Tax Function of the Future: Legal entity forecasting

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How to tackle the obstacles

Obtaining legal entity forecasts with sufficient detail for tax reform planning and compliance is a critical task, but also a challenging one indeed. A formidable speedbump is the complexity of calculations and the greater amount of needed analysis, particularly given the interdependencies between provisions.

In addition, this process historically has not been robust. On the contrary, companies often struggle with developing reliable legal entity forecasts that reconcile back to both the existing commercial plan and transfer pricing policy. Many companies don’t create proper forecasts at all, so the Tax function relies upon data manipulation typically in a spreadsheet environment, and assumptions to estimate the legal entity forecast.

Another difficulty is that more functions within an organization are wanting legal entity-based data – such as Treasury, Supply Chain and Deal teams – which often leads to duplicative, silo processes that result in inefficiencies from a broader organizational perspective.

What level of detail is now needed?

Tax reform created a number of data points that companies need to track and capture for not only compliance purposes, but also to understand a base-case impact of tax reform and consider potential operating model, value and supply chain changes. Below are a few broad examples:

New data points…
  • Certain payments made out of a US legal entity to foreign entities may be base erosion qualifying, and trigger BEAT.
  • US legal entity income which is derived through commercial activities in foreign jurisdictions can drive an FDII benefit.
  • Foreign income of certain legal entities can drive a GILTI income inclusion.
Possible changes to operational footprint…
  • On-shoring activities which may drive BEAT, such as shared services or contract R&D.
  • Migrating IP to the US, or otherwise restructuring to drive non-tangible income to the US, driving a greater FDII benefit.
  • Reorganizing the legal entity structure to mitigate the impact of GILTI.

What approach could help overcome the barriers?

Companies typically develop their commercial forecasts at the level of product and geography in order to report to investors. The legal entity dimension must be layered on so as to achieve a level of detail sufficient for tax planning, analysis, and base calculations for compliance and tax provision purposes. Most notably, a legal entity forecast must reflect that legal entities should be compensated based on the functional activities they perform, not necessarily the location of the earnings. A socalled ‘stratified forecast’ can be achieved if transfer pricing policy is then overlaid to add the dimensions of legal entity, functional activity, and intercompany counterparty. By adding these dimensions, the commercial outlook is effectively bridged to the tax outlook, creating alignment. Stratified forecasts can have sufficient details to run scenarios around how to further optimize value chain, operating model, and tax structure, by more accurately forecasting future tax rate, earnings, and value. Both commercial and legal entity forecasting can be viewed – in effect, showing both a management and a tax view of the business.

The Tax function need not go it alone.

Other functions also want this valuable data and may have duplicative processes; Tax should seek them out and consider leveraging existing technology to pursue a cross-functional solution and sustainable process that could bring value to the larger organization for years to come.

Contact us

Andy Ruggles

US Data Automation and Global Alteryx Alliance Leader, PwC US

David Nickson

Principal, Transfer Pricing, PwC US

Andrea Greene

Partner, International Tax Services, PwC US

Robert Petry

Director, Deals, PwC US

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