Unraveling the Complexities of Global Intercompany Service Transactions: Part 1
The Compounding Burden of Process, Tax, and Regulatory Issues
Any organization that transacts globally knows that intercompany billing can be fraught with problems. There are a variety of complexities – process, tax and regulatory – with the potential to wreak havoc on an enterprise’s performance. When those complexities compound, they can become such a burden that they threaten to paralyze the organization, making it difficult to even contemplate a better way forward. Worse, this phenomenon is often accepted as “just the way it is,” simply because the problem seems insurmountable.
But it doesn’t have to be that way.
This series will start by reviewing the three main complexities that plague intercompany processes and how they interrelate. In the follow-on content to this series, we’ll take a deeper dive into each of these issues.
One of the greatest pain points of intercompany billing is the process itself, which is typically manual in nature. The more human touch involved in any process, the greater the inefficiencies and risks. With intercompany processes, risk can manifest itself in many undesirable ways—from unreconciled balances, to prolonged settlement times, to cumbersome and ineffective dispute resolution processes that consume a lot of human resource without obtaining a high return on the time spent. Additionally, given the typically high turnover rate for shared service centers where intercompany processes tend to be centralized, a lack of knowledge about the process, services, and stakeholders can create further challenges.
Another process-related pain point is the likelihood that the organization’s various entities are using disparate ERP systems that don’t interact with each other seamlessly. Take booking a two-sided entry, for example. This isn’t possible across multiple ERPs, because the counterparty must always be involved in the transaction, creating a manual process and people-related burdens. Centralizing to a single ERP is a good strategic objective to strive for, but often overlooks the practical business environment. As the enterprise grows—whether organically or through M&A—the odds that such disparate systems exist only increase. Even if the organization commits to taking on the massive task of moving onto a single ERP platform, intercompany processes still risk being manual.
Further complicating the manual nature of the process and the disparate systems involved is the fact that many global organizations lack common, well-documented, and enforceable policies around intercompany processes. As a back-office function, intercompany billing doesn’t get much notice. So when employees in different entities handle intercompany tasks differently, process disparities may not rise to the level of garnering attention. As a result, guidelines and controls are inevitably interpreted differently, with no standard of measure for enforcing them.
When organizations have individual entities based in various countries all interacting with each other, the tax landscape quickly becomes complicated. Aside from the obvious fact that tax laws vary widely by country or region, they also vary by type of service rendered. And of course, those laws change often, creating a highly dynamic environment.
But that’s just the start.
Unintentionally, intercompany processes can both overlook and trigger tax problems, or fail to optimize transactions from a tax perspective. This downstream effect can result from something seemingly benign, such as each person involved looking at the transaction in a vacuum, with no one taking a holistic view.
For instance, the organization might fail to spot transfer price markups occurring on the same charge twice based on the pass-through nature of the charge, resulting in double or even triple transfer pricing markups. Or a process could result in BEAT penalties being incurred in the US, simply because an entity outside the US isn’t aware that such penalties exist or how to avoid triggering them. Or an entity might choose a billing route without full knowledge of the tax implications, unaware that defining and configuring the billing route differently based on the service type could optimize tax efficiencies, increase billing transparency, and increase indirect tax deductibility.
Layered on top of the many process and tax-related complexities of intercompany accounting is the equally complicated topic of regulations, such as currency controls. There is often a myriad of regulations that govern how intercompany transactions are processed in a country. In some countries, for example, before cash can leave that jurisdiction, the company must “check all the right boxes” from a regulatory standpoint.
As another example, in organizations that operate in heavily regulated countries, intercompany charges can’t be settled in the absence of a physical invoice; however, many entities don’t generate physical invoices for those types of transactions.
Without proper attention to the associated regulations, organizations run the risk of taking an intercompany transaction 90 percent of the way and not being able to close them out entirely. If the regulations prohibit you from settling that transaction, you won’t be able to reconcile it. And if you can’t reconcile it, you can’t conduct a proper audit and maintain the clean books and records that are integral to the management team and shareholders alike.
Together, these process, tax, and regulatory complexities can easily compound, creating even more significant problems.
If the process is highly fragmented across entities and primarily manual in nature, the risk of errors, higher costs, lost opportunities to maximize tax efficiencies, and failure to comply with regulations all increase dramatically. Conversely, a lack of knowledge about a specific country’s tax code or accounting regulations can hinder the entire intercompany process. Each potential complexity feeds upon the others. Without an optimized process and a robust technology solution to support it, global companies will always be left to tackle a tangled web of intercompany process, tax, and regulatory issues.
Part 2 of this series will delve into intercompany process complexities in more detail.
Many multinational organizations have turned to the experts at FourQ to address and even eliminate their intercompany accounting process, tax, and regulatory complexities. To learn more about our OneBiller solution for automating, centralizing, and optimizing the intercompany accounting function, contact FourQ today.