions and pretty much naturally Pillar two becomes one of my babies. And so I was working with a tax planning team on all the pillar 2 related planning as well as involved in like the Bank's enrollment of Pillar 2 implementation before moving to move back to Hong Kong. And here I am with A and M working with all sorts of clients on their Pillar two related matters ranging from implementation, modeling, compliance, et cetera. So I am very thrilled to be joining Jordan to speak to you guys about what's coming in for Giroud.
So I think a lot of you guys listening to this podcast will know we have yet another version of the Giroud.
But then I think there is a lot more going on here. Is that right Jordan?
[00:02:13] Speaker A: Yes, absolutely.
So we've been speaking to groups dealing with Pillar two implementation. Do you think businesses are ready for another change to gir?
[00:02:23] Speaker B: Honestly I think yes and no. The issue isn't necessarily understanding the change only, but getting it happening. Many groups have spent last couple of years building processes around the original requirements and now they are asked to get another version.
So naturally they will be asking around whether the data system ownership model they have built still work and makes sense. And that brings us to another important question. What is actually the change implemented in the new version?
[00:02:56] Speaker A: Exactly. So I focus on three areas. What has actually changed? First, the GIR now reflects the new Safe harbor framework. Second, there is an additional reporting around tax incentives and government benefits. And third, there are there are changes linked to domestic minimum taxes? But Joey, from an implementation perspective, which of those would concern you most?
[00:03:18] Speaker B: It's probably the incentive and government piece. A government benefits piece because information may not naturally situate the Pillar 2 tax team and may not even exist within the organization at the ripe grant or level at all. You could have a tax team preparing the GRL whilst the information about the grant or government incentive is sitting with finance, local tax, treasury or even business.
[00:03:44] Speaker A: I think that's the real important point. This isn't just adding another field to a tax engine
[00:03:50] Speaker B: exactly like practical question becomes like who owns the information and where does it exist in the system or if at all? And conversely Jordan like on Safe harbor, could the revised JIRA actually make our lives easier?
[00:04:05] Speaker A: It's a good question and potentially yes. If a group qualifies from a safe harbor, certain information may no longer be needed. But the quid pro quo is that the group needs to support why it qualifies
[00:04:19] Speaker B: so well. Potentially less data requirement, but more importance plays on the data you do report.
[00:04:26] Speaker A: I agree, that's exactly how I'd put it.
[00:04:29] Speaker B: Okay, so moving on to the mate, let me challenge that slightly. We keep calling it Safe harbors, which sounds like simplification overall, but the revised GIR now has to accommodate four new safe harbor elections as well as the extent Transitional CBCR Safe Harbor. So as a multinational tax person like am I genuinely saving time and work or are they simply replacing the calculation with four other different sets of exercise?
[00:04:59] Speaker A: It's a great question and annoying it annoyingly it does depend take the new simplified permanent ETR Safe Harbor. It can deem the top up tax for a jurisdiction to be zero where the jurisdiction has a simplified loss or or its simplified ETR broadly simplified taxes divided by simplified income meets the 15% safe harbor rate. That may avoid the full jurisdictional globe calculation, but it's not simply a rollover of the transitional CBCR test.
So therefore the starting point is generally the financial accounting data, but groups still need to work through prescribed exclusions and adjustments, for example to name a few Dividends, equity gains and losses, deferred tax, certain push down taxes, foreign exchange items, pension and M and A adjustments are a few of the adjustments that would need to still be made. There are also elections that can change the computation. So the calculation may be simpler than full globe, but it still needs its own controlled data set. So it may only be simplified in nature depending on the complexity of your group and calculation.
[00:06:06] Speaker B: Right. So it's not that simple as on the phase. But like what that means in the grl, then like do the redesign genuinely remove data requirements or if it is moving burden to actually prove which safe harbor applies to your group?
[00:06:23] Speaker A: Good question. The GIR makes the trade off quite visible. A group needs to report the election and the data demonstrating eligibility, including the relevant jurisdiction, simplified income or simplified loss, simplified taxes and the resulting simplified ETR together with applicable adjustments and elections.
Once the gateway is substantiated, however, the redesign switches off data points that are no longer relevant.
The sample principle applies across the other safe harbors, for example Substance based tax incentive safe harbor.
The GIR needs information on the election, the qualifying tax incentive and the substance based limitation.
For the side by side and UPE safe harbors to the gir, it needs the information supporting the groups and jurisdictions eligibility.
And for the extended transitional CBCR safe harbor, the group still needs to produce qualified CBCR and financial statement data to support the relevant de minimis, simplified ETR or routine profit tests. More importantly, for US parenting groups, there is a particularly important nuance where the side by side safe harbor applies. Much of the detailed jurisdictional globe reporting that is no longer relevant is switched off. So there is a real compliance benefit, but it is not a complete filing exemption. The group still needs to make the election and provide the eligibility data and core group structure. Information remains relevant to establish the filing perimeter, identify the constituent entities and demonstrate that they sit within the qualifying US parented group.
[00:07:57] Speaker B: Right? Like now that you mentioned US parent group you remind me we will be having another or we have another podcast dedicated to the US specific consideration of the pillar 2nd September package. So for US based US headquarter group listeners do check that out.
Sorry. Just to get back on track. So now we have the GRL reporting burden becoming more targeted rather than disappearing with fewer irrelevant data points. And in the right jurisdiction, no full top up tax computation. But the eligibility data still needs to be complete, consistent and auditable.
[00:08:34] Speaker A: Exactly right Joey. And consistency will matter beyond the gir. So it's not just the GIR that's the focus, it's all of the other relevant filings so on that tax authorities can compare the data with local corporate tax returns, CBCR statutory accounts and other non pillar 2 filings and increasingly use AI enabled audit tools to flag anomalies at scale. So therefore the concern and the need to get this correct first time is obviously now enheightened by an increase in audit readiness from tax authorities.
A number may say Sorry. A number may be technically supportable in isolation, but an Explained mismatch across fines can still trigger questions.
[00:09:19] Speaker B: Yeah, and that is why groups should not have kicked the can further down the road any further. I mean this is not only about GRL compliance anymore. They need consistency across the whole system, the whole ecosystem, the grl, other local filings with a clear audit trial and substantiated position for any differences, which sound quite scary in an AI enabled audit environment like tax authorities investing a lot in terms of AI would be using tools to increase, identify and test inconsistency in scale and raise like weird questions.
[00:09:55] Speaker A: Yeah, absolutely. So putting some examples to where that AI enabled scrutiny could come in is incentives and government benefits. So tax authorities may be able to connect incentive claims, grants, statutory accounts and GIR disclosures more quickly than before.
So Joey, you mentioned incentives earlier. Why do you think that deserves particular attention?
[00:10:20] Speaker B: Well, before going to the meat, I think also because of where we are coming from in Asia, a lot of like incentives are available in say for example Singapore, Malaysia, etc. Where naturally it pushes individual entities ETL down. So it is of particular importance. But it also because it cuts across the organization.
Imagine if you are a tax manager or senior Director operating throughout 30 to 40 jurisdictions, while your central group tax team might have very good visibility over corporate income tax incentives, but maybe less visibility over other grants and other forms of government support that you'd never have to use for tax reporting purposes. So this first exercise might simply be like what do we have? Where do we have it and who owns the information and where it is on the system, if at all. So Jordan does the new GRL means group will be. Should be reviewing all these incentives arrangements.
[00:11:23] Speaker A: Yeah. And how do
[00:11:24] Speaker B: you see it practically? Sorry.
[00:11:26] Speaker A: Yeah, no, of course, no worries. I think groups should at least understand what arrangements they have and assess which ones are relevant to the reporting requirements.
[00:11:35] Speaker B: Yeah, which makes like this particularly like data governance exercise rather than like a pure text and technical assessment, Right?
[00:11:43] Speaker A: Yeah, exactly. That's probably one of the broader themes coming through the new girth.
[00:11:48] Speaker B: Okay, so let's make this more practical. If you are a group preparing for the next GIR cycle, what would you do first?
[00:11:57] Speaker A: This is the key question and the one that most MNEs are tangling with right now. And I think the simple answer is I'd start with a gap assessment against the revised gir. Don't assume the process built for the previous version will automatically work. Your turn, Joey. What comes next?
[00:12:15] Speaker B: I would identify the onus of any new information required. Not just like sitting with tax most probably, but like surprise surprise. Like local finance treasuries, businesses and other teams where relevant. Then I'll look at the safe purpose, jurisdiction by jurisdiction or even entity by entity and ask like what exactly are the information we need? Additionally, whether we will be legitimately stop collecting? Like where would we put a stop in terms of the information?
[00:12:49] Speaker A: I couldn't agree more, but I'd add one more Looking at the domestic minimum taxes separately, the GIR and local filing requirements won't necessarily be the same exercise.
[00:13:00] Speaker B: Yeah, and I think that's where groups can underestimate the operational challenge as some of them might have learned the hard way in the 2024 round. But this might be fresher for Asia group because they are just waking up to the FY Y25 cycle. But we'll see. The calculation might be global but like given the various requirements, different timing, even like the forms can be very different. So it's quite a demanding exercise I would say.
[00:13:29] Speaker A: Absolutely. So I think we've gone through quite a lot of detail there.
So for our listeners, let's conclude some key takeaways. Joey, you take the first.
[00:13:39] Speaker B: Sure. To start with, I wouldn't say like treat the GRL as simple as a new template. Do a proper gap analysis against the process you already have.
[00:13:51] Speaker A: Agreed. Secondly, we would advise revisit your safe harbors. Understand not only where they simplify the calculation, but what you need to substantiate eligibility.
[00:14:02] Speaker B: Yeah. And third, look beyond the tax theme. Some, if not most of the information in the Girl now requires assessment that will be likely sitting outside of tax.
[00:14:15] Speaker A: Agreed.
That probably sums up where Pillar two compliance is heading, which is that there's not really going to be a one size fits all and it will be very much dependent on the M and E group itself of how they deal and actually comply with all of the obligations that come with the jurisdictional reporting for Pillar two.
[00:14:36] Speaker B: Yeah, exactly. It's not just about technical assessment of eligibility of safe harbors incentives, but more to make sure the organization have the right information consistency and process to support it like the reporting on a sustainable basis.
So Jordan, thank you for the discussion and thank you everyone for joining us today. We'll continue the conversation in upcoming episodes on Pillar 2 and wider policy matters. You can also find the latest development and selected insights from our Global Text Network in our monthly newsletter. Follow this channel for further podcasts and regular updates. If you have not already already done so. Subscribe to receive the newsletter directly in your inbox. So thank you all for joining us.
[00:15:23] Speaker A: Thanks everyone.
