Five steps to managing global tax complexity

Pavlo Boyko at TMF Group outlines a five-step strategy for multinational companies to tackle global tax complexity

Businesses that operate across international borders know only too well how challenging multi-jurisdictional tax accounting can be. Each jurisdiction has its own unique set of tax laws, compliance and reporting standards and digitalisation requirements, which are in a constant state of flux.

Global businesses need an effective strategy for managing these complexities — not only to maintain compliance, but also to ensure operational efficiency and potentially add strategic value as they do business around the world.

Drivers of global tax complexity

As the latest Global Business Complexity Index (GBCI) sub-report for Accounting and Tax sets out, global businesses face tax complexities on three broad fronts:

Varying rules and regulations – different jurisdictions can have very different tax regimes, and many make frequent updates to their tax policies and rates. Changes are often made at short notice in response to current economic pressures, leaving businesses scrambling to adapt. One example is Brazil, where intricate tax systems are operated at federal, state and municipal levels, each with different rules, requiring companies to dedicate significant resources to accurate reporting and compliance​.

Digitalisation – while ultimately seen as beneficial, the moves to digital tax platforms is a key driver of complexity for global businesses. More than half of the world’s jurisdictions included in this year’s GBCI report require at least some companies to issue electronic tax invoices. A similar proportion require companies to use accounting software that complies with their specific local requirements.

This makes it difficult for global companies to keep pace with local digital tax requirements, especially as the platform type and functionality can vary considerably from one jurisdiction to the next.

Localisation – aside from local differences in technology and data requirements, tax localisation comes in a number of other forms. These include: the need to maintain accounts in a local language; using a prescribed local chart of accounts; making tax payments from a local bank account only; or requiring that only local citizens can act as a company representative.

These local nuances not only make compliance more complex, they can also endanger the success of tax transformation initiatives. For example, in India local books must be kept on a local server, with a mandatory time stamp, which represents a vital input factor in any global technology project (for example, when rolling out a corporate Enterprise Resource Planning (ERP) or global invoicing platform).

A five-step strategy for simplification

Treated in the right way, tax can become an enabler of growth and value for global businesses, and not just talked about in terms of its attendant risks and costs. An accurate and timely analysis of tax elements can support strategic conversations about new product launches, M&A options, capital structure or geographical expansions, for example. 

Here is a five-step approach to countering global tax complexities and, ultimately, delivering strategic value to the business:

1. Keep tax ‘glocal’ 

Understanding local tax rules, perhaps with the help of local experts, is a must. But translating those requirements into standard global processes and transparent local deviations is equally important for a healthy tax function. A consistent but rigid global tax process which does not factor in local complexities might jeopardise overall compliance. And, vice versa, paying too much heed to local intricacies may lead to tax becoming a bottleneck in digitalisation efforts designed to enhance accuracy, efficiency and compliance.

It is important for businesses not to be too global or too local in their approach; a balanced ‘glocal’ approach works best.

2. Build a robust but flexible governance framework 

Establishing a robust framework for tax compliance, reporting and risk management helps build and maintain consistency across jurisdictions, while allowing for localisation where necessary. Centralised oversight of tax functions also helps improve efficiency by consolidating compliance efforts. 

Companies should conduct regular internal audits and reviews to identify potential compliance risks early. Regular policy updates to reflect regulatory changes, combined with staff training on the latest tax and accounting standards, will help ensure ongoing compliance.

3. Bake tax into technology transformation

Technology platforms, such as ERP systems, have a critical role to play in simplifying global tax compliance, by automating data collection, tax calculations and reporting. The trend toward real-time reporting means businesses need to integrate such tools into their broader digital transformation strategies.

However, if the future vision of automated systems taking in complex and sensitive datasets to calculate tax liability in real time is to be realised, tax experts with localised knowledge and expertise need to be deeply involved in the design of the systems from the outset – and be on hand when rules change over time. Companies will need to be highly agile in their response to changes in local accounting and tax rules, and have a proper understanding of such changes and the consequences of the measures required.

Tax experts with an understanding of technology will need to be involved in the ongoing development, configuration, maintenance and assurance of ERP systems. It is also important to involve stakeholder management — including head of tax, other tax professionals, IT implementation partners and other external consultants — as well as professionals with good project management skills.

4. Treat tax initiatives as strategic projects 

By treating tax initiatives as strategic projects, with defined dedicated leadership, clear objectives and sufficient resources, businesses can manage compliance more effectively to meet regulatory deadlines. Assigning a project lead who can coordinate between finance, legal and IT teams helps align efforts and facilitates the smooth implementation of new processes. Getting a non-tax or even a non-finance project sponsor on board can also increase the chances of success.

This project management approach will also help ensure tax transformation initiatives lead to tax functions being integrated with broader digital transformation goals and greater scope for automation and efficiencies.

5. Nurture a tax intelligence network

Global businesses will benefit greatly from having their own tax intelligence network, made up of internal and external sources of local tax knowledge and expertise. This monitoring function can track changes in key markets and assess the potential impact on operations.

With the help of local experts, companies stay on top of changing tax law and ensure that the intricacies of the required systems, relevant processes and legislation are fully understood. Many governments and tax authorities are showing an increased willingness to offer guidance and support to businesses to help them navigate particular tax changes.

Increasing complexity

Despite the continuing increase in tax complexity – driven mainly by changing regulations, digitalisation and highly localised practices – the five-step strategy outlined here will help multinational businesses simplify their accounting and tax processes and help them maintain compliance as the global tax environment continues to evolve.

Pavlo Boyko is TMF Group’s Accounting and Tax’s Global Solution Architect

Main image courtesy of iStockPhoto.com and Umnat Seebuaphan