TAXESIntroduction

Multinationals are challenged by changing tax laws, accounting practices, valuation methods and

penalties as administrations around the world clamp down on tax avoidance. The emerging

scenario is an opportunity to improve efficiencies by simpler accounting, institute internal controls

and better documentation to prevent audits. Global consulting companies are a window to the

best practices that can guide tax compliance in this world.

CORPORATE TAX COMPLIANCE

Introduction : Multinational companies are expected to narrow the hiatus in the reporting for

corporate tax and financial statements to comply with emerging regulatory mandates for greater

transparency.

Body: Multinational companies are adapting to new accounting standards, issued by a variety of

regulatory bodies, for the purpose of narrowing the differences in pre-tax income reported for tax

compliance and financial reporting purposes. Tax compliance and financial statements each

have, historically, had their own standards reflecting the purpose they serve. The data for them

has 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 financial

information into equivalent tax reporting data. This will begin with reporting all worldwide income

of US multinationals in US GAAP before it is converted into income for tax purposes. The tax

liability is then attributed to legal entities overseas after adjustments have been made for their

legal status. The US corporate tax liability is determined after taking into account the relevant

foreign tax credits. Nair and Co assists US multinationals with knowledge of international

accounting standards and expertise in process change before they successfully make this

transition.

VALUE ADDED TAX (VAT) / GOODS AND SERVICES TAX (GST)

Introduction: Multinationals should design a global internal control system, controlled from a

single point, for compliance with VAT / GST laws across the entire supply chain.

Body: Multinationals deal with several jurisdictions, within and across countries, for their

compliance with VST / GST as these taxes are levied on the incremental value added across

several geographies. The adoption of VAT / GST has grown worldwide (outside of the USA) as

Governments 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, an

assessment and possible penalties. An overarching control system with visibility into the entire

supply chain, adapted for the laws of each jurisdiction, will help to detect errors before they have

a material effect on the finances of the company. The reconciliation of the billing data for VAT

with the accounting information of companies helps to uncover any latent risk from errors in tax

compliance. Such a system is best designed from a single point, equipped with a database of

laws of each jurisdiction, and authority to institute and test controls for effective compliance with

the VAT / GST laws. Nair and Co assists in building a centralized system for compliance with

VAT / GST.

EXPATRIATE TAXESIntro: US Multinationals deal with the added complexity of compensating their expatriate

employees for increasingly higher taxes which apply to US nationals and permanent residents on

their overseas income.

Body: US nationals and permanent residents pay taxes on their worldwide income regardless

of its geographical source. Overseas income and housing expenses up to a threshold are

excluded. 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 as

compensation for higher living costs in overseas locations. In recent years, the effective tax rate

for expatriates has trended upwards as a higher applicable rate is applied based on the entire

income 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 of

compensating their employees for higher taxes by taking advantage of special provisions under

treaties signed with specific countries. They can also choose tax equalization plans over tax

protection plans for compensating their employees. Tax protection plans compensate for higher

taxes in some countries and let employees keep the benefit of lower taxes in others. Tax

equalization plans are designed to equalize the effective tax rates for all employees across the

world. Multinationals will offset the higher costs in some countries with the lower costs in other

countries. Nair and Co can bring its vast knowledge of tax regimes around the world to minimize

the tax related costs of compensation.

PENALTY MITIGATIONIntro: US Multinationals face a higher risk of penalties as expanded adoption of VAT increases

the 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. Disputes

over valuation of traded goods and services for transfer pricing are more likely.

Body: US Multinationals have to pay inordinate penalties for non-compliance with VAT

regulations besides interest on delayed payment for understated taxes. Since VAT is charged at

several stages of the supply chain, the jurisdictions and their tax rates change as well as the

person responsible for the tax liability. The likelihood of error increases especially if companies

don’t have automated systems for compliance. Failure to register for VAT compliance, delays in

payments or understated taxes can attract huge penalties. US multinationals have to also report

any of their overseas activity of any kind, whether a minority investment, an overseas bank

account or a subsidiary, to avoid penalties regardless of their tax liability. As tax administrators

gain greater access to the books of companies, prepared by accountants, they are more likely to

find them incorrect from a tax compliance perspective. Similarly, disputes over the valuation of

the traded goods and services increase the risk of penalties. The key to mitigating the risk of

penalties is incontrovertible documentation and the reputation for preparing it. Nair and Co can

help multinationals realize this goal.