Doing business in the United States: Setting up a US tax department
The organization and operation of a US Tax department may vary greatly depending on organizational structure, industry, home country, and even the culture of each individual business.
The drivers of the choices in this area relate to key success factors of the Tax function as they pertain to functional areas throughout the tax lifecycle. The Tax department’s level of success largely depends on its ability to deploy critical tax enablers related to technology, people, organization, and process.
Explore the issues around setting up a US tax department when investing in the United States.
A. Tax key success factors
The following broad considerations are the basis on which Tax should establish benchmarks and objectives for the US Tax department:
- Tax cost
- Tax risk (financial and reputational)
- Efficiency and effectiveness
- Sustainability of tax positions.
B. Functional areas – The tax lifecycle
A US Tax department may handle some or all of the following areas:
- Planning
- Tax accounting and reporting
- Tax return compliance
- Controversy
- Advocacy.
C. Critical tax enablers
Technology and data analytics
Technology and data analytics solutions have the potential to enhance every aspect of the tax lifecycle, from planning to controversy and advocacy. Quick access to accurate data for scenario analysis using self-service visualization tools can provide insights to enable planning decisions. Tax accounting and compliance technology solutions have evolved with capabilities to automate workflow, data collection, calculations, and tax return preparation and filing.
Furthermore, advancements in sharing and storage of tax-related data have improved the ability to respond timely to tax authorities with accurate information. Technology also can improve the way Tax collaborates across functions and geographies through the management of data. There is unforeseen potential in the power of emerging Artificial Intelligence (AI) and Machine Learning (ML) capabilities to automate and streamline the way the Tax function operates.
People/organization
- Professional skill sets
Skill requirements for Tax professionals are expanding. The complex tax environment, coupled with emerging technologies that likely are already deployed in other functions, requires Tax professionals to be not only proficient in tax rules, but also skilled in technology applications and the management of internal projects to implement such technologies and related projects.
- Tax operating models
Possible approaches to executing tax activities range from completely ‘in-house’ to use of a third-party service provider for comprehensive delivery of services pertaining to the tax lifecycle. An organization may deploy one or more of these options depending on a variety of factors, including availability of technology and people with the required skill sets.
Process
Regardless of the operating model deployed, the Tax function needs to have clearly defined processes, enabled by technology, to effectively meet tax requirements:
- Implementation and documentation of Tax processes and controls
- Collaboration outside typical Tax boundaries/stakeholder management
- Managing a changing workforce
- Documents and records management.
D. Key considerations
- The cost of efficiency and effectiveness
US Tax departments are challenged to manage the complexity of changing tax laws while executing tax planning and operations efficiently and effectively. A material amount of resources is allocated to tax accounting and compliance due to complex rules, high volume of activities, and the risk associated with inaccurate or unsustainable tax filings and positions. Tax functions therefore need to prioritize funding for the technology, people/organization, and process solutions needed to address the magnitude of responsibilities in this area.
Inbound insight: Managing the requirements of differing financial accounting standards, and often multiple accounting systems, within and outside the United States creates challenges in both financial accounting and tax compliance. This puts a premium on the efficient use of technology and other tools to allow continued focus on other aspects of the Tax function’s accountabilities in the United States.
Tax readiness insight: US tax reform further complicates tax accounting, financial reporting, and tax compliance activities. Taxpayers now are required to calculate and report the impact of law changes in income tax provision calculations and reflect these changes in upcoming tax filings. Significant effort is needed to secure accurate source data, capture, and test all required changes to tax technology solutions.
Managing financial and reputational risk
Due to the many levels of taxation — federal, state, and local — businesses in the United States often need to manage simultaneously numerous tax audits on differing issues at each level, placing burdens on a company’s budgets and resources. In addition, there may be financial statement impact due to the nature of tax positions taken and the number and magnitude of tax disputes that are ongoing at any given time. Easy access to accurate data, in the format needed to support tax positions, is essential to managing financial risk.
Inbound insight: Senior management of non-US companies often is surprised to learn the level of investment required for tax operations in the United States. Understanding the resources and budget that will be necessary for these activities – in addition to the desired investment in planning and risk management – is critical.
Finally, as is the case in a number of countries, the tax affairs of businesses operating in the United States are under increasing scrutiny by public institutions and the media. This focus requires increased attention to cross-functional stakeholder management, informed decision-making, and risk-management processes with additional considerations regarding the reputational risk to the business, beyond financial statement and balance-sheet drivers.
Inbound insight: The changing global environment in regards to tax magnifies the importance of the cultural and governance differences that can exist between the United States and the country of the parent company. Companies must consider these differences when developing a tax strategy and risk management policy.
Tax readiness insight: Recent sweeping US tax reform focuses attention on the need to consider technology, people, organization, and process enhancements as organizations update their calculations and evaluate planning scenarios that can significantly affect the entire business.
US Inbound Tax Leader, PwC US