TAXES IntroductionMultinationals are challenged by changing tax laws, accounting practices, valuation methods andpenalties as administrations around the world clamp down on tax avoidance. The emergingscenario is an opportunity to improve efficiencies by simpler accounting, institute internal controlsand better documentation to prevent audits. Global consulting companies are a window to thebest practices that can guide tax compliance in this world. CORPORATE TAX COMPLIANCEI ntr oduc ti on : Multinational companies are expected to narrow the hiatus in the reporting forcorporate tax and financial statements to comply with emerging regulatory mandates for greatertransparency.Body: Multinational companies are adapting to new accounting standards, issued by a variety ofregulatory bodies, for the purpose of narrowing the differences in pre-tax income reported for taxcompliance and financial reporting purposes. Tax compliance and financial statements eachhave, historically, had their own standards reflecting the purpose they serve. The data for themhas also been housed in different IT systems. Going forward, multinationals will invest in a time-consuming and elaborate process of developing applications that will help to convert financialinformation into equivalent tax reporting data. This will begin with reporting all worldwide incomeof US multinationals in US GAAP before it is converted into income for tax purposes. The taxliability is then attributed to legal entities overseas after adjustments have been made for theirlegal status. The US corporate tax liability is determined after taking into account the relevantforeign tax credits. Nair and Co assists US multinationals with knowledge of internationalaccounting standards and expertise in process change before they successfully make thistransition.VALUE ADDED TAX (VAT) / GOODS AND SERVICES TAX (GST)Introduction: Multinationals should design a global internal control system, controlled from asingle point, for compliance with VAT / GST laws across the entire supply chain.Body: Multinationals deal with several jurisdictions, within and across countries, for theircompliance with VST / GST as these taxes are levied on the incremental value added acrossseveral geographies. The adoption of VAT / GST has grown worldwide (outside of the USA) asGovernments recognized the cascading or the compounded effect of tax paid on the after-tax
value of inputs on final goods prices. The processes for VAT compliance span the entire order-to-cash and purchase-to-pay cycle; an error at any on stage could trigger an investigation, anassessment and possible penalties. An overarching control system with visibility into the entiresupply chain, adapted for the laws of each jurisdiction, will help to detect errors before they havea material effect on the finances of the company. The reconciliation of the billing data for VATwith the accounting information of companies helps to uncover any latent risk from errors in taxcompliance. Such a system is best designed from a single point, equipped with a database oflaws of each jurisdiction, and authority to institute and test controls for effective compliance withthe VAT / GST laws. Nair and Co assists in building a centralized system for compliance withVAT / GST. EXPATRIATE TAXESIntro: US Multinationals deal with the added complexity of compensating their expatriateemployees for increasingly higher taxes which apply to US nationals and permanent residents ontheir overseas income.Body: US nationals and permanent residents pay taxes on their worldwide income regardlessof its geographical source. Overseas income and housing expenses up to a threshold areexcluded. US expatriates are also entitled to credits for the income taxes they pay overseas.However, credits for payroll taxes are available only if tax treaties specifically provide for them.Foreign governments are also prone to tax allowances expatriate employees receive ascompensation for higher living costs in overseas locations. In recent years, the effective tax ratefor expatriates has trended upwards as a higher applicable rate is applied based on the entireincome including all housing expenses instead of the excess over the tax exempt threshold level.In addition, housing exclusions have been reduced. Multinationals can lower their costs ofcompensating their employees for higher taxes by taking advantage of special provisions undertreaties signed with specific countries. They can also choose tax equalization plans over taxprotection plans for compensating their employees. Tax protection plans compensate for highertaxes in some countries and let employees keep the benefit of lower taxes in others. Taxequalization plans are designed to equalize the effective tax rates for all employees across theworld. Multinationals will offset the higher costs in some countries with the lower costs in othercountries. Nair and Co can bring its vast knowledge of tax regimes around the world to minimizethe tax related costs of compensation. PENALTY MITIGATIONIntro: US Multinationals face a higher risk of penalties as expanded adoption of VAT increasesthe probability of an error. The tax administrators have been granted recourse to books of
companies which they could find to be inaccurate from a tax compliance perspective. Disputesover valuation of traded goods and services for transfer pricing are more likely.Body: US Multinationals have to pay inordinate penalties for non-compliance with VATregulations besides interest on delayed payment for understated taxes. Since VAT is charged atseveral stages of the supply chain, the jurisdictions and their tax rates change as well as theperson responsible for the tax liability. The likelihood of error increases especially if companiesdon’t have automated systems for compliance. Failure to register for VAT compliance, delays inpayments or understated taxes can attract huge penalties. US multinationals have to also reportany of their overseas activity of any kind, whether a minority investment, an overseas bankaccount or a subsidiary, to avoid penalties regardless of their tax liability. As tax administratorsgain greater access to the books of companies, prepared by accountants, they are more likely tofind them incorrect from a tax compliance perspective. Similarly, disputes over the valuation ofthe traded goods and services increase the risk of penalties. The key to mitigating the risk ofpenalties is incontrovertible documentation and the reputation for preparing it. Nair and Co canhelp multinationals realize this goal.