Do more with less: this is a common ask many senior business leaders are faced with these days. And finance leaders are no exception.
While the role of finance is expected to shift from governance to guidance, the expectation is that CFOs will generally fund any finance redesign programmes through efficiency gains and the resulting cost savings. In line with this, we at TMF Group have recently observed a general tendency towards greater finance centralisation among our global clients. And we estimate this trend will continue – as a lean and agile finance function is expected to better support growth, leveraging technology and consistent processes.
A key pillar of finance centralisation is having one system – bringing different parts of organisation onto one technological platform. But in our experience tax and wider statutory compliance often remain outliers (we will include tax within the statutory compliance function throughout this article).
Let's adopt the analogy of a shiny, new electric car to represent the finance function – embellished with the latest and greatest gadgetry (in this case a best-in-class cloud platform, taking advantage of the latest technologies such as artificial intelligence and intelligent automation). But under the hood of that fancy electric car, imagine finding a somewhat rusty statutory compliance combustion engine, and one that runs on good old Microsoft Excel – the fuel of yesteryear.
Looking under the hood
A chain is only as strong as the weakest link. When talking about successful finance redesign programmes, the statutory compliance (including tax) should be assessed as well. From our experience, the statutory compliance function is often overlooked for a seat at the table when it comes to planning. And that might become a painful oversight. Contrary to what the name suggests, the statutory compliance function brings value not only in the form of remaining compliant (keeping in line with varied local regulations and legislation), but also provides benefit operationally.
Consider invoicing. Your centralised billing unit might boast a state-of-the-art platform and processes, allowing sales, operations and finance to interact and produce invoices in matter of seconds. But is that sufficient to send the invoice and be paid by your client entity in say, Brazil, Chile or Hungary? Brazil is ranked as the most difficult place to do business, according to our annual flagship publication the Global Business Complexity Index (GBCI). Without providing the necessary details at a municipal level, among other requirements, you will hardly get your invoice paid in Brazil. In Chile, your invoice needs to be shared electronically with the government. Same for Hungary – and don't forget to do that on the same day!
And we haven't even touched upon local language requirements. Another of TMF Group's proprietary publications, the Global Guide to Tax Compliance suggests that roughly 65% of jurisdictions require local language invoices (on top of, or instead of, English). Another interesting number from the same report (we gathered the knowledge of our own experts on the ground in over 80 countries) is that 85% of jurisdictions request annual financial statements to be submitted in the local language. This requirement – along with knowledge of local GAAP (generally accepted accounting principles) and the local chart of accounts – will clearly impact the sourcing strategy around your local finance function.
And then there is the system itself. Generally, a great amount of planning goes into the selection process – with multiple stakeholders being involved. We at TMF Group sometimes see signs that statutory compliance might have not been involved from the very beginning. Those signs are usually manifested in global companies having separate instances of the platform for a few countries. China and Brazil are among the countries mentioned most often – this matches up with their high rankings in our Global Business Complexity Index.
Another area potentially affecting central finance model is local responsibility and qualification requirements. In many Latin American countries – among them Colombia, Argentina and Peru – annual financial statements can only be signed by a certified public accountant. In Poland and Bulgaria, an e-signature is required to submit a tax return, with some additional criteria attached. We estimate these local requirements related to responsibility and qualification are here to stay in the medium- and longer-term. Our GBCI report identifies the rise of responsible governance among the three major themes dominating business complexity for international businesses.
Making a complex world simple
As our GBCI research shows, emerging from Covid-19 only accelerated existing trends. Some tax exemptions and other pressure-alleviating measures introduced during the pandemic are being reversed. The depth, breadth and pace of various legislative changes impacting statutory compliance might seem overwhelming to many finance leaders. But these barriers are not insurmountable. We have shared some ideas previously in another article (Digital taxformation – how CFOs combine digital transformation and tax), but here are some more aspects to consider while planning your finance centralisation:
- Hear the voice of statutory compliance prior to and throughout the finance redesign exercise. This should help you to avoid certain costly operational and compliance reworks further down the line. For example, a relatively straightforward idea of properly mapping invoices issued by the central billing department to statutory invoices, if not implemented, might jeopardise the invoicing process and ultimately the timeliness of cash inflows.
- Ask the right questions. Despite the astronomical number of local complexity nuances, it is still possible to define critical data points by asking the right closed questions. Is the use of a local system a must? Can invoices be issued in English only? Should the return preparer possess a specific qualification? Having those consistent and actionable data points should allow you to efficiently lock statutory compliance into the finance machine.
- Assess your sourcing strategy for finance and statutory compliance. What are the criteria used to assess outsourcing potential for an activity? How does your outsourcing strategy fit into the objective to support company growth?
It takes a village to design and build a technologically advanced and environmentally friendly electric car. Similarly, building a digitally driven and growth-supporting finance function requires joint efforts of many parts of organisation, including statutory compliance.
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.