The global trend toward stronger tax enforcement has increased the need to focus on mitigating tax compliance risks. Businesses must not only stay on top of returns, audits and tax disputes, but also focus on understanding and responding to regulatory changes quickly.

Business risk management has always been a top priority for CFOs and CEOs, but the recent pandemic and macroeconomic climate have made it even more crucial. Tax compliance risk is listed as one of the top 10 risks that need to be actively managed. This is according to the majority of company risk management reports created by reputable insurers in recent years.

Why is tax compliance risk so important for businesses? Simply put, due to the numerous negative effects that non-compliance could have on a business, including:

  • Financial exposure
  • Brand or reputational risk
  • Disruption of operations

There are four main areas of tax compliance risk that require active management:

1. Tax registrations

Before a company is allowed to function in a given market, it must register for tax purposes. Our Global Business Complexity Index (GBCI) report indicates that the need for tax registrations is on the rise. In 2020, 83% of countries required a tax registration. That number increased to 86% in 2021.

Companies should examine the following factors when determining whether they need to register for taxes:

  1. Single tax vs. multiple tax registrations. Around 15% of countries require corporate income tax registrations at the national, regional and/or local levels – while 20% of countries have similar requirements for VAT and/or sales taxes. Failure to determine the appropriate tax registrations needed could make it impossible to conduct business certain locations.
  2. Digital taxation requirement. The trend is towards expanding the definition of services included in scope for digital tax. As a result, more companies must register in nations where they previously had no such requirement and must provide more information about their transactions. Businesses have a great responsibility to understand local laws and to stay current with service definitions. Mexico, Ukraine, Czech Republic are just a handful of the countries that have made recent changes in this area.
  3. Transaction details. Specific registrations and/or business licences are required for certain sorts of transactions. For instance, import and export licences are required in some Latam nations.
The number of tax registrations required has a significant impact on the cost of doing business, by increasing the tax filing burden and increasing the potential consequences of non-compliance a business may face. Multiple tax registrations can impose fines and penalties at varying levels, and can also result in multiple financial penalties for the same transaction.

2. Tax filings

Managing multiple cross-border tax filings is a difficult undertaking. There are numerous deadlines, submission methods and forms that must be considered. Companies must carry out a thorough review in the following areas to lower the risk of failing to submit tax returns on time:

  • Deadlines. Only 35% of tax jurisdictions worldwide allow businesses to postpone filing dates by providing written notice. The filing extensions that were granted during the pandemic are being gradually removed. While Europe has returned to its regular filing deadlines, some APAC nations (such as Indonesia) still permit extensions. To avoid fines and penalties, it is essential to have established tax calendars and a system that enables comparison of real filing dates with established ones.
  • How to submit. By filing tax returns online, businesses can spend more time preparing and reviewing tax returns. Most countries require online filing of tax returns, but there are still countries in Latam (eg El Salvador, Honduras, Bolivia) or APAC (eg Indonesia) that require you to submit a paper copy.
  • Cooperation system with tax authorities. Support from tax authorities is key to getting the tax laws and regulations right. Most countries provide online or phone instructions on how to complete a tax return, but some countries (eg Greece and Serbia) offer limited support from their tax authorities. And tax authorities in fewer and fewer countries allow businesses to amend their tax returns without imposing fines or penalties (27% in 2021 vs. 39% in 2020). In this situation, getting the right level of assistance in understanding and applying local regulations is critical to mitigating tax compliance risks.

Proper tax risk management requires local presence and expertise, as well as people who understand the local language and can communicate with local authorities in the local time zone.

3. Tax reporting

The number of tax authorities choosing to request detailed real-time or near-real-time transaction reporting has increased from 40% in 2020 to 45% in 2021, and the trend is on the rise. Poland recently announced that it will introduce e-invoicing in 2023. Romania is testing SAF-T reporting on large taxpayers in 2022 and plans to significantly expand it in 2023.

The need to have the right tools in place to manage data at the level of detail demanded by tax authorities and produce the right reports in the right format will have a major impact on companies' digital strategies.

What should you do to reduce your tax risk?

  • Understand local requirements related to reported data and how tax authorities use the data to reconcile reports and initiate tax audits.
  • Identify necessary data sources and aim for global standards. Choosing a local solution in every country with digital tax reporting can quickly become difficult to manage with so many different interfaces and data sources.
  • Create a test library. Real-time or near-real-time reporting greatly reduces your ability to review and correct data. Therefore, it is very important to check the data as it enters the system and ensure the correct tax amount from the beginning.
  • Be prepared to answer tax questions. Tax disputes and tax dispute policies become very important in a digital tax reporting environment. Businesses must implement robust processes to respond to tax authority requests in a timely manner.
4. Tax payments

43% of tax authorities worldwide, including Mexico, South Korea and Serbia, require the payment of tax from a local bank account. Also, in many countries, paying from a foreign bank account can make tax adjustments difficult. In this situation, the tax risk management process should consider the time it takes to open a local bank account and the resources to manage such bank account. Failure to do so may result in late payment of taxes, which can have serious consequences for your business.

The global trend toward stronger tax enforcement has increased the need to focus on mitigating tax compliance risks. Businesses must not only stay on top of tax returns, tax audits and tax disputes, but also focus on understanding and responding to tax changes quickly.

To successfully mitigate cross-border tax compliance risks, businesses should:

  1. Implement a risk assessment framework that focuses on the four areas detailed above.
  2. Identify the right mix of people, business controls and technology to get a comprehensive view of existing tax risks.
  3. Prioritise all tax risks.
  4. Define and implement appropriate tax policies, especially when dealing with tax disputes.

How TMF Group can help

Our accounting and tax experts located in more than 80 jurisdictions can keep you compliant, wherever you do business.

We can provide in-country tax and statutory reporting that works seamlessly with your systems and processes, to help your teams complete that 'last mile'.

Need more information? Contact us today.