The Action Plan on Base Erosion and Profit-Shifting (BEPS) set by the Organisation for Economic Co-operation and Development (OECD) is creating a high-stakes audit environment for multinational enterprises. With jurisdictions around the world enacting legislation to boost transparency and end corporate tax avoidance, a lack of data accessibility across jurisdictions could create a scenario ripe for audit—and it’s time for finance departments to take action.
As most of us know by now, the centerpiece of the OECD’s BEPS guidance is country-by-country (CbC) reporting, which requires multinational enterprises to report annually for each tax jurisdiction in which they do business. The goal is to ensure that adequate taxes are paid in the jurisdiction where profits are generated, value is added, and risk is taken. This means, of course, that organizations operating in numerous jurisdictions around the world must keep track of local regulations to remain compliant. Collecting, organizing, and reporting on this data by country can be a monumental task, to say the least.
Global trends in BEPS reporting are evolving as well. For example, tax authorities in Brazil and in several European countries have enacted SAF-T (Standard Audit File for Tax) as their standard for the electronic exchange of accounting data. This signifies a move to a more granular audit that enables tax authorities to look into transaction-level data, prompting multinational enterprises to boost technology and documentation to manage the potential risk of audit.
From the finance department and CFO perspective, audits that are not properly managed and under control can impact the company’s effective tax rate, increase global exposure, and result in reputational damage. This is particularly true in R&D-intensive industry segments, like automotive, tech, and pharmaceutical, which are more vulnerable to audit on a global scale.
Existing Processes Not Enough
If your company is federally audited every couple of years, manual audit processes are certainly not enough given the intense scrutiny of the global tax environment. The post-BEPS world demands the ability to leverage data and create efficiencies. Because audit and controversy has been rewritten, the way audit software is built has also changed. Today, multinational enterprises can take advantage of innovative audit technology to meet the challenges of a high-risk landscape.
Consider this example: prior to adopting audit management software, one of the world’s leading automotive manufacturers stored and managed documents across six continents using a tree and folder structure, which was used only by their federal audit group. Without workflow functionality, the company had limited reporting capability. Plus, the highly customized nature of the application made it impractical for the IT team to continue to support it.
After adopting a centralized audit management solution for all its audit groups, this multinational enterprise now automates audit processes, tasks, and documents more efficiently and effectively. The company has even reallocated tax resources from manual administrative work to valuable analytical and transactional reviews. With “audit-ready” documentation and processes in place, they’ve accelerated audit cycle timing and results across North America, Europe, and South America.
Underscoring the Need for Automating Audit Processes
We recently collected insights from a focused group of our customers to understand their challenges. Nine out of ten stated that they decided to introduce software into their audit/controversy management process to centralize audit documentation, followed closely by the decision to create a standard, organized approach. Half of these customers managed more than fifty audits/controversies each year, on average.
Every customer we spoke to indicated that timelines and due dates were significant challenges associated with their audit process, followed closely by gathering data, managing data, time, and cost, and having oversight and control. When we asked why they chose their audit management software, the majority said they did so based on an organized document repository, while four out of ten made the decision due to integration with their current workflow offering.
For industries like automotive, tech, and pharmaceutical, integration is particularly important, as it enables R&D tax credit work to sync with audit software. This integration significantly simplifies the documentation process and can help organizations withstand scrutiny from taxing authorities.
Managing Audit Risk in a Post-BEPS World
With the looming increase in audit activity, tax professionals within multinational enterprises need to have global control and insight, including a global view linking data across audit types and connecting documentation across jurisdictions.
For finance departments and CFOs, the urgency to help their teams centralize data collection processes and increase visibility across jurisdictions cannot be overstated. To meet demands that arise from this high-stakes audit environment, a comprehensive audit management software solution is necessary not only to reduce risk, but also to increase data accessibility and transparency. Both are critical in a post-BEPS environment.
Marc Mehlman is vice president and head of ONESOURCE Direct Tax at Thomson Reuters.