An agreement on global tax reform was announced at the recent G7 meeting. On July 1, 2021, the G20 issued a statement on proposed solutions and provided additional details (the “July Proposals”).

The Organization for Economic Co-operation and Development (“OECD”) has been leading discussions on international tax reform under the Base Erosion and Profit Shifting initiative, better known as BEPS, for many years. The July Proposals provide details on how to implement Pillar 1 which relates to taxing the digital economy and Pilar 2 which relates to a minimum global tax rate.

Pilar One – Taxing rights transfer

The Pilar One proposals apply to multinational enterprises (“MNEs”) with a turnover of more than €20 billion and a profit margin of more than 10%. These thresholds will be determined based on the accounting results of MNEs, with some adjustments. MNEs subject to Pillar One will not be limited to companies operating in the digital economy. However, extractive industries and regulated financial services will be excluded.

The objective of Pillar One is to shift the taxation rights from the home countries to the market jurisdictions (where the customers are located). The exact portion of profits that will be shifted has not yet been confirmed. The July Proposals indicate that between 20% and 30% of profitability in excess of 10% will be allocated to jurisdictions in which an MNE is deemed to have a sufficient presence, a concept known as “nexus”. The allocation will use a turnover-based distribution formula.

Profits will be allocated to a market jurisdiction if revenues in that jurisdiction exceed a certain threshold that depends on its GDP, i.e.:

  • GDP lower than €40 billion: €250,000
  • GDP equal to or greater than €40 billion: €1 million

Revenue will be sourced to the end market jurisdictions where goods or services are used or consumed. To facilitate the application of this principle, detailed source rules for specific categories of transactions will be developed.

In many cases, because of its current structure, the residual profits of an in-scope MNE are already taxed in a market jurisdiction. In this case, a marketing and distribution profits safe harbour will cap the residual profits allocated to the market jurisdiction. Further work on the design of the safe harbour will be undertaken.

The application of the arm’s length principle to in-country baseline marketing and distribution activities will be simplified and streamlined. This work will be completed by the end of 2022.

The Pilar One proposal will result in a significant transfer of profits between jurisdictions and will require the use of exemptions or credits to avoid double taxation of MNEs. One reason for the risk of double taxation is that different jurisdictions will not necessarily impose the rules in the same way.

Pilar One will be implemented through the use of a multilateral instrument, the same recently used to implement changes to tax treaties. The OECD expects that the multilateral instrument will be opened for signature in 2022 and come into effect in 2023.

The turnover threshold of €20 billion is expected to be reduced to €10 billion seven years after the implementation of the agreement.

Pilar Two – Global Minimum Tax

Pilar Two establishes a minimum tax on a country-by-country basis. It introduces Global anti-Base Erosion Rules (“GloBE”). These proposals will apply to MNEs that meet the €750 million threshold as determined for the country-by-country reporting of transfer pricing declaration.

The July Proposals state that countries are free to tax MNEs that do not meet the €750 million threshold. The Proposals could potentially apply the small and medium-sized enterprises (“SMEs”). Government entities, international organizations, non-profit organizations, pension funds or investment funds that are Ultimate Parent Entities (“UPE”) are not subject to the GloBE Rules. Only the international shipping industry is excluded from these proposals.

The minimum tax will be 15%, using on a common definition of covered taxes and a tax base determined by reference to financial accounting income (with agreed adjustments consistent with the tax policies of Pilar One).

Some types of income (for example, interest and royalties) could be subject to a lower rate (between 7.5% and 9%).

The July Proposals reiterate the range of mechanisms that can be used to achieve a global minimum tax. These mechanisms are:

  • Income Inclusion Rule (“IIR”): which imposes top-up tax on a parent entity in respect of low income of a constituent entity.
  • Undertaxed Payment Rule (“UTPR”): which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR. This is a measure similar to the U.S. base erosion and anti-abuse tax (BEAT).
  • Subject to Tax Rule (“STTR”): a treaty-based rule that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.

It is agreed that Pillar Two will apply a country-by-country minimum rate. In this context, the July Proposals will take into account the conditions under which the U.S. GILTI regime will coexist with the GloBE rules. This concession is important to ensure U.S. participation in the Pillar Two proposals.

According to the OECD, the July Proposals will establish a robust minimum tax with limited impact on MNEs that engage in real economic activities with substance. A plan to implement Pillar Two is expected by 2022 and it will take effect by 2023.

The next steps

The July Proposals provide the tax community with additional information on Pillars One and Two. However, several details remain to be worked out. The OECD is expected to finalize a detailed implementation plan by October 2021.

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Updated on April 21, 2022

Sustainable development is no longer an option. Is your organization prepared to integrate ESG factors and climate risks in its management process?

On April 7, 2022, the federal government released its 2022 budget, which includes significant measures to build a low-carbon economy and achieve national net zero by 2050.

Mandatory reporting by 2024

Among these new measures, the government is committed to moving towards mandatory reporting of environmental, social and governance (ESG) factors and climate risks across a broad spectrum of the economy based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.

Federally regulated institutions (banks and insurers) will be required to provide climate disclosures based on the TCFD framework by 2024 under the supervision of the Office of the Superintendent of Financial Institutions (OSFI).

This commitment comes a few months after the G7 endorsed a possible mandatory climate change disclosure. The group had stated its support “towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants” and that are based on the TCFD recommendations.

The TCFD framework, first published by the Financial Stability Board in 2017, addresses four key areas aimed at embedding climate-related risk into the financial system and beyond. It encourages companies and institutions to take a holistic approach to the challenges by integrating them into existing business structures of governance, strategy, risk and performance management and publish disclosures on the steps taken.

A measure anticipated by investors

This type of measure has already been implemented by many countries such as France, the United Kingdom, and recently, the United States, by extending TCFD mandatory disclosure to registered public corporations.

Investors have been awaiting this measure. The Canadian federal government is laying the groundwork for the disclosure requirements that every player in the economy will face in the coming years. OSFI also expects “financial institutions to collect and assess climate change risk and emissions information from their clients”. The pressure is expected to increase on Canadian companies and how they manage climate change risks and exposures.

The federal government welcomed the International Financial Reporting Standards (IFRS) Foundation’s selection of Montreal to host one of the two central offices of the new International Sustainability Standards Board (ISSB). This Board will develop standards to enhance the quality and comparability of ESG reporting.

Beyond simply reporting sustainability data, the TCFD recommendations necessitate businesses to consider the wider impacts of climate change, understand the physical and transitional risks on their operating model in order to mitigate them and seize new business opportunities.

This requires input from all departments, the creation of appropriate scenarios and management buy-in. The various players in the organizations, both the board of directors and senior management, have a role to play.

The board of directors’ role

Risk management has become increasingly complex in recent years, and organizations have seen the emergence of new types of risk associated with climate change. Boards of directors must understand and fulfill their fiduciary responsibilities in monitoring these risks and implementing sound governance.

This may involve training these members or recruiting members with the right skills to provide oversight of the measures implemented for management to respond to climate-related risks and opportunities.

The board could consider matters such as:

  • How does it oversee the entity’s overall risk management?
  • How does it monitor climate change risks and opportunities?
  • How does it ensure that all members are aware of and understand climate risk?
  • How does it integrate climate change risks and opportunities into overall enterprise risk management?
  • Are there specific climate change risks or opportunities that require special attention by the board?
  • Do external stakeholder expectations, such as investor mandates or changing client preferences, warrant special attention by the board?

Senior management and managers: accountable for implementing tangible measures

While the board of directors is responsible for the governance of climate-related risks and opportunities, management is responsible for designing, implementing and carrying out the entity’s response to these risks. The challenge is twofold.

From the senior manager’s perspective, the challenge is to understand the impact of climate change on the entity and its long-term sustainability and how to communicate the efforts being made to mitigate it. By asking the right questions, management will be able to identify and prioritize risks and put in place the right measures:

  • How does climate change impact the value chain?
  • What is the entity’s level of dependence on suppliers?
  • Where are these suppliers located?
  • What natural resources are at risk in the production chain?
  • How are products moved along the value chain and what is the impact of climate change at each stage?
  • What is the impact of climate change on the entity’s infrastructure?

For its part, the board must be able to assess the appropriateness of management’s approach by asking the right questions:

  • How is climate risk integrated into the entity’s enterprise risk management program?
  • What climate-related demands have come from investors and other stakeholders?
  • What are the risks and opportunities along the entity’s value chain? For example, are key suppliers at risk? Are there opportunities to increase market share related to investment in renewable technologies? Are key clients seeking more sustainable options?
  • How does the staff perceive the entity’s commitment to environmental sustainability?

Directing external disclosures

Companies have become more aware of the importance of climate change, as evidenced by increased voluntary disclosures of climate risks and opportunities.

Climate change risk disclosure has grown rapidly in recent years; in their 2020 sustainability statements, 397 Russell 1000 companies said they responded to the CDP (formerly Carbon Disclosure Project), and of the 92% of Russell 1000 companies that produce a sustainability report, 38% referenced the TCFD for climate-related financial disclosure.

Private company directors and management are facing increased attention on sustainability and climate risk from private equity firms, lenders, and clients. This is expected to increase with the new federal disclosure requirement. While the disclosure rules do not apply directly to private companies, and inconsistent disclosures still lead to comparability issues, there are many expectations for these companies to report on their ESG and climate strategies.

Other risks to monitor in 2022

Biodiversity risks

This integrated approach is key to ensuring a sustainable future for business, and with the launch of the Taskforce for Nature Related Financial Disclosures (TCND) on June 10, 2021, also supported by the G7, this model will tend to become the norm.

Organizations are becoming aware of their impact on biodiversity and the financial impact of natural losses.

Supply chain risks

This is the financial impact of the supply chain being interrupted or slowed down as a result of weather disasters. This means the organization needs to ask the right questions to support long-term production.

Human capital risks

Consider this risk and the pressure that can be exerted throughout the value chain.

In light of recent federal and foreign regulatory developments, as well as existing climate change risks and opportunities, now is the best time to begin your approach to addressing TCFD recommendations.

Our Management Consulting team has the expertise and experience to help you address these new risk management and sustainability challenges and ESG issues.

This article was written in collaboration with Alicéa Reck, Senior Business Process Transformation Consultant.

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Clara Demers
Senior Manager | Management consulting

A number of organisations are considering the working model they will adopt. Should your organization consider a hybrid work model?

The hybrid work model: pros and cons
How to adjust to the hybrid work mode

The hybrid work model: pros and cons

Managers are currently facing an unprecedented situation and unfortunately there’s no proven formula for navigating these uncharted waters. Companies need to weigh the pros and cons of the various possible work arrangements and choose the one that bests suits their needs in today’s new reality. They should also leave room for adjustments in case the model needs fine-tuning down the line.

According to a CROP survey conducted in May 2021 for the Ordre des CRHA-CRIA du Québec, 38% of workers would rather continue working from home full-time, while 24% would like to be given the freedom to choose and 18% would prefer following a hybrid model set by their employer. Additionally, 23% of respondents said going into the office is worthwhile for meetings and team discussions.

The hybrid model is generally considered the most attractive because it lets employers and employees reap the benefits of telework while keeping the drawbacks in check. To help you decide what’s best for your company, here’s a summary of the pros and cons of remote work.

Advantages of teleworking for employees

  • Time savings and productivity gains;
  • More autonomy in carrying out duties;
  • Reduced stress, as there is less direct pressure from managers and fewer disruptions caused by background noise or chatty coworkers;
  • Less money spent on transportation, parking and meals;
  • Improved quality of life and wellness (work/life/family balance);
  • Better for the environment thanks to reduced transportation.

Advantages of teleworking for employers

  • Reduced monthly expenses (e.g., leased office space);
  • Increased productivity (no travel time or unexpected disturbances);
  • Decreased presenteeism and absenteeism;
  • Larger pool of potential candidates (workers who live in remote areas or have reduced mobility);
  • Improved profitability;
  • Better for the environment;
  • Enhanced talent attraction and retention (thanks to a better employee experience).

Disadvantages of teleworking for employees

  • Risk of psychological distress (loneliness and isolation);
  • Frequent distractions for some workers (children, neighbourhood, television, etc.);
  • Hard to disconnect from work;
  • Decreased sense of belonging and dedication to the company;
  • Increased risk of injury due to poor ergonomics (neck pain, back pain, dry eyes, etc.);
  • Harder to make a name for yourself in the workplace (promotion/salary);
  • Skill development is less organic;
  • Harder to forge social ties with colleagues and supervisors.

Disadvantages of teleworking for employers

Consult our thematic section on teleworking to learn more about its different facets and to help you improve your remote work practices.

How to adjust to the hybrid work mode

If your organization opts for a hybrid work model, there are a few key things you’ll need to set up and adjust as needed.

Get the right work tools

When the pandemic first hit, a lot of companies had to make a quick switch to remote work, even though they didn’t necessarily have the tools their employees needed to work efficiently. As a result, they grappled with things like a lack of mobile computer equipment, Internet network issues and trouble accessing information because it was stored on site and not digitally. If this was the case for your business, you should:

  • Create or update your list of the workstation equipment required for each position, taking proper ergonomics into consideration (e.g., headset, tablet, laptop, ergonomic chair, screens, etc.);
  • Assess your current IT systems to make sure they can support your preferred work model (e.g., integrated management system to ensure the integrity and availability of required information).

Don’t forget to consider cybersecurity. This is a critical element, both on the company’s premises and when working remotely.

Develop a formal communications structure

In many organizations, communications are mainly in the form of informal, in-person conversations. When you switch to a hybrid work model, you’ll need a more formal internal communications structure to make sure important information flows in both directions and is relayed to everyone as needed.

Organizations should also establish criteria to help people decide when meetings should happen face-to-face and when it’s ok to talk remotely. The deciding factors should include the purpose of the meeting, the topics you need to cover, the people invited to attend and the number of participants required. Here are some tips for taking action:

  • List all current meetings and make sure you cover all management levels (e.g., team, management committee, executive committee or project kick-off, ideation, kaizen, etc.);
  • Determine the main meeting objectives, participants and recommended format (in-person or remote).

Adjust your HR management practices

All human resources (HR) management practices are affected by your work setup. Organizations that choose a hybrid model will almost certainly need to adjust their practices to suit the new work arrangement.

From the outset, companies will need to clarify what they expect from employees (work from home vs. from the office) using a survey and formal telework policy. Other ideas include:

  • Adjusting the onboarding process to allow new recruits to meet their colleagues and develop a sense of belonging within the organization;
  • Adjusting the communication method used for employee performance appraisals (in-person or virtual meeting). Ideally, these meetings should happen face-to-face, but managers may also have to make adjustments to suit the meeting location and approach;
  • Reviewing the criteria assessed during performance appraisals. Performance appraisals should focus more on achieving results and participating in projects. 360 reviews were very popular in the past, but they were very difficult to do as they involved input from managers, peers, customers and suppliers. However, the peer review aspect could become more interesting since working virtually requires different communication and interaction skills than in-person setups;
  • Protecting worker health and wellness by adopting a policy that gives them the right to disconnect.

While hybrid work arrangements remain challenging for organizations to implement, this revolutionary shift has many benefits. So much so, in fact, that we’re sure to see a turning point in the market. Whether or not you decide to adopt this approach, you will need to remain flexible and sensitive to your employees needs during this adjustment period.

Our experts can assist you throughout this process to implement winning and engaging solutions with your teams.

07 Jul 2021  |  Written by :

Clara Demers is your expert in management consulting at Raymond Chabot Grant Thornton. Contact her...

See the profile

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The Grant Thornton International IFRS team has published Insights into IFRS 13 – Fair Value Measurement.

IFRS 13 Fair Value Measurement explains how to measure fair value by providing clear definitions and introducing a single set of requirements for almost all fair value measurements. It clarifies how to measure fair value when a market becomes less active.

IFRS 13 applies to both financial and non-financial items but does not address or change the requirements on when fair value should be used.

The publication Insights into IFRS 13 not only summarises the standard, it also provides detailed commentary on various aspects of applying IFRS 13 from the perspective of a preparer working alongside a valuation expert.

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