The global-local service to tax compliance and financial reporting
18 September 2013
Posted by: Author: Warren Taylor (EY)
Author: Warren Taylor (EY)
Mr. X who works in finance for a global company must answer a tricky question for his chief financial officer: can his company submit all its tax and financial filings around the world from an efficient global centre and yet maintain the local expertise necessary to get every detailed, country-specific calculation correct?
It is not an uncommon challenge; a survey conducted by EY shows that some global finance executives are trying to accomplish just that: go global yet remain local. However many are hesitating, and this CFO is among them.
His Fortune 500 company operates in over 100 countries and faces a massive tax challenge each year of filing thousands of tax returns with national and local governments. These cover not only income taxes but also value added taxes, withholding taxes and many others. On top of the tax returns there are other statutory filings which local employees in each country have traditionally done.
In the recent years compliance and reporting – a jargon for all the required filings – has become a much bigger challenge.
One executive put it bluntly to EY, "We are just inefficient. We end up being accurate but it takes way too much effort.”
In order to economise and get a handle on the scope of the challenge, companies have considered using the global or regional centres that so many of them are setting up, for their finance and accounting functions. However, it is still necessary that to get tax returns and statutory filings done right, you have to have access to local expertise.
Which trend is stronger, the imperative for efficient, globalised operations or the need for local expertise? In the EY survey, 82% of finance executives said they considered the need for local expertise to be a significant barrier to completing compliance and reporting from a regional or global service centre.
However as difficult as the global service may seem to these executives, the status quo is not working for their companies. Almost two-thirds of Fortune 500 respondents to the EY survey were surprised with tax audits in just 12 months, with almost half being assessed for taxes or penalties. One in six said that a compliance failure has caused a business interruption such as goods confiscated by customs agents, revocation of authority to do business due to statutory financial reporting problems and executives faced with personal fines or risk of arrest due to unpaid taxes.
Another survey respondent expressed frustration that he cannot prevent errors in a decentralised system. "There’s no supervision beyond the country in question — that would be too costly, as it’s usually a small operation. So if they’re doing it wrong, we have no idea [until it’s too late].”
Slow economic growth and rising government debt, have increased pressure on tax authorities to raise revenues, which is driving rapid change in tax policy, elevating tax controversy and a creating a high degree of focus on timely and accurate tax compliance and reporting.
Allegations of tax avoidance now make front page news, and tax remains in the political spotlight with the ongoing "what is a fair share of tax” debate.
So how did Mr. X answer his CFO’s quandary? He told his boss that the company could indeed do both, go global and yet retain local expertise.
The hybrid service is to locate their in-house finance personnel in just a few key countries. The company would then fill the gaps by partnering with a global service provider with an extensive network of local tax and accounting professionals. That would enable the company’s finance and tax teams to focus on core operations and governance without sacrificing the quality of its local compliance and reporting.
With Africa emerging as a viable destination for international businesses’ expansion plans, such a model is crucial, especially when considering the complexity and variety of the regulatory and compliance landscape across 54 countries. Each has its own and different direct and indirect national and state taxes, while revenue authorities are becoming increasingly sophisticated by sharing best practices with each other through the Africa Tax Administration Forum (ATAF).
The best practice for companies starting to operate in a new country is to open sales and marketing operations in that country while outsourcing non-core finance and tax functions to a reputable in-country service provider. The service provider can protect a company’s brand in that country by ensuring compliance with the local laws and regulations.
A good mantra for companies that are transforming their finances to fit the new globalised economy is "standardise, digitise, globalise.” This process should include making all components of compliance and reporting global and efficient, not just the income tax returns. Almost two-thirds of companies in the EY survey have established global processes for tax accounting, but many have omitted income tax compliance, value added tax returns, financial statements or some other important filings.
Fortunately, most finance executives are aware of the risks. The survey shows that 69% think that failing to globalise compliance and reporting will lead to incomplete or inaccurate data, 68% think it will add to the cost of compliance and reporting, 57% think it will result in missing deadlines and incurring penalties, and 50% think it will lead to an increased tax burden.
The historical patchwork of compliance and reporting spread across different departments and geographies is untenable. Nevertheless, local expertise is critical, so a totally global approach is not possible. As in the above scenario, leading global firms are using a mix of global and local personnel and taking advantage of global service providers.