May 17, 2012 Comments Off on The three models for tax compliance and reporting – It’s your choice
Global Tax Compliance & Reporting
The search for a more effective delivery model
There have been significant changes in the business landscape over the last 10 years, which have materially affected the global tax compliance and reporting processes for corporate tax payers. These include changes in regulation and tax laws, electronic filing requirements, risk-based assessment techniques, and advances in tax technology solutions among others.
Recent research commissioned by Deloitte, which included 250 interviews with the tax directors of 250 global organisations, shows that the principal commercial objectives for global tax directors are managing or reducing Effective Tax Rate and ensuring sound risk management. Other objectives include a desire for operational efficiency or cost reduction but these are of less importance.
Likewise, where metrics are in place to measure the performance of the tax department, these are based on managing the Effective Tax Rate in the vast majority of cases.
Resourcing and management
The resourcing of global tax functions appears to vary significantly.
What is clear is that outside of the headquarter location there are often inconsistent levels of in-house tax expertise. As tax directors seek to assert more control over global compliance, making sure there is sufficient expertise is very rarely a straight choice between in-house management and outsourcing. Instead, hybrid models prevail with the ultimate requirement being to ensure there is sufficient tax expertise at each stage of the process, regardless of whether it is resourced in-house or externally. However, where resource and expertise does allow, overall there appears to be a preference for in-house management over outsourcing. 65% of the researched companies manage indirect tax compliance solely in-house, 52% manage statutory accounts in-house and 73% manage the global tax provision in-house. Only when it comes to corporate income tax compliance, a minority of companies manage it in-house (36%).
Across every area of compliance and reporting, where management is not solely in-house, total outsourcing is marginal and ‘co-sourcing’ is far more prevalent. This demonstrates the requirement to bring in external expertise mainly to fill the gaps around in-house capability.
There is evidence that as part of the in-house management of global compliance and reporting, businesses are using their own shared service centres. 55% of multinationals state that they operate a shared service centre for finance and in just over half of these, some compliance and reporting work is carried out. However, qualitative assessment suggests that only certain data related tasks reside within the service centres and there is no significant tax expertise apparent.
Conceptually, the potential benefits of technology in compliance and reporting are well acknowledged: only 13% of global tax directors believe that they could not do more with technology.
However, deeper questioning suggests there are barriers to adoption when it comes to new technology. Typically, these revolve around perceptions that implementation will entail significant disruption, the cost is too high, and there is insufficient return on investment or a view that major technology projects are not something that tax functions would embark upon unilaterally within the business.
Compliance and reporting service provider delivery models
Tax directors show a general preference for external expertise delivered at a local level. When asked whether central service centres or local teams work better, 75% express a preference for local teams while 19% think that central service centres work better. The hypothesis here is that more ‘progressive’ global businesses are seeking to outsource non-core business functions or to achieve integration with their own shared service centres.
The three methods of compliance and reporting delivery are:
Delivered and managed locally
All services are managed and delivered locally. This approach relies on local control and responsibility.
Delivered locally, managed centrally
This method involves local delivery of service but introduces a strong element of central coordination and management. This brings greater efficiency, better control, and less risk.
Delivered and managed centrally, supported locally
This method shifts the emphasis toward central delivery as well as coordination and management. Crucially, though, local activity, relationships, and support are also maintained.
It is important that whichever model is adopted it should grow and evolve with the organisation to meet their needs now and in the future, wherever they are on the spectrum. Standardised processes and methodologies underpinned by common technologies and tools are essential in this regard. Tools such as Microsoft Office-based solutions (Excel and Word) that have been in widespread use no longer match much better tax technologies in the market for example MS Dynamics NAV (for data management and statutory accounting), 3rd party tax software (for due date tracking, VAT return production and tax provisioning) and web-based dashboard portals.
An organisation should ensure it selects a delivery model and service provider that at a minimum provide the following benefits:
- Increased visibility, transparency, and control over global compliance and reporting
- Flexibility to maximize use of in-house resources, respond to shifting priorities and the ability to provide expertise at the global and local level
- Integration and efficiency to control costs, increase accuracy, minimize risk and to respond to regulatory changes
- A path to improvement without the introduction of significant risks
- Insight to make informed strategic business decisions
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