The last 10 years have seen a sustained acceleration in the speed and volume of global tax rate and rule changes resulting in what can only be described as a hyper-regulatory environment. In simple terms, the sheer number and degree of changes means that many multinational businesses have reached a point where they are unable to efficiently and cost-effectively manage their tax positions around the world using the tools that are currently at their disposal, typically native ERP tax functionality.

Consider this current scenario. Throughout 2009 and moving into 2010, we have seen thousands of global tax changes. In the U.S., there were 850 sales tax rate changes across its 8,000 tax areas and Brazil’s transaction tax amendments also numbered in the hundreds across its 5,500 taxing jurisdictions. When you combine the sheer number of these transaction tax changes with the income tax, VAT/GST (value-added tax/goods-and-services tax), payroll tax, customs and excise duties, environmental tax and other fiscal changes that have occurred and then add in a “complexity factor” to take account of the effects of tax authority policy changes, the dimensions of tax management grow immensely. But the problem does not stop there. Factor in on top of that the case law that has been released over the same time period and multiply this by the number of jurisdictions in which a company does business and you start to appreciate the enormity of managing a global tax position within a multinational corporation. And all that is simply to maintain compliance.

This situation has been exacerbated over time by the restrictions faced by in-house tax departments in respect of cost management and resource limitations. The mantra of tax professionals “doing more with less” has never been more applicable and struggling to keep up has become a typical feature of in-house tax teams rather than being the exception.

Not only are companies dealing with current technology resource issues, but they are also struggling with the rapidly evaporating tax talent pool. Recruiting seasoned professionals with relevant backgrounds is already difficult, especially in the international space in which experience and skills in working with transfer pricing, withholding tax, international tax, customs duties and VAT/GST are critical. The problem has been building for many years with insufficient recruitment at the lowest levels, where younger generations rarely see tax as an attractive field of study and practice. This has led to an increasingly aged tax professional population, many of whom are approaching retirement, with fewer quality candidates to replace them. It is likely that this problem will persist for some time to come and will continue to deteriorate an already difficult global tax management position.

U.S. Tax Challenges

Beyond individual rate and rule changes, many tax teams must also shoulder the burden of managing more substantial developments such as a wide range of U.S. focused issues and initiatives:

• Complex multinational discussions around Internal Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) have proved to be a significant distraction for many businesses.
• Determining income on a combined entity basis has created uncertainty.
• The introduction of further environmental taxes, such as the grocery bags tax in Washington DC and the broader rise of this type of tax is starting to spawn a new area of tax expertise.
  
• Discussions around new or reformed tax systems to address the national debt and entitlement spending will continue to be a significant distraction for some time to come.
• Compliance with the Foreign Account Tax Compliance legislation that was introduced in 2009 and extending global banking compliance under the Bank Secrecy Act has led some tax teams to reevaluate their multinational positions.
• Sarbanes-Oxley reform, which is much needed, will continue to cause uncertainty and increased workloads for finance and tax teams.
• The loss of privilege and confidentiality work-paper protection is leading to more intrusive audits and may lead the way to full disclosure, resulting in new processes and controls in the tax area.
• New legislation around uncertain tax positions is another step towards forcing open the doors to total transparency in tax affairs.

The Global Tax Environment

Looking to the rest of the world, the position is hardly any better. Driven by diverse economic, business, administrative and revenue requirements, tax authorities have been addressing a multitude of compliance and administrative problem areas:

	•		India will be introducing its new GST system in April 2011. This two-tier transaction tax regime will replace some dozen indirect taxes that exist today. Businesses will see long-term benefits but with a shorter term cost in tax and IT resources along with external consultancy requirements.
	•		Malaysia is scheduled to introduce GST to replace its sales-tax system in July 2011.
	•		China has been considering the abolition of its business tax, which applies to services supplied within China and extending its VAT system to incorporate such services (presumably at a higher tax rate than currently applied).
	•		The rise of environmental taxes, carbon taxes and emissions permit trading has created uncertainty and demands for automated solutions for several new tax types.
	•		Transfer pricing negotiations and disputes have continued unabated.
	•		New national audit methodologies such as Tax Control Framework (Netherlands), the Cooperative Approach to Tax Compliance (Ireland) and the like are emerging as the future direction of taxpayer management. However, in the short term they represent additional work for already-stressed tax teams.
	•		The United Kingdom (U.K.) has introduced new compliance regulations that require senior accounting officers to take personal responsibility for the efficacy of their companies’ tax accounting processes and systems.

Additionally, there have been several initiatives that have been implemented or at least launched on a multi-country level:

• The 2010 European Union (E.U.) VAT Package introduced a wide range of “simplifications” across the 27 Member States. Although this will produce long term benefits across the E.U., the work involved in implementing these changes was significant and costly.
• The six Gulf Cooperation Council countries (Saudi Arabia, Oman, Kuwait, U.A.E., Bahrain and Qatar) are scheduled to adopt new GST systems over the next two years to three years. This will be the first widespread adoption of a VAT-type system in the Middle East.
  
• There has been a sizeable expansion of the bilateral international treaty and information exchange networks. So far, the number of treaties redrafted to incorporate Organisation for Economic Co-operation and Development (OECD) standards is approaching 100.
• The OECD and World Trade Organization (WTO) have been pushing ahead with efforts at international tax synchronisation and the OECD is expected to launch new efforts around business restructuring rules in the near future.
• New compliance requirements such as the OECD’s Standard Audit Files — Tax have emerged and are in the early stages of adoption across the OECD’s 30 member countries.
• E-filing of tax returns is moving from being an option to a requirement in many countries. Compliance in this area should be near the top of most tax managers’ agendas, creating yet another distraction from the everyday business of tax management.
• Several countries are currently examining the use of statistical sampling as a new audit tool. Once this becomes a widespread methodology over the next five years or so, tax professionals will need to consider their own technology responses to manage such new requirements.

Conclusion

For many in-house tax teams, it is already clear that the workload has greatly increased and in many cases is becoming unmanageable without additional resources, which are slow in coming. However, it is often the case that the scale of the problem is not readily appreciated until all these issues are individually written down and considered in detail. The examples cited above represent only a small sampling of the total compliance burden. There is no question that the global tax picture for many companies is truly overwhelming.

To read more of the discussion regarding how the tax industry has gotten to this point and what companies can do to best survive a hyper-regulatory environment, view the full article: Managing Taxes in a Hyper-regulatory World (PDF).