Tax reporting has never been a bigger focus in the boardroom. According to a recent report by Allen & Overy, 23% of C-suite executives say tax issues are now the topic of boardroom discussion more than once a month, up from just 5% five years ago.
The globalization of world trade and an increasingly complex web of cross-border tax regulations have put global companies under the microscope, with both governments and the public calling for greater transparency into how and where businesses are paying tax.
The globalization of world trade and an increasingly complex web of cross-border tax regulations have put global companies under the microscope.
Meanwhile, over 100 countries are collaborating on new corporate reporting frameworks, like the OECD’s Base Erosion and Profit Shifting (BEPS) project, aimed at bringing consistency to international tax practices. When BEPS comes into effect in early 2018, organizations will be expected to be more open about their earnings in every jurisdiction where they operate.
Finance leaders have always been responsible for ensuring the business regulatory compliance, but they need an approach to tax reporting that is faster, more accurate and more transparent to stay on top of fast-changing requirements.
“While flagship technologies like ERP have seen a high level of investment in the last few years, many organizations still rely on manual data entry and spreadsheets for tax reporting.”
This requires a shift in priorities. While flagship technologies like ERP have seen a high level of investment in the last few years, many organizations still rely on manual data entry and spreadsheets for tax reporting.
Businesses need to be able to demonstrate at a granular level the rationale behind their tax contributions in each country, and be clear about how they allocate costs across their organization. They also need to be scrupulously accurate and transparent in their reporting. The risk of error is too high to work quickly enough with spreadsheets, and audit trails have become too hard to follow in many cases.
With compliance burdens set to increase and shareholders calling for more frequent, accurate reporting, organizations are increasingly automating where possible. Automated processes have a clear audit trail, resulting in greater transparency and accuracy.
“With compliance burdens set to increase and shareholders calling for more frequent, accurate reporting, organizations are increasingly automating where possible.”
Also, because this added level of rigor makes it easier to keep track of what is going on the entire reporting process is faster, which means businesses can keep stakeholders informed at all times.
What does a modern, automated reporting system look like? At its core are three fundamental technologies:
1) Profitability and Cost Management: While traditionally used to track whether a particular product is profitable, Profitability and Cost Management applications are now being used to calculate and justify transfer pricing policies. This is less about tracking all the different components of a product supply chain, which is straightforward, and more about attributing less direct costs.
Consider a factory in Malaysia that manufactures vacuums for a European vendor. A breakdown of costs per vacuum also needs to include the cost of keeping the lights on in the factory, of employees on the assembly line, and of the executive staff who run the operation locally.
2) Tax Reporting in the cloud: Tax reporting systems allow businesses to achieve greater alignment between tax and finance teams, which is essential to delivering on the country-by-country reporting requirements set out by legislation like BEPS. For more on this, check out this interview with Richard Scammell of PwC on how the cloud can help businesses modernize their reporting approach.
3) Narrative Reporting: Governments, stakeholders and the public expect companies to share transparent and accurate results with a clear narrative. Data without context has little value, and for companies to continue being transparent about their tax approach they’ll need to rationalize their decisions with more detail than ever.
We are undergoing one of the biggest overhauls to corporate taxation in years, and companies need a reporting infrastructure that is change-ready. The shift to cloud-based reporting has already begun to gain traction in the finance department, and as businesses look to adapt to a more transparent, regulated environment this shift will increasingly extend to tax processes as well.