Ensuring readiness in your legal department for BEPS 2.0
Several of the data points required for Pillar Two calculations will come from the legal function. The amount of data required from the legal function will vary depending on the group structure, specific entity and internal ownership of the data. Details such as involvement in intercompany transactions (e.g., dividend distributions, share ownership transfers), issuance of stock-based compensation, or third-party asset or share deals and similar transactions, may be additional relevant data points for Pillar Two.
Your legal team will need to be confident about the accuracy and comprehensiveness of its worldwide legal entity data, so it can timely and accurately report the data to the Pillar Two lead team within your company. The following are actions your legal team should consider taking to prepare.
1. Evaluate your ability to efficiently report accurate and comprehensive legal entity data.
The following types of legal entity data would typically come from the legal department.
Basic legal entity data
- Entity name;
- Jurisdiction of incorporation;
- Tax jurisdiction;
- Ownership information, including minority ownership;
- Tax ID number; and
- Ultimate parent and ultimate beneficial ownership.
Additional legal entity data
- Changes in ownership, along with historical ownership information;
- Changes in accounting principles;
- Changes in functional currency;
- Certain fines or penalties;
- Permanent establishment data; and
- Flow-through entity data.
Transaction-related data
- Third-party transfers, and intercompany transfers, of assets, liabilities or shares — e.g., merger, demerger, business transfer, asset sale, etc.;
- Dividend and profit distributions — along with details such as amounts, entities involved and dates;
- Other intercompany transactions between constituent entities; and
- Joint venture agreements and data.
Legal effective dates
- All relevant legal entity data points;
- All transactions or corporate changes; and
- Any required underlying corporate documentation
This data should be captured and kept updated to reflect the current entity status in as close to real time as possible, while at the same time keeping the ability to pull relevant data that may be needed for Pillar Two.
In addition to current entity data, historical legal entity data may be requested for Pillar Two calculations, so your legal team must be able to easily find and report the right entity data for the correct period.
2. Conduct an internal Pillar Two legal entity data-readiness assessment.
If there are doubts about whether your legal department is ready for Pillar Two, you may take this as an opportunity to conduct a legal entity data-readiness assessment.⁵ Some key items to verify internally are, for instance, whether your legal team has a suitable legal entity management platform, efficient processes and procedures, and sufficient support staff in place to gather, verify, update, store and present the relevant legal entity data and, if needed, the relevant underlying entity documentation.⁶
While conducting your assessment you may come across some of the following challenges.
Ownership of legal entity data
Even though control of legal entity data is traditionally assigned to the legal function, other functions — e.g., tax, finance or human resources — may keep their own organizational chart or other legal entity data.
Also, legal entity updates resulting from transactions may not have been communicated across the various in-house functions, or may not have made it into the legal entity management system. This can lead to inconsistent entity data across functions, and make entity management software less reliable.
It may be necessary to reestablish clear rules regarding the ownership of legal entity data, real-time reporting of changes to the entity structure and the protocol for updating the entity management tool, so it becomes the only source for this data.
Changing of legal entity management approach
MNEs often adopt one of two approaches to legal entity management. Under a centralized approach, there is one central team within the legal department of the MNE that is tasked with managing all the entities and updating the entity management system, albeit different team members from the central team may be in charge of regions or specific countries.
Under a decentralized approach, the local legal teams in countries outside the MNE's headquarters handle the entity management of their respective local country entities largely independently, and report back to the MNE's headquarters on the entity's legal entity status and any changes.
While the decentralized model may work for some MNEs and may be driven by business, operational or local business relationship considerations, its general challenge is that the MNE's headquarters — and the legal entity database it uses — may not have the latest data and documents for its worldwide entities. As such, the headquarters' legal team may have to obtain the latest entity information from the local legal teams, which may present challenges.
To the extent this challenge exists in your organization today, it will likely be further amplified due to Pillar Two's data requirements. MNEs may wish to reevaluate their current processes and procedures within the decentralized model, or consider shifting to a centralized entity management model, to preemptively address some of these potential issues.
Suitability of existing legal entity management database
Pillar Two represents a fundamental change in how multinationals are taxed. It will likely require companies to deploy new systems and technologies to manage myriad requirements.
These changes provide an opportunity to assess whether the legal entity management database currently in use is actually fit to allow you to be Pillar Two-ready. When undertaking this exercise, you may also discover that the technology your team is currently using may be subject to steep licensing fees or training costs, which may necessitate looking for a potentially more efficient technology solution.
Elements of a state-of-the art legal entity management platform that can accommodate Pillar Two include historical look-back capabilities, including point-in-time organizational charting functionality, and the ability to synchronize with a corresponding tax and Pillar Two technology platform.
Gaps in legal entity data and remedial actions
To the extent your internal assessment identifies existing governance issues, or if you otherwise have doubts regarding entity data readiness for certain entities, the time to act would be now, before Pillar Two becomes effective.
Typical steps would include conducting health checks of relevant entities, identifying and implementing remedial actions and updating the legal entity management database — or switching to a more suitable platform — such that it can be relied on by all cross-functional teams.
Staffing challenges
Both preparation for Pillar Two and the actual amount of work required from your team on Pillar Two are likely be time-consuming. When evaluating your current staffing needs, some questions to consider include:
- Does your current team have the bandwidth to take on Pillar Two tasks?
- Are more legal team members needed?
- How can internal resources be freed up to focus on more strategic work streams, mergers and acquisitions, transaction support, etc.?
3. Prepare for potential intercompany restructuring.
Your tax team may want to revisit your current entity structure in response to Pillar Two. This may result in an intercompany restructuring, which would likely involve your legal team — e.g., share transfers, mergers, redomiciliations, continuations, etc. Under this scenario, your legal team will, for instance, want to:
Be ready for a legal entity rationalization (LER) project.
If an intercompany restructuring is being considered, you and your tax, finance, HR and other cross-functional teams may also want to assess whether an LER of some of the entities in your organizational structure may be warranted, either as a direct result of the intercompany reorganization or as its by-product (e.g., to get rid of dormant entities in an effort to save recurring annual corporate, tax, and audit compliance and other operational costs).
Be ready to implement corporate changes.
Depending on your cross-functional teams' assessment of Pillar Two's impact, and the design of a potential intercompany restructuring, corporate changes may be required that could affect local entity management and control.
These changes would likely require your legal team's involvement and may mean reevaluating items such as the current slates of directors, who has signing authority and current practices regarding the issuance of corporate approvals.
4. Learn a new language.
Several new terms have entered the tax lexicon as a result of the BEPS 2.0 project.⁷ Some common terms your legal team will want to be familiar with include:
- CbCR — country-by-country reporting;
- Constituent entity — (a) any entity that is included in a group; and (b) any permanent establishment of a main entity that is within (a);
- GloBE rules — set of model global anti-base erosion rules;
- IIR — income inclusion rule;
- OECD — Organization for Economic Cooperation and Development;
- QDMTT — qualified domestic minimum top-up tax, and
- UTPR — under-taxed profits rule.
Conclusion
The effects of BEPS 2.0 will be felt beyond tax. The data required will impact departments across the organization and across MNEs entity structures. As jurisdictions continue to bring these rules online, legal departments will want to make sure they are staying connected with not only their organization’s tax teams, but finance, HR, IT and decision makers throughout the business.
