CFOs can't foresee every challenge when entering a new market but they can set themselves up to face them head-on.
Global accounting and tax regulators have been making moves towards uniformity and harmonisation. Transparency initiatives such as the OECD's international exchange of Country-by-Country Reports (CbCR) are in place in over 77 jurisdictions. And approximately 90 countries have fully conformed with International Financial Reporting Standards (IFRS). However, unpredictability reigns for a chief financial officer looking to establish operations in a new market.
Countless operational differences exist in cross-border business and rigid local requirements, frequently-changing local laws and the adoption of digital reporting can throw curveballs.
A deadline is a deadline
One of the fixed rules that businesses come up against are deadlines for tax and statutory filings. These due dates cannot be extended in 63% of the 76 jurisdictions surveyed for the Global Business Complexity Index - a report which measures the relative difficulty – or ease – of business environments around the world.
"These deadlines put a lot of pressure on companies, because they need to collect the necessary financial information and report it on time," explains Emine Constantin, Global Head of Accounting & Tax at TMF Group. "To do this, they must have the right locally-compliant software systems and processes in place."
The unwillingness of financial authorities to extend filing deadlines is linked to the increasing desire for data from companies in real-time. "There is a global drive to reduce tax evasion and fraud, and the demand for taxpayers to participate in real-time reporting helps authorities to stamp this out," she continues.
Going digital
The digital revolution sweeping through the global accounting and tax landscape is not new, but jurisdictions vary greatly in their digitisation maturity. Take Brazil, whose digital reporting is very advanced after pioneering the use of technology to standardise tax reporting and enhance foreign investment. It's ranked third most complex for business in the GBCI behind Indonesia (2) and Greece (1).
"Brazil began its digitisation journey in 2000, so it has had time to improve its systems and adapt them to various challenges that arose," says Constantin. Other jurisdictions are just beginning to go digital. "Usually, it starts with the introduction of e-invoicing. Italy and Hungary are two European countries that have just recently made this mandatory. We typically then see electronic reporting extended to other areas of tax collection."
Digitisation is important, but not the key factor in determining a jurisdiction's business complexity score from a financial compliance perspective. If it were, Brazil would arguably be ranked much lower than third most-complex in the world. "Complexity depends on many factors" says Constantin. "You can say that when you report your data digitally in a jurisdiction, it makes things much simpler, particularly after the headache of the initial set-up stage. However, business complexity doesn't just relate to the way data is reported to the authorities. It's also about how often laws change and more specifically, what notice companies are given of the change."
A changing playing field
Constantin explains that countries which tend to be ranked higher in the GBCI are those with very frequent, last-minute law changes that often catch companies by surprise. "The notice periods are so short, they leave businesses with zero time to adapt, implement and understand the impact of the change on their operations."
One factor driving Greece's place at the top of the GBCI is the tax rate variation between islands. Frequently changing and conflicting laws make it difficult for businesses to know what to comply with. In some cases, VAT refunds in Greece are subject to different tax treatments depending on the individual office a company deals with. On occasion, identical dividend declarations have been taxed at rates varying by more than 10%.
China, ranked ninth in the Index, has differing laws at federal and provincial level – and even between cities. Constantin: "However, the third phase of the Government's 'Golden Tax' project will simplify the electronic tax return submission process and this should make things easier for companies operating in China."
Don't overlook the details
When putting together business expansion plans and making risk assessments, Constantin believes that CFOs can often be guilty of neglecting key administrative issues. "We see it with some of our clients. They're understandably hyper-focused on the operational side of things and fail to factor in company registrations, incorporations, in-country accounting and tax obligations." Constantin stresses that it's important for a CFO to understand the cost of these essential processes, the challenges they're going to face and formulate a plan of attack. "It makes sense to seek out accounting and tax partners with local knowledge and expertise in the countries they're moving in to, to help them mitigate the risk."
Explore the complexity profiles of key jurisdictions in the Global Business Complexity Index.
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