Go Beyond Zero by Intelligently Managing Global Tax Processes

In part one of this series, we discussed improving operational efficiencies in regards to intercompany processes. In part two, learn how to go beyond zero by intelligently managing global tax processes.

Tax-efficient intercompany processes and pricing strategies enable increased deductibility, reduce tax leakage, and lower effective tax rates, in such a way that post-tax income is maximized. To gain these advantages, sophisticated tax processes design, data management, and substantiation are key, but can be challenging to accomplish.

Although it is estimated that intercompany transactions account for 70% of world trade (OECD), the control, granularity, and accessibility of data related to intercompany generally falls far behind the rigor provided to third-party transactions. 

Exacerbating the problem, intercompany transactions, and the challenges of managing them, are ever-increasing as companies expand globally, adding complexity with new, disparate systems and significantly accelerating intercompany transaction volume.

Increasingly, tax authorities’ audit teams bring to the table an intercompany specialist who closely examines intercompany transactions and related tax calculations. This kicks off investigations that raise probing and multiplying questions about how intercompany is handled. Poor management of intercompany financial transactions increases risk exposure, unexpected costs, and potential penalties.

Challenges to intercompany tax management are also increasing as tax authorities have begun making automation a requirement and international tax rules are aligning with the digitalization of the economy, no longer making physical presence a sole test for tax jurisdiction.

For all these reasons, multinationals have ample reason to be concerned that they cannot defend their intercompany decision-making to tax authorities without meaningful improvements in their intercompany processes and reporting.

Whenever a new intercompany process is changed, reallocation models must be deduced and built. For example, instead of having finance people spread out around the globe, a multinational may decide to centralize a finance process through a shared services team in Hungary that will handle statutory work for the entire organization. A process must be built to reallocate the cost going through that center to corporate entities all over the world.

Alternatively, suppose a multinational decides to outsource an enterprise IT service to a BPO located in Atlanta. When the bill arrives, those costs need to be charged out to various entities with appropriate weighting.

Building new processes is often done by an FP&A team in conjunction with tax to ensure tax implications have been considered. Transfer pricing is established, indirect tax considerations are accommodated, tax rules are established, and so on. The considerations are numerous, detailed, and interlocking, so building the new process is best accomplished working from the ground up and asking:

• What organization will be managing the new tax process?

• Who is being billed out to, how many and which entities? How is the weighting decided on?

• What is being billed for?

• How is pricing to be set?

Based on these key questions, and many concatenating decisions, a system to control processes must be coded and integrated with a multitude of existing systems where data may reside, or with those that require data from the new process and related systems. When built from scratch, the costs in time, money, and talent can be immense, as system development is commonly taken on for each new process and company in the enterprise and must be continuously maintained and independently updated.

It’s clear that control and management of intercompany tax processes need to evolve. Intercompany Financial Management (IFM) is a new discipline for designing, building, and managing intercompany operating models. It also allows tax teams to become a core component of a multinational’s intercompany strategy and management, using automated, consistent, transparent, and accurate data and logic for that data.

Only by having global control and visibility into tax data throughout the enterprise can intercompany and tax teams identify issues and address audits that come up years later.

The BlackLine Intercompany tax solution allows clients to streamline intercompany processes, including tax processes and pricing strategies that can reduce not only tax leakage and costs related to audits, but also operational inefficiencies. It allows them to substantiate deductibility for hundreds of jurisdictions, improve transfer pricing transparency, and prevent VAT leakage.

Furthermore, it empowers transaction lifecycle management from initiation to close, ensuring consistent tax compliance that can free companies from conservative risk-avoidance so that they can drive strategy with confident substantiation.

Dirk Van Unnik is Vice President of Tax Development at BlackLine

Get your copy of this exclusive survey that examines essential questions about the state of intercompany at multinational companies.