Managing cross-border tax risk: triggers and consequences

Before, during and after a transaction

When it comes to timing, compliance requirements might apply before, during or after finalising a transaction, so it’s important to stay on top of them at every stage.

If all the necessary tax registrations and business licences are not in place, a company cannot perform its everyday activities. In Brazil, for example, you need to obtain a RADAR licence for import/export activities. In the absence of this licence, no importing or exporting is possible.

Real-time reporting and withholding tax payments are probably the most telling examples of compliance requirements arising almost at the same time as an event is triggered. In Hungary, every sales invoice needs to be electronically sent to a government platform on the same day. In Serbia – similar to many other European countries – the withholding tax payment is due on the same day as the qualifying payment, examples being dividend payouts or payment for certain cross-border services. The penalties for withholding tax underpayment include a fine of up to 50% of the unpaid tax and late payment interest for each day of delay.

Most reporting and filings – from classical corporate income tax returns to more recent requirements, such as SAF-T (Standard Audit File for Tax) – apply after the period end. The implications of non-compliance vary, from modest monetary fines to significant operational blockages, such as bank accounts being frozen.

Monetary, reputational and operational considerations

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 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 from country to country and, in some cases, businesses face fixed, relatively small penalty amounts. However, in certain jurisdictions, penalties can be as high as a percentage of company revenue and could be accompanied by other consequences, such as the suspension of business licences. In the Netherlands, a fine of up to €820,000 can be issued for failure to file a Country-by-Country Reporting (CbCR) report.

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 published by the local finance authority. Sometimes, being on these lists could prevent a company from participating in a request for proposal (RFP), especially in instances where an RFP has been made by governmental authorities. Chile’s tax authority has recently released a list of over 100 foreign digital service providers operating in Chile without having registered for VAT (i.e., being non-compliant).

On the operational side, certain types of penalties – such as a ban on performing certain transactions or operating bank accounts – are extremely severe and will likely prevent companies from being able to continue to do business.

There is another, more subtle, cost of non-compliance with regulations: 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 needs 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 TMF Group’s Global Business Complexity Index 2023 (GBCI), regulatory changes happen quite frequently. They’re often announced very close to their enforcement date. This can mean that companies simply don’t have the time to familiarise themselves with the new changes, or to make the necessary adjustments to prevent non-compliance. It’s why we advocate the use of local accounting and tax experts who have the knowledge and tools to carry out any necessary business changes in sufficient time, particularly in highly complex jurisdictions such as China, Brazil and Turkey.

Is technology making compliance easier?

Our 2023 GBCI report identifies “global compliance challenges” as one of the three most impactful global trends. While online systems are intended to simplify processes, it is common that they will lead to an initial short-term increase in complexity, especially if authorities lack alignment.

For example, Indonesia – ranked as one of the five most complex jurisdictions globally for business complexity in our GBCI report – brought all interactions with the authorities under a single submission portal (OSS). However, the portal concept required licensing bodies, and this has resulted in an initial hybrid of electronic and paper-based submissions. Also, for transaction-level types of reporting, such as SAF-T (Standard Audit File for Audit), emphasis is on additional system customisations. An optimal scenario for businesses is to have their systems modified by the manufacturer. If that is not the case, though, be ready for workarounds – from internal developments to manually handling and processing the relevant data.

Financial compliance requires local knowledge

The level of resource that should be dedicated to financial compliance within a company is very much dependent upon:

• the size of the business
• the jurisdictions in which it operates
• what local complexities it faces.

For many global companies, given a shift towards finance centralisation, the presence of local finance teams is likely to be limited. So, to have a good grip on specific local requirements, finance and tax leaders need a robust sourcing strategy in place.

Looking ahead

Technological developments will continue to drive changes globally, especially in the way tax offices interact with taxpayers. A notable milestone in this regard is the discussion paper by the Organisation for Economic Co-Operation and Development (OECD) – Tax Administration 3.0: The Digital Transformation of Tax Administration. Developments in e-invoicing, such as in Serbia (2022) and in Slovakia (2023) or SAF-T implementation in Romania (2022) are a good illustration of this.

Corporate income tax rates will be reviewed for certain countries, following the deal struck by the international community, which will introduce a minimum tax rate of 15% as of 2023. This deal, now endorsed by G20 leaders, might also trigger new developments, or the reversal of previous changes, in the digital services tax domain.

We will be seeing further harmonisation, with transnational bodies such as the OECD and the EU coordinating international legislation. Increasing regulations driven by the OECD around country-by-country reporting are yet another illustration of such harmonisation. Global companies are requested to be more transparent about their activities, and make their financial results more visible to the tax authorities.

Talk to us

Globalised fiscal scrutiny can turn a local compliance mistake into an international embarrassment, so scrupulous tax compliance is at the heart of everything we do.

Our localised accounting technologies and teams of in-country experts help you purge cost, complexity and risk from cross-border compliance.

If you need support with any aspects of financial compliance, make an enquiry.