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Base erosion and anti-abuse tax reform challenges to intercompany accounting
Wide-sweeping tax reform, including the introduction of the base erosion and anti-abuse tax, has resurfaced existing intercompany accounting challenges and brought new challenges to the forefront for many organizations.
March 22, 2019
A blog post by Katie Glynn, senior manager, Deloitte & Touche LLP.
Intercompany accounting, the recording, and reporting of internal financial activities is a complex system that involves not just accounting functions, but also treasury, tax, and controllership. Recent transformations to the business and financial landscape are introducing cross-function challenges into an already complicated environment—from globalization forming multi-national value chains to more regulatory scrutiny and widespread tax reform.
The tax reform act of 2017 is one of the many significant disrupters transforming the accounting process and challenging financial institutions. When we surveyed attendees during a Deloitte Dbriefs 2016 webcast, only 3.1 percent were specifically concerned with reducing fines, penalties, or unintended taxable events. In just a few years, wide-sweeping tax reform has changed the game. It may not have been top of mind then, but it’s a challenge likely on a lot of minds now.
Overview of the base erosion and anti-abuse tax
The 2017 tax reform reconciliation act included an anti-abuse tax that imposes a new minimum tax and additional tax liabilities on the income of domestic corporations that make base erosion payments to related foreign parties. Some key points central to the computation:
- A base erosion payment is defined broadly to include any amount paid or accrued by a taxpayer to a related foreign person with respect to which a deduction is allowed.
- BEAT only applies if the “base erosion percentage” is three percent or more (two percent for certain banks and securities dealers) and the company has average annual gross receipts of greater than US $500 million for the last three years.
- The base erosion minimum tax equals the excess of five percent of modified taxable income over the regular tax for 2018, 10 percent for 2019-2025 and 12.5 percent thereafter.
Common intercompany accounting challenges
- Lack of a central repository: Heterogeneous systems often manage the intercompany process resulting in fragmentation of data and limited transparency into the intercompany transaction universe
- Complex intercompany calculations: Very little transparency on types of cross charges and calculations applied to support analysis and compliant reporting
- Inefficient matching and reconciliation: Significant manual efforts are often required to correctly reconcile and record entries, such as charge-in and charge-out
- Ineffective governance: Lack of visibility and ownership, including the approval process across global legal entities
New challenges introduced through the BEAT
- Complex calculation: The base erosion and anti-abuse tax calculation are complex and data-driven. The need to identify intercompany payments to non-US subsidiaries by counterparty, type of payment, legal entity, and period—as well as by country according to the country-by-country requirements in the European Union—produces a large volume of data required to be standardized that further adds to an already crowded data environment.
- Data Sourcing: Fulfilling BEAT reporting demands may require different data sources and data attributes from those used to satisfy current requirements. Since companies may already be disclosing intercompany transactions to regulators and tax authorities under the existing rules, this may create a reconciliation issue and increase the risk of regulatory scrutiny.
- International rules: Interdependent calculation requires consideration of other provisions and laws, including foreign-derived intangible income, global intangible low-taxed income, and foreign tax credit position.
- Global pricing: Further challenges can arise as the base erosion and anti-abuse tax calculation intersects with a company’s global transfer pricing policy and related intercompany transactions between affiliated entities.
- Misclassified profits: Misclassified legal entity profits may lead to tax penalties, interest, and reputational damage.
- Tax rate impact: There is also a potentially permanent unfavorable impact on a company’s effective tax rate and after-tax earnings.
Addressing challenges with an intercompany accounting framework
An intercompany accounting framework can help you address these existing challenges and help navigate new tax reform complexities. The four enablers of the framework are:
- Governance: Process standards and defined policies driving improved oversight
- Process: Centralized and standardized intercompany treatment for end-to-end transactions
- People: Centralized management solution
- Technology: Enterprise resource planning (ERP) or third-party applications
Stay tuned as we dive into these four enablers of the framework, the six pillars that structure the process, further considerations for tax reform and treasury, and other ways to help solve intercompany accounting issues with digital controllership.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
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