Managing global tax compliance: emerging trends in a new era

The ongoing tide of corporate governance developments continue to create pressure on organisations to demonstrate adequate control and management of tax risk. For Tax Directors of multi-national organisations, demonstrating appropriate management and control of tax in all jurisdictions can be a confronting task, given the various levies, imposts, legislative complexities, and differing revenue authority approaches. Historically, most Australian headquartered multinational groups have taken a decentralised approach, delegating the management of tax compliance obligations to overseas in-country finance teams. This creates added pressure on Global Tax Directors, who need to satisfy the Board that tax compliance is being managed on a timely and effective basis by the global tax team.

So how does the Global Tax Director obtain the degree of confidence needed to respond to enquiries, whilst proactively advising the Board, of where the management of responsibilities has been delegated? In recent times, particularly in the United States of America (USA), Europe and increasingly in Australia, there has been a growing trend in companies adopting a more centralised compliance approach, with Global Tax Directors and their teams taking on a proactive role in ensuring the company’s global tax compliance obligations are captured and met.

One of a series of articles discussing optimising the effectiveness of the tax function, this article focuses on the options and challenges faced by Australian headquartered global or regional tax functions, in developing a global strategy for managing compliance.

Key challenges

In an ideal world, the global tax team of an Australian multinational corporate would:

• know the status of all group tax returns in each country, timing of lodgements, pending audits, areas of revenue authority focus, and relevant legislative developments

• have confidence that a consistent approach to risk management was applied in each jurisdiction ensuring that tax provision calculations, tax returns and filings are accurate and materially correct; and that planning opportunities are readily identified, and reflected in returns and filings

• have ready access to quality information for planning purposes, such as net operating losses, tax credits and costs, and copies of relevant advices and filings.

When it comes to the Asia-Pacific tax region in particular, it is not uncommon for global tax teams to view it as a relatively homogenous area, with similar systems and cultures. However, in reality there is a massive array of different cultures, business and tax environments, with the tax regimes ranging from highly developed through to those in their early stages of evolution, making it a dynamic tax region. To help illustrate this, the following table outlines some of the tax returns (in addition to corporate income tax returns) that need to be filed in a sample of Asia countries.

In addition to dealing with the complex rules and regulations for each location in which a corporate operates, global tax teams headquartered in Australia often experience a significant degree of separation from their overseas operations as a result of distance, time zones and limited resources. They also often struggle to access consistent reliable information from around the globe for risk management and tax planning purposes. Organisations must nonetheless respond to these challenges in order to ensure that the risk of financial loss through lodgement failure, error or misrepresentation, legal disputes and reputational damage, is kept within tolerable thresholds.

Global compliance strategy

In response to the significant challenges faced by Australian headquartered global and regional tax teams, many companies are implementing a global compliance strategy to provide them greater confidence that their compliance obligations are met, by ensuring risks are identified, assessed and managed effectively in all jurisdictions.

In our experience, there are a number of key components to developing an effective global compliance strategy. These include:

• establishing clear risk management objectives and guidelines for the management of tax compliance

• effective project management to ensure compliance obligations are captured, monitored and met on a timely basis

• easy, real time access to reliable, relevant information

• communication and escalation protocols are identified so as to respond to local sensitivities in a manner which has regard to local and global risk management guidelines

• appropriate resourcing in overseas locations.

People

As with most business functions, the core component of a tax function is its people (both external and internal team members). It is critical to the success of any global tax compliance strategy to have the right people, with the right skills, focused on the right issues at global and local levels.

Global

At a global level, there is a trend towards allocating the management of global compliance to one headquartered located person. This role is likely to involve the supervision of overseas compliance activities, and it is at this level that risk management standards and protocols should be established through liaison with the relevant stakeholders, such as representatives from risk and strategy, internal audit, and finance.

Local

It is at a local level (i.e. in the overseas jurisdictions) that identifying the right people to prepare and review tax returns and filings can be most challenging. With in-house tax expertise often restricted to head office and a few key strategic locations, local country tax returns are either prepared in-house by the finance team or by external service providers.

The following questions should be considered when assessing the right combination of resources required to mitigate risk:

• Are there sufficient resources in-house to ensure the timely and accurate calculation of tax provisions and preparation of the tax returns/filings?

• Does the person(s) reviewing and approving the provision and returns/filings have sufficient expertise and knowledge of both the entity in question and local tax laws? Are they capable of effectively working with the compliance tools in place, and understanding the risk management protocols?

• Is an alternative resource(s) available (with the required knowledge) if the current internal compliance preparer leaves the organisation?

• Can the internal team deliver the relevant information that the global tax team require on a timely basis?

Having identified the correct resource to implement and manage the strategy, it is important to clarify and document the processes that will be followed. An important part of process design is ensuring that the right resource is assigned to each of the processes, and that both the global and local teams (internal and external) are aware of their roles and responsibilities.

Design of the process gives life to risk management protocols and controls. Many organisations will standardise compliance processes at a local level before then overlaying with appropriate management processes for co-ordination and project management. Process design will generally be managed through a combination of global resources in setting guidelines, standards and global reporting needs, and local resources in managing territorial specifics.

The table below breaks down some of the key management activities that need to be identified and addressed in designing and implementing a co-ordinated compliance tax strategy.

In practice, the allocation of these activities will vary between two extremes:

• an all encompassing role whereby the global tax team has a large part to play in the management of overseas compliance and all of the activities identified above rest therewith, or

• a high level oversight role using a single service compliance provider globally, allowing them to take on the bulk of the co-ordination and control of the local compliance processes.

Technology

In recent years companies have realised the significant value technology brings to the management of global compliance, from strategy and risk management through to delivery, and the sophistication of the tools being employed is ever-increasing.

The key uses of technology in supporting an organisation’s global compliance strategy are as follows:

• status tracking reporting tools which look at the compliance status in various countries around the world and quickly identify what is outstanding

• data repository to store key documents and data, such as tax returns and tax payments, and provide real time access to key information

• monitoring revenue authority review/tax audit status

• computation/calculation of either local territory specifics or more extensive reporting, e.g. global tax reporting, or accounting tools.

Looking forward

In summary, Australian headquartered global and regional tax teams are trending towards implementing a global tax compliance strategy as they seek a solution for dealing with the many challenges in managing their global tax risk, reporting and compliance obligations. Designing the right global tax compliance strategy that meets the needs and objectives of a tax team requires a combination of people, process and technology. The right combination will vary from organisation to organisation, depending upon their risk management objectives, territorial dimensions, organisational complexity and revenue authority attitude.

There is certainly a trend towards the centralisation of the management of compliance to provide tax teams with the level of assurance they require in respect of the identification and management of tax risks and comfort that compliance obligations are being met on a timely basis. This trend has been led by US headquartered groups, followed by European and now Australian headquartered groups.

As the corporate governance environment continues to evolve, so will the co-ordination and management of tax compliance, as leading Australian organisations respond to the challenge.

For further information, please complete the following form, or contact:

Grant Stewart, Partner
PricewaterhouseCoopers Tax
T&L National
Phone: +61 (2) 8266 2644

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