In June, we published our annual Global Business Complexity Index (GBCI) report which provides an authoritative overview of the complexity of establishing and operating businesses around the world. Using 292 indicators across the areas of legislation, compliance, accounting, tax, human resources and payroll, our report publishes a global ranking of 77 jurisdictions based on the complexity of their business environments.
This follow-up article will focus on accounting and tax, to further explore the drivers of complexity within this space. Accounting and tax requirements for businesses that are incorporating and operating in foreign jurisdictions can add to the burden of complexity, as companies struggle to navigate new and unfamiliar legislation. This is rendered even more complex when legislation varies at a global level for instance across different regions within a jurisdiction, or when organisations need to keep up with rapidly changing regulations.
The Covid-19 pandemic has brought with it changes to accounting and tax that businesses need to adapt to. For instance, the UK government recently announced changes to employee National Insurance contributions to recoup some of the increased spending during the pandemic. In order for economies to effectively bounce back, tax contributions in particular are likely to be adapted in the coming months, as the dust from the past two years begins to settle.
Changes to accounting and tax legislation offer new challenges
In response to the pandemic, taxation has been adapted in multiple ways, including filing and payment deadline extensions in a large number of jurisdictions. While many of these measures were designed to ease the burden during difficult times, complexity arises as organisations need to properly understand and adapt to these changes to avoid making errors in their accounting and tax processes, and possibly incurring sanctions or penalties as a consequence.
This year, Sweden implemented the 'economic employer' concept. This will lead to further registration and reporting responsibilities for some corporates and will place pressure on foreign organisations wishing to incorporate and operate in the jurisdiction, especially if they seek to use temporary foreign workers. Previously, it was possible for foreign short-term workers in the jurisdiction to gain tax exemption, but under this new legislation that is no longer the case.
We see similar themes in Colombia where changes in legislation are common and can lead to complexity. A review in 2021 by the Colombian Congress has resulted in a new tax reform that includes changes in the corporative income rate, the elimination of some tax discounts, changes to the treatment of VAT for certain products and services, and important changes to withholding taxes and social security. This will be the 3rd fiscal reform in the past three years; Colombia also has 1420 municipalities, each with its own legislation, taxes and reporting or payment frequencies. It's perhaps no surprise therefore that the jurisdiction ranks as the 3rd most challenging when it comes to accounting and tax complexity.
Local nuance creates both local and global complexity
Changes to tax legislation creates business complexity; this is also compounded by the need to navigate local nuance. GBCI 2021 findings reveal the scale of this complexity: this year's research revealed that local GAAP is the most commonly applied accounting standard, with 57% of jurisdictions reporting that all companies must adhere to this standard, an increase of 8% over 2020.
This can create an additional burden for businesses. In Germany, for instance, where local GAAP is in place, on top of the requirement to use German language for accounting and tax processes. This means that foreign businesses looking to operate in this market must acquire an understanding of both German GAAP and German language in order to adhere to accounting and tax standards and remain compliant.
As we explore in this year's GBCI 2021, local GAAP isn't the only accounting and tax legislation that creates complexity for businesses. In Greece, the rate and deadlines for submission and payment of indirect taxes such as VAT, stamp duty, transfer tax and custom duties depend on each individual transaction and time it took place. The result is that the burden of tax assessment is shifted onto the entities themselves and this transactional variation requires much scrutiny and a granular approach. Legislation leading to regulations as complex as these clearly increase the time and resource that organisations must dedicate to remaining compliant.
One possible solution to reduce complexity for some businesses is to use shared service centres, where shared functions such as HR and IT are consolidated into a single hub that services the global business. However, local differences such as local GAAP and localised regulations can undermine the complexity reduction that shared service centres offer. We've explored this theme recently, in an article that you can read here.
Digitalisation: increased efficiency or greater complexity?
The GBCI 2021 also highlights that digitalisation is a key trend which, when used effectively, can simplify and streamline certain processes within accounting and tax. Certain jurisdictions have seen an acceleration in digitalisation to meet the challenges posed by the pandemic to existing rules or processes. However, this has not impacted all jurisdictions to the same extent or at the same pace, creating an complications for those businesses operating within multiple markets, who would benefit from a unified or standardised approach to managing accounting and tax.
Norway has seen new SAF-T digital reporting requirements for Value Added Tax/Goods and Services Tax (VAT/GST). Norway will mandate SAF-T VAT reporting, including direct digital submission from accounting systems, to replace the current manual VAT filing from 2022 onwards. Those operating in this jurisdiction who will need to ready their systems and processes in order to make the transition to digital.
Conversely, other jurisdictions are still in the early stages of their digitalisation journey. In Russia, for example, accounting and tax processes still very much depend on physical, paper-based workflows. Initial steps are being taken to digitalise, but the transitory processes are quite convoluted, with additional requirements around gaining e-signatures, and a limited number of official channels. The persistent need to both create and retain physical copies of documents adds to storage and operational costs that have largely been eradicated in jurisdictions that have gone fully digital.
These jurisdictional differences demonstrate that global businesses are likely to find themselves operating in jurisdictions where they need to adapt to advanced technologies, and others where they need to combat laborious traditional processes. The spectrum of digitalisation can therefore create complexity for multinational organisations having to adapt their own processes to accommodate localised legislation and requirements.
GBCI 2021 and tackling accounting and tax complexity
It's clear that businesses seeking to incorporate and operate in foreign jurisdictions will encounter certain complexities when navigating the local accounting and tax environment.
With the impacts of the Covid-19 pandemic finally starting to ease, governments are seeking ways to drive their economies and balance the books of their pandemic spending. Consequently, businesses are facing more rigorous tax enforcement and rapid changes to legislation that can be challenging to monitor and keep up with. Add to this the interaction between local and international accounting standards, and vary levels of digitisation in different regions and jurisdictions; adapting to and managing the requirements of accounting and tax compliance can be a tough ask for international organisations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.