Tax compliance across multiple jurisdictions

22nd October 2011

A taxpayer organisation must comply with every tax regime within which its activities fall – not only for direct corporate taxes but also Customs and Excise duties, VAT/GST and sales taxes.  Furthermore, the tax planning activities which may be crucial in cutting tax costs are generally dependent on a sound foundation of compliance, says Donald Drysdale, FSN contributing author.


Tax compliance might be regarded by some tax personnel as the poor relation – not as high profile as tax reporting, and not as creative as tax planning.  But this would be inappropriate.  Iain Stewart, Head of Tax at Damco, explains:  “There is a big focus on compliance in most corporates.  The challenge tax departments face is trying to obtain the underlying information and often the statutory accounts to start the computations.” 

Tax compliance requires access to the right people, skills, processes and technology.  Businesses undertaking computational aspects of compliance themselves have to choose between third party tax compliance packages, in-house technology solutions or other working methods.  Within each tax jurisdiction, the scale of business operations and the complexity of local taxes determine the range of third party tax compliance software solutions available.  Government policy, particularly in setting the complexity of the local tax code, may also impact on the extent to which technology is needed. 

In the United Kingdom, for example, corporation tax online filing using Inline XBRL (iXBRL) has been mandatory since April 2011, giving the already active third party compliance market a boost and spawning a range of new iXBRL-enabled online filing solutions.  A few of these third party products are particularly well suited for the largest businesses. 

Organisations doing business overseas require accurate intelligence on the local direct and indirect tax regimes of the countries within which they operate.  In general they rely on a combination of external tax advisers, local finance professionals and in house tax personnel for information – supported by published sources.  Tax authorities and third party publishers in the developed economies offer much of the necessary information online, where it can be readily available – often at a substantial cost – to those with the skills and experience to understand it. 

Multinational businesses are concerned not only with the tax regimes within individual jurisdictions, but also with the way in which these interact.  For example, crucial areas affecting direct tax include transfer pricing, thin capitalisation, the treatment of debt and debt finance and the interaction of double tax treaties. 

With some exceptions, transfer pricing rules are imposed by individual jurisdictions to ensure that multinational businesses undertake connected party transactions at arm’s length prices and do not avoid local taxes through the unfair manipulation of internal or intra-group prices – whether for goods, services or borrowings.  Getting the transfer prices right can be a matter of meticulous attention to detail in determining pricing policies and recording how individual pricing decisions are made.  Technology can be used in this process – for example, in producing and applying contract templates, calculating prices based on underlying information extracted from ERP systems, recording all current contracts and ensuring that these are reviewed at appropriate times. 

Iain Stewart adds:  “By mechanising the accounting for transfer pricing, the inevitable adjustments to inter-company pricing to comply with the arm’s length standard can be incorporated on a close to real time basis in the underlying accounting records.  This ensures an accurate view of local results, intercompany balances and issuance of invoices.” 

Thin capitalisation is the financial side of transfer pricing, although in some jurisdictions like the US debt/equity is regarded as a completely separate area of law and totally different legal principles are applied.  Jurisdictions impose restrictions to address situations where (for example) a company is carrying more interest-bearing debt than it could sustain on its own, suffering more that a commercial rate of interest, borrowing for longer than it could at arm’s length, or subject to repayment or other terms that are more disadvantageous than could be obtained at arm’s length. 

Given the transparency with which tax authorities now operate and the co-operation they expect from large businesses, advance transfer pricing agreements and advance thin capitalisation agreements are common to provide a degree of certainty between the business and a tax authority.  Negotiating such agreements necessitates demonstrating to the tax authority how related party prices are determined.  Once in place, technology can help the business ensure that it stays within the terms of the agreement. 

Technology may be used also in monitoring the indebtedness of group companies and the tax relief they may claim for financing costs.  Some countries offer favourable tax relief for interest but impose limits on what can be claimed.  The UK is one such jurisdiction, and the UK worldwide debt cap rules can restrict the UK tax deduction for interest costs of UK companies which form part of a large group – an approach being followed in other European countries such as the Netherlands and Denmark.  The complex provisions to achieve this depend largely on accounting rules and can impose significant compliance burdens on many groups.  Their purpose is to ensure that the aggregate local corporation tax deductions for financing costs do not exceed the group's external financing costs on a worldwide basis.  Using a template to review the limitation regularly is a key part of managing the tax rate in a group. 

Multinational businesses wishing to establish the most appropriate and efficient business structures for their cross-border activities need to navigate their way through a minefield of double tax treaties to determine the interaction of the different tax regimes likely to affect them.  Large groups make use of a variety of technology tools in managing cross-border tax compliance issues.  In many cases specialist applications or bespoke software – including spreadsheet or database applications – are used to address such requirements. 

Not all large organisations undertake their tax compliance work in-house.  Many employ tax agents to do this work, while in some cases retaining in-house tax teams to address tax planning.  Others outsource their tax reporting and tax compliance work or send it offshore to reduce costs in what – from the larger economies such as the US and the UK – has developed as a commoditised service.  While technology has been the key factor enabling outsourcing and offshoring of tax processing, other factors are important.  Large outsource service providers have established centres of excellence, able to provide core processing skills developed with economies of scale.  Language can also be a factor – for example, where US and UK tax work is outsourced to English-speaking India. 

Jim Robertson, Vice President Tax East at Shell International, takes this a stage further:  “Big companies increasingly have their own captive shared service centres in low cost jurisdictions like India, and the recent trend is for these to cover foreign language tax returns as well.” 

VAT, VIES, Intrastat and sales taxes are transactions-based and involve a different set of compliance requirements from taxes on profits – but still based on flows of information from accounting systems.  Periodic returns for these taxes have to be made online in many countries. 

Payroll compliance must be geared to each country’s specific requirements, and multinational businesses have the added dimension of international staff movements and expatriate employee arrangements.  Country payroll systems may need to be linked to centralised reporting and integrated with ERP systems.  Complex payroll systems have to keep abreast of changes in local payroll regimes.  For example, the United Kingdom will be transferring its existing Pay As You Earn scheme to a new Real Time Information regime by 2013, with systems implications for all UK employers. 

“Multinationals are increasingly required to develop solutions for managing globally mobile employees with regard to pensions and share schemes,” says Iain Stewart.  “They are turning to technology to track share grants and employee movements and make the necessary reports to tax authorities, and at this stage the solutions are predominantly developed in-house.”