By Ernst & Young
World’s largest and leading companies have active global operations across borders throughout the world. As a consequence, they have learned it is very critical for their business and performance to comply with local tax law and local accounting principles effectively and efficiently.
In general, the procedures are called as Global Compliance and Reporting (GCR) incorporated in those world’s largest and leading companies in relation to tax compliance, tax accounting, statutory accounting and the related reporting in accordance with local tax law and local Generally Accepted Accounting Principles (GAAP). It includes headquarter level procedures, but is not limited to local entities level only.
Companies with global operations are still struggling to comply with increasing regulation and growing complexity on financial reporting and tax rules around the world. And they realize they must transform the GCR to deliver greater efficiency, control and value, while mitigating risks.
According to Ernst & Young’s recent publication ``Seizing the opportunity in Global Compliance and Reporting,’’ 64 percent of Fortune Global 500 respondents experienced unplanned tax audits within the past year, with almost half receiving unexpected tax assessments or penalties.
Nearly two-thirds said that changes in rules would challenge their compliance and reporting processes. These findings are based on a survey of more than 200 financial executives from the world’s largest companies.
Globalization and the drive for sustainable cost advantages change the way enterprises position their financial and tax operations. Companies are seeing an increasingly complex regulatory landscape and closer, cross-border collaboration by tax authorities under pressure to increase revenue. It is imperative that global businesses update their processes for statutory financial and tax filings to maintain compliance and competitiveness.
Ernst & Young, based upon experience with client companies as well as the latest study, identified five most important areas for GCR improvements and also provided relevant observations for finance and tax executives in the 36-page publication.
1. We are at a tipping point for GCR
Historical models are not sufficient to support the needs of the new business environment. Fortune 500 respondents to our survey indicated that, in just the past 12 months, 64 percent experienced unplanned tax audits, and almost half received unexpected tax assessments or penalties.
In addition, almost two-thirds say that changes in regulatory requirements will impose significant challenges on GCR processes. A more rationally organized, efficient and controlled GCR function can help mitigate these risks and unexpected costs. The question is no longer whether companies need to redesign their GCR processes, but how and when.
2. Finance change initiatives provide a catalyst for improved GCR
The focus on standardized business processes _ particularly in finance _ provides a significant opportunity to create vastly more efficient GCR processes. Almost two-thirds of companies in our survey reported that they have established standard global processes for tax provision preparation.
However, less than half have standard global processes for other areas of GCR. The opportunities to extend finance change into all areas of GCR are significant and tangible. The risks that could result from excluding GCR from structural changes in the finance department are substantial.
3. Local expertise is key to a successful GCR model.
Between 64 percent and 78 percent of survey respondents indicated that local country resources are vital to successful compliance with tax and regulatory requirements. Yet the trend in finance has been to reduce or redeploy to global or regional centers the in-country finance resources that traditionally supported local GCR processes.
At the same time, the trend toward more aggressive tax enforcement actually heightens the need for skilled local expertise. Accordingly, it is essential that GCR functions have access to the right local expertise in a manner that supports quality and efficiency and drives value.
4. Leading companies blend the use of internal resources and external providers to optimize GCR
Leading companies are taking a strategic view of their operating models and their GCR requirements to identify the optimal mix of internal and external resources and to create opportunities for internal resources to focus on the highest-value activities.
The ideal mix of resources will vary by company, but more than 80 percent of those who outsourced one or more GCR processes indicated that the use of external providers creates access to a necessary level of local expertise. Similarly, more than 70 percent reported that it enables access to expertise and methodologies that enhanced their processes while almost 60 percent said that it provided needed levels of flexibility and scalability.
5. Effective GCR models require a strong governance structure
More than 40 percent of respondents indicated a lack of global governance over statutory financial filings, and more than 60 percent indicated no global governance over direct and indirect tax filings required by their companies.
These results point to a need for a greater level of control, visibility and accountability within GCR. By clarifying geographical ownership of GCR processes and reducing the variety of departments responsible for those processes, companies are able to improve effectiveness, enhance visibility and avoid costly and time-consuming surprises across the GCR spectrum worldwide.
Strong corporate governance reduces the likelihood of unplanned audits and is a prerequisite for simplification, standardization, automation and centralization of key processes. It is also a vital ingredient for most successful transformations.
Proven approach
With so much at stake, companies should not allow their GCR processes to continue performing to yesterday’s standards. It is essential that companies clearly assess the state of their GCR functions and formalize plans for adapting and improving GCR for the future.
The latest Ernst & Young report provides further survey results, case studies and additional insights for each of the five observations above. It also includes a suggested and proven approach for implementing an improved GCR model that enables a company to achieve ― and, more importantly, to sustain ― the optimal balance of efficiency, control and value.
This article was contributed by Ernst & Young Korea.