Improve Intercompany Efficiencies & Stem Tax Leakage as Expat Staffing Surges

Intercompany financial management (IFM) is an extremely complex beast that multinational corporations continually struggle to tame. The challenges are endless. Multi-route billing systems experience hundreds, if not thousands, of touch points. Corporations rely on manual processes that waste time and delay accounting closes. And poor intercompany visibility means that entities run the risk of suffering unnecessary conflicts, overpaying taxes, and inadvertently violating tax laws.

Amid this backdrop of intercompany inefficiency and opacity are the critical tasks of managing non-trade finances related to expat hires—workers who are relocated to work in a new country while still being employed by the legal entity they came from—as well as local hires who are allocated to work with entities in other countries.

The pandemic has spurred an increase in expat and local-hire activity, with more employees working for entities in a multitude of countries, in addition to the multinational’s home country. Given these issues, it’s critical that multinationals seek out solutions that enable them to take control of expat IFM.

To understand the difficulties that multinationals face in processing expat charges, let’s imagine that US-based Company A hires an employee named Peyton. After onboarding, Peyton is moved to the corporation’s Canadian subsidiary, where some of her responsibilities include staffing Company A’s other subsidiaries in Spain and Belgium.

In this scenario, Company A and each of its subsidiaries must manage a variety of charges each month including:

Employee salary and taxes. Company A continues to pay Peyton’s salary. As Peyton spends months working for the Canadian entity, Company A must recoup a prorated portion of Peyton’s salary from the Canadian entity. If, during this time, Peyton is assigned to spend a month remotely working for the multinational’s Spanish entity, the salary charges become even more complicated as does tax withholding and Peyton’s tax filings for the year.

Moving and housing expenses. Company A must pay a US-based moving company to transport Peyton’s belongings to Canada, as well as a Canadian vendor that handles the unloading. There are also flights and other moving expenses associated with Peyton traveling, such as payments made to a local apartment rental company.

Local expense reimbursements. As Peyton spends three months of the year working in Spain, she will need to be reimbursed for numerous expenses, including plane travel, accommodations, local transportation costs, meals, and supplies. Expense forms must be separated by country so that entities process only charges that occurred in their locations. Ultimately, Company A will be responsible for reimbursing each entity for payments that were made to Peyton.

Delayed expenses. Company A will need to pay some expat-related charges after Peyton has left an assignment or moved out of a jurisdiction. Examples could include performance bonuses, moving expenses, and lagging vendor invoices. For example, since Peyton is getting paid by a US entity and living in Canada she must submit both US and Canadian tax returns. While Company A graciously pays an outside tax firm to file Peyton’s various tax returns, bills from these providers may lag employee assignments by many months.

Given the many data-processing tasks involved with Peyton’s work, it’s easy to see how an extraordinary number of staff hours, meticulous inter-entity communication, and expert knowledge of international tax laws would be required.

This is not an uncommon scenario. Large multinationals have thousands of expats and local hires working in different capacities in various countries for multiple corporate entities. All the while, the multinational (Company A in the Peyton example) is ultimately responsible for paying the expat, processing data correctly, complying with tax laws, and collecting from other entities to cover expat-related expenses.

Do most multinationals manage these intercompany non-trade activities smoothly and efficiently? Hardly. And to aggravate matters, because many rely on antiquated, manual processes and disjointed ERP systems, they’re unable to identify friction points, much less correct them in a timely manner. A recent BlackLine survey of more than 100 intercompany stakeholders found that 96% of respondents reported challenges with IFM, and 97% indicated that intercompany challenges negatively impact overall business outcomes.

As such, corporations that don’t have sound and efficient IFM processes are vulnerable to a host of risks.

Issue: Global mobility teams and HR departments use manual processes to work with and store data.

• Risk: Payment delays, unnecessary costs, and a chaotic accounting close process.

Issue: Disparate ERP systems, such as SAP and Oracle, are cobbled together and are not designed to process intercompany transactions; they are particularly unprepared to manage non-trade services.

• Risk: Disfluencies between when bills are paid and when they are netted out and settled.

Issue: Data is dumped into a financial “data lake,” an abyss of information and files that must be normalized and then sifted through for later use.

• Risk: Many wasted staff hours, working with inaccurate records, and data getting lost to the system.

Issue: A failure to gain visibility over activities performed by global entities.

• Risk: Violation of local tax laws, such as Base Erosion and Anti-Abuse Taxes (BEAT), and tax leakage, in which entities are paying more taxes than what is actually required.

Issue: Difficulties processing charges that occur months or years after expats have left their posts.

• Risk: Inter-entity conflicts over which departments are responsible for payments.

Given the complexities of non-trade intercompany, multinationals seeking to mitigate expat-related issues must look beyond only making local improvements to data-tracking systems. Instead, they should adopt solutions that are designed to holistically, efficiently, and consistently manage all intercompany functions and seamlessly integrate with existing systems while requiring minimum staff ramp-up time.

BlackLine Intercompany empowers multinationals and their subsidiaries to channel all intercompany cost tracking through a single, integrated system. At the same time, automated processes help save time and money, while intercompany visibility and insights enable global mobility teams to make better business decisions.

The features of BlackLine Intercompany address all aspects of IFM, including the management of expat activities. Some examples include:

• A centralized, cloud-based system. Multinationals can store and manage data all in one place—one that serves as a “virtual intercompany subledger.”

• Expat reference ID. Expats and local hires are tagged with a unique identifier that is referenced by all touch points and entities, even months after the employee has left a post or the parent company.

• Visibility and data transparency across all entities. Data doesn’t get lost, costs are processed in a timely manner, and taxes are leak-proof and paid and filed in compliance with international laws.

• Fully automated processes. Manual processes are replaced with automated ones, saving hundreds or thousands of staff hours and improving the accuracy and timeliness of data processing.

• Seamless integration. Existing HR systems and ERPs, such as SAP and Oracle, dovetail with the BlackLine platform.

Intercompany can get complicated fast. Multinationals that rely on antiquated, “homegrown” financial management systems will continue to be plagued by issues that put them at financial and legal risk. Risk is compounded when bespoke processes are known only to certain individuals within an entity or business unit. This can delay reporting and dispute resolution or be lost entirely due to job changes and retirements.

A quintessential example of these complexities is the hiring and data processing of expat-related charges and those of local hires. Transactions must pass through a dizzyingly complex, multi-route billing system with a plethora of touch points—each of which poses a risk to accounting-close and tax-filling schedules. On the other hand, multinationals that adopt BlackLine Intercompany can save staff time and cost and increase revenues by improving intercompany efficiencies, data sharing, and tax compliance.