Can Technology Save the Corporate Tax Shell Game?

As the OECD's BEPS program presses multinationals to clarify their global tax strategy, coordination among tax, finance, and IT departments is cruc...
Brian PeccarelliJuly 5, 2016
Can Technology Save the Corporate Tax Shell Game?

CEOs around the world are staring down a growing operational risk that has the power to tarnish the reputations of even the most successful Wall Street darlings: tax. More specifically, the public perception of tax avoidance.

Brian Peccarelli

Brian Peccarelli

It doesn’t matter if a public company has achieved double-digit quarterly earnings growth or disrupted a new market with huge product sales. If the CEO gets called before government authorities to explain his or her global tax arrangements, the company is pilloried in the press and quickly branded with a scarlet “T” for tax avoider. Increasingly, the only way to fight back is with technology that removes any ambiguity from the global corporate tax shell game.

The issue of companies being publicly scrutinized for not paying their fair share of taxes is nothing new. But over the last two years it has become a full-contact sport as lawmakers around the world have been newly empowered to initiate investigations into corporate tax strategies. The shift stems from an initiative called BEPS, which stands for Base Erosion and Profit Shifting, a program launched by the Organisation for Economic Cooperation and Development (OECD) to stop companies from shifting their profits to low-tax jurisdictions.

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The full BEPS plan calls for a far-reaching list of recommended changes to tax policy and taxpayer reporting rules. But the centerpiece of the initiative is a country-by-country reporting mandate, which requires companies to declare the amount of revenue, profit, and tax paid in each country where they do business, along with details on total employment, capital, and assets used in each location.

In practical terms, this means tax authorities in England, for example, will be able to see the total tax exposure and operational details of a company operating inside its borders, alongside the tax exposure for that same company in other countries.

If, say, they see that the company has more employees and a seemingly bigger physical presence in England, but reports higher revenue in Switzerland, Luxembourg, or Ireland, they have enough evidence to suggest that the company may be diverting its profits. Whether that is actually happening is really not the issue. Once the public inquiry is made, much of the reputational damage is done.

BEPS was officially endorsed by the Group of 20 largest economies (G20) last November, and tax authorities around the world wasted little time moving to enforce its core tenets. Already this year Apple, McDonald’s, Ikea, Google, and many others have been called before tax committees throughout Europe to explain their global tax positions.

This is why it has become so critical for multinational companies operating in this environment to have a crystal-clear tax story. Tax professionals call this showing basis, which means they are able to draw a clear line between expenses and profits in a particular region of the world to prove quantitatively that profits being attributed to low tax regimes are indeed originating from that region.

Making that level of granularity available on a global scale at a moment’s notice is not easy. It will require a level of coordination between tax, IT, and finance departments to compile and organize the data and develop systems for managing that information on an ongoing basis. Senior leadership will also need to be involved in this process to determine where to draw the line between providing complete tax transparency and releasing information that could expose the company to competitive threat.

Ultimately, the data collection and reporting requirements associated with BEPS have created a mammoth technology challenge for multinationals that now must be able to document and defend their results to taxing authorities at the drop of a hat. This involves collecting information from multiple data sources around the world, some of which may be in legacy financial reporting systems, while others may be in XML or even Excel files, and consolidating all of that information into a concise, localized snapshot for potentially hundreds of different tax authorities.

Fortunately, the last decade of Big Data technology development has made available many of the tools necessary to accomplish this task. The challenge is finding the budget and philosophical commitment among senior management to deploying them in the tax department.

When weighed against the risk of a public lashing over alleged tax avoidance, the decision becomes easier. But it’s going to take a widespread recognition that the role of the tax department in a multinational corporation has evolved quite dramatically in recent years.

Likewise, the technology used for managing that function is beginning to look a lot more like the predictive modeling software used by financial firms than the old spreadsheets and ledgers that have traditionally been associated with tax.

Brian Peccarelli is president of Thomson Reuters Tax & Accounting.