Technology is Key to Compliance in a World of Global Tax Scrutiny
16 October 2013
Posted by: Author: Brian Peccarelli
Author: Brian Peccarelli (Thomson Reuters)
Technology has created the global village in which most businesses now operate. It has also enabled the extension of legal scrutiny across borders. It makes sense, therefore, for organisations to use technology to improve their ability to collect, maintain, and report on data that holds implications for their tax compliance – and, therefore, for their credibility with the public. The United States’ FATCA legislation and the OECD’s Action Plan on Base Erosion and Profit Shifting are adding impetus to tax directors’ search for tools that will make transparency and compliance easier and more intuitive.
Companies that look as though they are evading tax, even when they are not, are likely to be early victims in an effort by many nations (and nation groupings) to ensure that corporate tax bills are paid in full.
The priority for tax directors and finance departments, therefore, should be transparency. Without transparency, compliance in complex corporate environments can be difficult to prove. With transparency, the public and governments will assume that, even if compliance has not been fully achieved, the taxpayer is being forthright acting in good faith. This will save corporate reputations as well as brands, businesses, and jobs.
With the tax paid by businesses being seen as a major contributor to nations’ sustainability, public and government pressure on tax directors is certain to increase.
If they don’t have the right tools, however, managing transparency and compliance could become difficult and costly enough to threaten an organisation’s own sustainability.
Urgency for such tools has escalated sharply with the U.S. Foreign Account Tax Compliance Act (FATCA), introduced in January this year. FATCA is focused on reducing the loss of US$ 500 billion a year in American tax revenue by requiring foreign financial institutions (FFIs) to collect, manage, and report on all information that could reasonably point to tax liability to the United States.
According to the European Banking Federation and the Institute of International Bankers, the process of implementing systems that will allow non-American banks, investment funds, insurance companies, mutual funds, broker-dealers, custodians, intermediaries, and private equity firms to meet this requirement is expected to cost at least US$250 million. The deadline for compliance has recently been moved to June 30, 2014.
Even for financial organisations with robust client data management frameworks, anti-money laundering (AML) systems, or Know Your Customer (KYC) assessment schemes, the deadline is extremely challenging. Operationally and systemically, there are significant pain points, particularly around on-boarding, classifying, and documenting new clients and in gathering sensitive data from a variety of structured and unstructured sources.
In addition, the multi-disciplinary approach needed for FATCA compliance touches most parts of an organisation, raising a number of questions. Who has ownership of all taxes? How does tax responsibility cascade through the business? How does the chief financial officer measure the effectiveness of the tax department?
The OECD’s Action Plan on Base Erosion and Profit Shifting, which is focused on reducing international tax avoidance through cross-border transactions, makes these questions even more pressing. During the past 50 years, most countries have focused transfer pricing legislation on related parties, usually subsidiaries or branches of multinationals, dealing with one another across national boundaries.
Part of the OECD’s plan, is to ensure that there is transparency when profits are fairly allocated where transactions across borders happen among related parties. An additional, updated emphasis is now being placed on enforcing the arms’ length principle in domestic transfer pricing.
In South Africa, cross-border and domestic transfer pricing legislation is currently under review, with advice being taken from the United Kingdom, which has used organisational self-assessment to establish one of the world’s most robust and effective transfer pricing regulation systems. South African Revenue Services (SARS) is also consulting India, which uses fairly aggressive transfer pricing principles.
Whatever principles and policies regulators adopt, organisations must still confront the practicalities of collecting, maintaining, and reporting on data – across business disciplines and across borders. The tax process at all levels of a business will have to be automated to ensure consistency and eliminate error. And, the effectiveness of the tax department will be measured by how seamlessly it integrates with, rather than disrupting and causing expense for, the overall business.
None of this is possible without the use of technology. But, there’s no time (and no rationale) for building entirely new tax compliance systems from scratch for each individual organisation. The shortest route to transparency and compliance is through systems that bring together market leading technology and content already widely used by organisations around the world to solve regulatory compliance, tax documentation, and tax reporting issues.
This article first appeared in the September/October 2013 edition of TaxTalk