Beyond boundaries

Material changes in the business landscape over the last decade have significantly affected the tax compliance and reporting processes for corporate taxpayers.

These include changes in regulation and tax laws, electronic filing requirements, risk-based assessment techniques, and advances in tax technology solutions, among others.

Also, the global recession has ensured that revenue authorities across the world ‘dive deep' to collect revenue. These challenges get aggravated when corporates are dealing not just with one country but multiple jurisdictions.

The global attention that the Vodafone case in India has received is a clear indication that a local tax issue now has the ability to ‘shake up' the global headquarters.

Some of the questions which frequently come up maybe: Which return is due tomorrow — and where a tax payment may have been missed out? Are all deadlines being met? In which country has the law changed recently? What should the first priority be?

In a recent survey by Deloitte Touche Tohmatsu, 50 per cent of tax directors have stated that managing changes in regulation and tax law is their main priority over the next three years, versus only 20 per cent stating that cost reduction would be the priority over that time.

So how do multinationals deal with such an emerging tax landscape with sweeping change in laws and regulations? How do they structure themselves to cope with the evolving tax environment?

In-house expertise

What is clear is that outside of the headquarter location there are often inconsistent levels of in-house tax expertise. The structure has usually evolved over time rather than been designed from the outset. And it is determined by historical precedent, the presence of in-house tax expertise in certain countries, the approach of the local finance controllers, and local relationships with external tax advisors.

Accordingly, as tax directors seek to assert more control over global compliance, making sure there is sufficient expertise is seldom 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.

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.

Shared service centres

As part of the in-house management of global compliance and reporting, businesses have also started using their own shared service centres.

Mirroring their clients, that is, the global tax function, such shared services centres are often found to follow a hybrid model.

Some concentrate on completion of very basic tasks such as processing of tax-specific information, tax accounting, and so on.

On the other end of the spectrum, one could find shared service centres concentrating on value-added activities such as preparation of tax returns, assistance during tax audits, undertaking transfer pricing analysis, etc.

The success of such centres is dependent on a variety of factors such as complexity of business, use of local language in compliances, cultural issues, availability of appropriate tax talent, quality of technology available within the company and, above all, the overall attitude of the global finance function.

Another important aspect that comes to bear in such shared service centres is the ability of the ERP (enterprise resource planning) systems to make changes for tax at the local level.

Increased tech use

Also, it has been observed that tax departments have increased their usage of technology for undertaking tax compliance and reporting. However, 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.

Moreover, implementation of any tax management solution requires the company to free up internal resources for some time and many corporates are unwilling to make that short-term investment for long-term gain.

With the unprecedented pace at which Indian multinationals have broadened their global empires, overall tax management is certainly going to be a big challenge.

The tax departments of these companies would now be faced with the challenges of getting themselves accustomed to new tax rules, the attitudes of various tax authorities, the war for global tax talent, changes in tax reporting and ERP systems, and so on. It would be a tough but equally exciting journey to make.

(The author is Partner, Deloitte Haskins & Sells. Ashish Sabharwal, Director, also contributed to the article.)

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