As the global footprint of business continues to expand, regulatory authorities are strengthening and broadening legislation on corporate transparency and control.
Finance and accounting professionals must continually keep up with changing local tax policies, currencies, and transfer pricing, as well as new global mandates. This adds layers of complexity to an already challenging global intercompany balancing process that has companies struggling to stay compliant.
Today, multinationals minimize their tax exposure by leveraging gaps and mismatches in the global tax laws that claim profit at the lowest taxing jurisdiction. Corporations aren’t required to provide transparency into dealings between their legal entities, and jurisdictions have little to no visibility into escalating corporate tax avoidance strategies.
In 2013, the Organisation for Economic Co-operation and Development launched the Base Erosion and Profit Shifting (BEPS) project to allow for greater transparency of company tax information on a country-by-country basis. The package was issued in December 2016 and provides 15 BEPS Actions that give governments the tools they need to ensure all activity and value generating profits are taxed.
The BEPS action plan focuses on three fundamental pillars:
- Introducing coherence into the domestic rules that affect cross-border activities
- Reinforcing substance requirements in the existing international standards
- Improving transparency and certainty for businesses that do not take aggressive positions[i]
The 31 countries that signed the agreement have been working toward integrating the changes into their local tax laws.
Action 13, arguably the most concerning new legislation to impact multinationals, requires that visibility for business operations and transfer pricing policies are detailed at the individual country level. Country-by-country reporting is filed in the jurisdiction of the parent entity’s tax residence and includes detailed information on revenue, profit and loss, income taxes paid and accrued, stated capital, accumulated earnings, and other tangible assets.
Taxing authorities throughout the world now have the ability to ascertain how multinational companies allocate their income and tax payments to a particular country, and other countries as well. These regulations give global tax authorities the information necessary to conduct transfer pricing risk assessments to combat the rise in corporate tax avoidance strategies.
The impact to multinational tax departments is significant. Tax-minimizing transfer pricing strategies can no longer be orchestrated without granular transaction-level auditable information.
Compliance with Article 13 requires businesses to analyze and capture intercompany transactional level detail globally across multiple entities and ERP systems, aggregate the data and produce standardized reports for compliance.
The level of detail that BEPS requires is unlike anything the tax departments have had to face in years. An estimated 25% of companies expect to miss the BEPS filing deadline of December 31, 2017.
Manually managing compliance isn’t sustainable. To meet compliance needs, multinationals will be forced to leverage technology solutions that can aggregate transaction-level data through an end-to-end intercompany process flow. Cross-functional working groups across tax, finance, accounting, compliance, audit, and technology will need to be established to pull together the process and understanding necessary for compliance.
As the need for intercompany transparency grows, it is important to understand the compliance burden by continuing to operate with manual processes and data siloed throughout multiple ERP systems.
It’s time to look toward automated solutions to keep up with the growing and changing regulatory environment.