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Compliance

Will Adapting To The New Tax Laws Mean Revamping Your Tax Function?


by Kate Barton

The level of effort necessary to comply with the new U.S. tax law may be among the biggest overlooked consequences of this landmark reform.

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In among the highs and lows of what is consistently called “once-in-a-lifetime tax reform” is a stark piece of reality: the cost of your business tax compliance burden could double. Are you ready for that?

Many companies aren’t, as a great deal of the initial attention has been put on what to do with the potential windfall rather than what compliance under the new tax laws actually entails. Although the new laws offer many otherwise welcome and overdue changes benefiting multinational corporations — a lower 21 percent corporate tax rate and quasi-territorial treatment of global income — we estimate that compliance efforts could increase anywhere from 25 percent to 100 percent for most businesses.

Arguably now more than ever, we need to look at compliance holistically — not only what’s related to the IRS federal form preparation and filing but also what’s included in the full scope of the U.S. federal and state compliance burden, as well as the underlying mechanics. That means factoring in the new and expanded data requirements, systems, processes and computations that ultimately go into the myriad forms and filing, particularly for multinationals.

In that context, it’s not so surprising that the level of effort necessary to comply with the new U.S. tax law may be among the biggest overlooked consequences of this landmark reform.

A closer look at the components

The U.S. Tax Cuts and Jobs Act of 2017 (TCJA) fundamentally revamps U.S. taxation of international operations. As an end result, companies are now taxed on all global income in the year earned, with limited exemptions of certain foreign earnings. Congressional intent to introduce simplification notwithstanding, the TCJA is making things more complex in many cases — especially for multinational businesses — through the interaction of such provisions as the global intangible low taxed income (GILTI), foreign-derived intangible income (FDII) and the base erosion and anti-abuse tax (BEAT) — all topped off by one-time phase-ins, including the transition tax imposed on the previously untaxed foreign income of many multinationals for tax year 2017.

In tax year 2018, the complexities of most of the 119 new TCJA provisions fully kick in, again with especially arduous implications for multinationals. Under the old rules, information on foreign corporations owned by a U.S. company was gathered and reported, but there was rarely actual tax calculated on these subsidiaries. Many companies facing resource constraints took a risk-based approach to information reporting and deferred maintenance of such areas as earnings and profits (E&P) pools.

The new rules, in contrast, require that actual taxable income be reported and maintained for each non-US subsidiary. Taxable income calculations and informational returns are very different. For taxable income calculations, the level of accuracy and information needed is more comprehensive since actual tax is calculated on these numbers. Getting this done correctly will likely require new systems and controls.

Take for example a large U.S. multinational corporation, which can have 200 or more subsidiaries worldwide. Under the old rules, 20 or 30 of those entities could have had an impact on U.S. taxable income in any given year. Now, all 200 entities will likely have an impact under the new GILTI regime. What’s more, to get to a U.S. taxable income computation, items like depreciation, which may not have been material in the past, must be recomputed under the U.S. alternative depreciation system. Companies now have the onerous task of re-computing depreciation for all their foreign subsidiaries, and manual systems are not likely to be able to keep up. Foreign reporting of U.S. multinational information is still alive and well, with a penalty for failure to file complete or accurate returns that can be $10,000 per return. For our representative U.S. company with 200 subsidiaries, this can add up to six-digit penalties.

US multinationals that own minority interest companies (the 10 percent- to 50 percent-owned entities) need to be considered as well for purposes of determining the transition tax computation. Many multinationals don’t have the requisite information on their minority-owned subsidiaries and will have to go back in time to recreate earnings and profits for these entities. Sorting through how a multinational can gather the requisite data, setting up the proper controls for compliance with Section 404 of the Sarbanes-Oxley Act and making sure the tax provision and U.S. tax return are done correctly is now significantly more arduous.

In short, there’s a lot to consider when it comes to getting U.S. federal and state returns right under the new operating norm. So it’s hard to envision a scenario where that does not result in an impact on a company’s resources, time, skill set and budget across the tax, finance and IT functions.

And U.S. tax reform represents just one body of law that has changed. Many other countries’ tax laws are changing, too. In fact, many countries are contemplating changing their law in response to U.S. tax reform. Looking around the corner and planning ahead have become even more important.

Teeing up questions in the process

Today’s business landscape is shaped by the convergence of some powerful factors: increasing tax complexity, broader global and jurisdictional needs, a shortage of qualified talent and the proliferation of digital technology in government. Determining how to succeed in that environment is causing companies to rethink the tax department of tomorrow, taking a hard look at available build vs. buy/in-house vs. outsource options.

If you haven’t done so already, now is the time to consider asking questions of yourself, your leaders and your stakeholders, like these “serious seven” for starters:

  1. Do I have enough of the right people to move us forward?
  2. Do I have the bandwidth to train my people on all aspects of the new laws and address implications to my compliance and reporting process?
  3. Is this an opportunity to use and/or consolidate vendors for greater efficiency and transparency?
  4. How can I revamp my processes to obtain better data quality so tax calculations are “right the first time?”
  5. What technologies are needed (including automation)?
  6. How do I make the business case for investing in these new processes and technology?
  7. What other risks/opportunities does this bring to my organization?

Finding answers in innovation

Though technology has provided answers to myriad “how can I” questions and more over the years, the pace of innovating new technologies today, as well as their vast application, is unprecedented. Tax departments can’t afford to be traditional or even agnostic when it comes to using these technologies or consider themselves immune to adopting and adapting to them. In fact, with tax professionals being asked to do more with less — a long-standing challenge that just seems to get more and more onerous — embracing new technologies and the potential of automation can drive necessary solutions that address the TCJA and other legislation while also improving efficiency and opening opportunities for more value-added activities.

Tax departments that “lean in” — to embrace innovation, technology and the potential of the possible — are realizing that at the heart of a well-run compliance process (for both direct and indirect tax) is data. Data needs to be ingested, cleansed and organized in the most efficient manner, which means doing it once for many purposes — local country tax compliance, U.S. tax compliance, planning and controversy. Data is at the heart of the tax life cycle, which encompasses provision, compliance, planning and controversy. Once the right data is collected and ready for use, the rest of the process is far simpler and can be more readily fed to the proper calculation engines and planning tools.

Tax also stands to benefit from calculation tools that can be augmented with the use of robotics, artificial intelligence and other cutting-edge machine learning applications. Albeit with a far less human touch, the process gains more accuracy and efficiency and enables tax people to perform more high-value activities that may also be more rewarding, motivating and career-enhancing.

Even companies that “get it” may be ill-equipped or just don’t want to build their own tax technology and data management platform for compliance — it is costly, time-consuming and not that easy to get done. Outsourcing or co-sourcing routine work may provide the transformation the tax department needs and at a more measured pace and manageable budget.

There is a lot to do to be successful, even in the short-term. As the long-term implications of the new operating norm really take hold, pressure mounts to reimagine the tax department and the tax function overall. Both the willingness and the ability to change become imperative. How prepared are you? Complying with the new U.S. tax laws may just be the impetus to get you there.

Kate Barton is EY’s Global Vice Chair – Tax Services.