Why Multinational Corporations Need to Execute Intercompany Financial Management

While every multinational company (MNC) constantly navigates numerous legal, societal, and currency-related risks, new challenges are emerging in logistics, tax, and regulation. Global expansion is creating internal complexity that, in most cases, is difficult to manage correctly. As a result, new legal, regulatory, tax compliance, and tax leakage issues are wreaking havoc on the reputation and bottom line of many MNCs.

For example:

  • Coca-Cola suffered a $3.4B tax penalty for intercompany royalty rates not being applied correctly, leading to underreported US taxable income.
  • Bristol Myers Squibb is involved in an ongoing $1.4B tax penalty case for an abusive ‘tax shelter’ in Ireland where intercompany shifted profits related to IP amortization, resulting in underreported U.S. taxable income.

To adequately address and overcome these significant challenges, MNCs need to understand better how the transactions within the corporation and between their legal entities are structured. The rewards for doing so are maximum staff efficiency, increased accounting accuracy and optimized tax exposure while ensuring consistent tax and regulatory compliance.

To achieve these outcomes, MNCs must implement what Ventana Research describes as intercompany financial management (IFM). Well-orchestrated IFM can have a meaningful impact on the bottom line, improve financial control and reduce reputational and other risks. It also benefits a broad set of people and roles in a company through efficiency gains, better management of tax costs, and greater control of risks.

To understand how to overcome the intercompany challenges affecting organizations, consider the three major causes of IFM problems.

Cause #1 – Multiple ERP Systems

When individual business units in giant corporations regularly buy and sell goods and services to each other, intercompany challenges are created. Headquarters must take numerous steps to produce a consolidated set of financial statements that match, reconcile, and eliminate these transactions. And when an MNC has multiple instances of ERP systems run by various entities, the complexity quickly becomes unmanageable.

Large corporations struggle to automatically pull together all transaction data from multiple ERP systems into a coherent whole to support consistency and accuracy in tax compliance and analysis. Add to this that ERP systems are not built to account for holistic tax and legal consequences, are not designed to be end-to-end solutions, and don’t consider all the process steps required to complete a transaction.

Cause #2 – Corporate Structural Complexity

The number of legal entities and ownership relationships, including joint ventures, partnerships, and cross-holdings — is another major cause of costly IFM problems. Each of the multiple legal entities that make up a corporation introduces specific tax and regulatory considerations into intercompany transactions. This is especially true when transactions span numerous jurisdictions.

Both parties to an intercompany transaction must apply the correct accounting treatment. Specific tax and regulation considerations come into play when two separate legal entities are involved, particularly in cross-border transactions. The parties need to automate the process of correctly applying tax rates. Digital tax filing and any required regulatory reporting related to exports and imports should be streamlined too. While this may sound simple, the reality is it’s not.

For many multinational organizations, the amount of effort and time required to handle intercompany accounting seriously delays the accounting close period. The widely accepted close period benchmark is one business week. However, Ventana’s Office of Finance Benchmark Research found that one-half of companies with 1,000 or more employees take seven days or longer to complete their close.

Cause #3 – Lack of Global Thinking

While each business unit of an MNC naturally aims to optimize its own results, allowing blind self-interest results in suboptimal corporate performance. For example, measures taken to minimize local tax expense may result in higher tax payments at the corporate level or reputational risk if aggressive local tax strategies are interpreted as an orchestrated corporate tax shell game.

At the same time, all businesses are governed by local administrations and business customs with unique laws and regulatory requirements. Successful navigation of these factors requires local knowledge and expertise—skills and knowledge that are likely siloed deep within the organizational structure. IFM problems increase when large corporations allow unbalanced local decision making.

IFM – A Integrated Solution to Intercompany Problems

At first glance, it may seem that the development or acquisition of the right technology would be a fix-all for intercompany problems. However, the truth is competent intercompany financial management requires an integrated approach to the people, process, information (data), and technology (software) elements of the discipline.

People with expertise acquired through education, training, and experience are the most important ingredient because of the ambiguities and complexities inherent in tax and accounting done on a global scale. Having staff with these capabilities will ensure that issues are resolved quickly and correctly.

Then, with the right people in place, the following information technology components are essential:

  • A pan-corporate data source that automates the ongoing extraction of all relevant intercompany data from multiple ERPs and other systems of record.
  • Application programming interface (API) and robotic process automation (RPA), technology that automates data movements to ensure the integrity of the data in the pan-corporate data source.
  • Automated invoice processing to ensure accuracy and efficiency.
  • A global billing and payments capability that supports a high level of granularity with speed and accuracy.
  • A tax rules engine that accurately applies rates to individual line items and can comply with the rising requirement for digital tax filings.

FourQ is More Than Technology

While other providers nibble around the edges with consulting services that simply diagnose problems, software that only handles part of the process, and people-only BPO solutions, FourQ attacks the intercompany problem and owns the service delivery model end-to-end.

According to a recent poll conducted by SharedServicesLink, 63% of companies are actively reviewing intercompany processes and deficiencies. They realize the cost of getting intercompany transactions wrong is very high. To improve your IFM processes and take steps to reduce your regulatory and operational risk, contact us today.

By Kivanc Pakel June 01, 2021