The risk of financial non-compliance has more than just financial and reputational consequences. It can also affect your resources, ultimately increasing the cost of doing business.
There are different ways in which the risk of not complying with local regulations will impact your business. It can vary from low financial risk to high operational challenges. If all the necessary tax registrations and business licences are not in place, a company simply cannot perform its everyday activities. For example in Brazil, you need to obtain a RADAR license for import-export activities. Put simply, RADAR is a license that grants access to the SISCOMEX system (Integrated System of External Commerce) within the Federal Revenue. With such a system, foreign trade operations, customs, accounting and fiscal information of all companies are available at any time to fiscal auditors working for the IRS (Internal Revenue Service). In the absence of this license, companies simply cannot perform any import – export activities.
Equally, in Argentina, all importers must request approval from the Argentina Tax and Customs authority prior to making each import.
So the risk of non-compliance can be as significant as preventing you from generating revenue and fulfilling the very purpose of your company's existence. But there are other consequences that stem from regulatory non-compliance as well.
Money and reputation considerations
If you're not complying with the requirements of the countries in which you operate, your company could be subject to fines and penalties, particularly if an audit is undertaken by the local tax authority or if you have failed to file or pay taxes on time. Severity levels vary country-to-country, and in some cases businesses face fixed, relatively small penalty amounts. However in some jurisdictions, penalties can be as high as a percentage of company revenue and could be accompanied by other consequences, such as suspension of business licenses. In Canada, Colombia and Chile, penalties are a percentage of the tax liability, while in Ecuador the penalty could be as severe as forbidding the company to operate.
Other consequences are more difficult to measure because they are not financial but rather reputational. In some countries, companies are 'named and shamed' on lists frequently published by the finance authority. Sometimes, being on the list could have prevent the companies from participating in various RRPs, especially in instances of RFPs conducted by governmental authorities.
There is another, more hidden cost of being regulatory non-compliant: the expense of assigning a dedicated resource to correct your filings. This person or team would typically need to spend time with the local tax authority to explain why your books are the way they are - and the reasons why you didn't comply in the first place.
So the risk of non-compliance also puts the squeeze on your resources, ultimately increasing your cost of doing business.
What leads to financial non-compliance?
Compliance issues can easily be overlooked when a company is very focused on its core operations – what they need to get done to generate profit and grow the business.
But probably the most common reason for oversight is the fact that, especially in complex jurisdictions such as those highlighted in our Financial Complexity Index, regulatory changes happen quite frequently. They're often announced very close to their enforcement date. Sometimes, companies simply don't have time to familiarise themselves with the changes, and make the necessary adjustments before they become non-compliant. It's why we advocate – particularly in highly complex jurisdictions such as China, Brazil and Turkey – the use of local accounting and tax experts who have the knowledge and tools to carry out necessary business changes in sufficient time.
Is globalisation making compliance more difficult?
The answer to this question largely depends on the jurisdictions in which you are doing business. In some parts of the world, globalisation makes compliance easier because tax regulations are aligned across the region. A great example is of course Europe and the 28 Member States of the European Union. While there are some country specifics in terms of corporate tax or withholding taxes, VAT rules are highly aligned.
However, regions outside Europe – Latin America and Asia Pacific in particular – feature very strong local nuances. Accounting and tax regulations can vary significantly country-to-country, so a US company doing business in these regions for example, would find it challenging to understand and comply with all the different local rules.
Financial compliance requires resource
The level of resource that should be dedicated to financial compliance within a company is very much dependant upon:
- the size of the business
- the jurisdictions in which is operates
- what local complexities it faces.
Often, small and medium-sized companies don't have the luxury of their own personnel on the ground to take care of compliance activities. Or, they may have a regional resource to coordinate and oversee, but specific local requirements can be missed.
Businesses can expect the alignment of tax regulations to continue in 2019, particularly in Europe. There are discussions about using a single EU system for companies to calculate their taxable income and a "one stop shop" to file a tax return for all their EU activity. And there are calls for a more equitable spread of the corporate income tax liability for companies that have activities in various EU countries. We can also expect the move to electronic reporting to continue – such as those phasing in, in Italy and the UK. We are all living in a tech era, and this includes tax authorities for whom technology is becoming increasingly important for receiving reports and monitoring compliance.
And obviously increasing OECD regulations around BEPS and Country-by-Country reporting is another trend that will continue. Global companies need to be more transparent about their activities, and make their financial results more visible to the tax authorities.
Talk to us
TMF Group's accounting and tax specialists in more than 80 countries worldwide can help lift the financial compliance burden from your business. We keep across the latest regulatory changes and what they mean for your operations, so you can focus on your core.
Need more information? Get in touch with us today.
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.