As corporate accounting undergoes even tighter scrutiny, how can CFOs ensure transparency and accountability? Finance Monthly here benefits from special insight by Nigel Youell, EPM specialist at Oracle.

Tax reporting is rapidly climbing up the corporate agenda, with one quarter of C-suite executives saying that the issue comes up at board-level discussions more than once a month, up from just 5% five years ago.

Thanks to the globalisation of world trade and an increasingly complex array of national and cross-border regulations, companies have understandably put tax affairs under the spotlight. Complicating things even further is the public’s growing interest in corporate tax, which has led to a call for greater transparency into businesses’ tax reporting.

This shift has led to initiatives such as the OECD’s Base Erosion and Profit Shifting (BEPS) project, which aims to bring consistency to international tax practices. When BEPS comes into effect in early 2018, organisations will have to publically report in detail on their earnings in every jurisdiction in which they operate.

Finance leaders have always faced the challenge of balancing their fiduciary responsibilities to shareholders with regulatory compliance. In order to stay on top of changing regulations and stand up to increased scrutiny on corporate tax however, businesses need a new approach to reporting that is faster, more accurate and more transparent.

This will take a change in strategic priorities. Much of the money spent on enterprise technology in recent years has gone towards flagship systems such as ERP, yet many organisations still rely on manual data entry and spreadsheets for tax reporting. This approach is no longer suitable for the type of granular tax reporting that is now mandated by so many jurisdictions and cross-border authorities.

Businesses need accounting and reporting systems that can measure contributions in each country they operate in, and be clear about how they allocate costs across their organisation. They also need to be scrupulously accurate and transparent in their reporting. The risk of error is too high to work with spreadsheets quickly, and audit trails have become too hard to follow in many cases.

A technical fix for the exigencies of modern reporting

Automation is the key to helping businesses meet regulatory compliance obligations and satisfy shareholder demand for greater accuracy and transparency in their reporting. This is because automated processes provide a clear audit trail.

Also, because this added level of rigour makes it easier to keep track of what is going on, the entire reporting process is faster and businesses can keep stakeholders informed up to date on their activity.

A modern, automated reporting system consists of three core functions:

• Profitability and Cost Management: While traditionally used to track whether a particular product is profitable, Profitability and Cost Management applications are now being used to calculate and justify transfer pricing policies. This is less about tracking all the different components of a product supply chain, which is straightforward, and more about attributing less direct costs.

Consider a car factory in Sunderland that manufactures vehicles for the global export market. A breakdown of costs per car also needs to include the cost of keeping the lights on in the factory, of employees on the assembly line, and of the executive staff who run the operation locally.

• Tax Reporting in the cloud: Tax reporting systems enable businesses to achieve greater alignment between tax and finance teams, which is essential to delivering on the country-by-country reporting requirements set out by legislation like BEPS. For more on this, check out this interview with Richard Scammell of PwC on how the cloud can help businesses modernise their reporting approach.

• Narrative Reporting: Governments, stakeholders and the public expect companies to share transparent and accurate results with a clear narrative. Data without context has little value, and for companies to continue being transparent about their tax approach they’ll need to rationalise their decisions with more detail than ever.

We are undergoing one of the biggest overhauls to corporate taxation in years, and companies need a reporting infrastructure that is fit for purpose – not just to meet regulatory requirements, but also to ensure that businesses have the insight they need to run their operations efficiently.

The shift to cloud-based reporting has already begun to gain traction in the finance department, and as businesses look to adapt to a more transparent, regulated environment this shift will increasingly extend to tax processes as well.

It has been now more than a year since the Organisation for Economic Cooperation and Development (OECD) issued its recommendations addressing base erosion and profit shifting (BEPS). Following this initiative, Europe has embraced the BEPS Project and has passed various directives at a rapid pace, thus actively contributing to changing the international tax landscape. One of the biggest milestones reached so far is the Anti-Tax Avoidance Directive, which was passed by the Economic and Financial Affairs Council (ECOFIN) in July this year.

The measures of this Directive are expected to have a significant impact on the tax landscape in Europe. Most EU countries are thus already reforming their taxation systems and proposing new tax incentives in compliance with the latest standards.

Luxembourg has not escaped this trend and is adapting its tax framework to both the OECD-BEPS standards and the new EU requirements, while also ensuring that it remains attractive. Luxembourg’s recent announcement of a progressive decrease in the corporate income tax rate, from 21% to 18%, marks one of the first steps towards remaining competitive, and will lead to a global income tax rate of circa 26% in 2018. The government is already considering a further decrease in the corporate income tax rate, but a final decision will not be taken before an assessment of the effects of the BEPS Project and related measures on the State budget is made.

Bearing in mind the above developments, a key element of the country’s competitiveness undoubtedly remains its economic strength and stability. Major rating agencies have confirmed the country’s 'AAA' rating with a stable outlook. And it is further expected that Luxembourg will continue to experience growth superior to the European Union and Eurozone average, which is particularly noteworthy given the current changes in the international corporate tax framework. Additionally, in the context of Brexit, Luxembourg is well positioned compared to other EU countries as a leading centre in Europe for investment funds (in second place worldwide after the USA), and investors can rely on its long-standing business-friendly environment as well as on fewer bureaucratic and administrative hurdles.

Looking into the future, it is clear that the Luxembourg tax landscape will continue to evolve to keep pace with international tax changes. In the short term, the main trends that are likely to remain dominant are a continuing and increased focus, by the Luxembourg and other local tax authorities, on transfer pricing and substance requirements. This has already resulted in the recent release of a new bill in Luxembourg providing further guidance on applying the arm’s length principle from 2017 onwards, in line with the work on Actions 8-10 of the BEPS Project (on ‘Aligning Transfer Pricing Outcomes with Value Creation’). The bill outlines the legal framework for a comparability analysis and emphasises that the arm’s length principle must be applied to all controlled transactions. Another trend that will inevitably derive from all these evolutions, and from tax transparency and automatic exchange of information becoming the new normal, is the increase in tax audits and cross-border tax disputes.

These international developments will heavily affect multinational groups, which face the challenge of understanding the changes, delineating the unique ways in which their organisations are affected, and mapping out the best way to respond. Companies must therefore start reshaping their structures and business models, where appropriate. They must also ensure that they have adequate transfer pricing and supporting documentation to outline how they have determined the arm’s length principle for their intra-group transactions in the context of a wider value chain analysis, and to demonstrate that they have the right economic substance and business rationales underlying their transactions. This will definitely be key in a world in which tax authorities worldwide have, more rapidly than ever, greater access to all taxpayers’ data.