Nearly half of 4,000 participants in a recent Deloitte webcast poll indicated their organizations are looking to achieve greater consistency in intercompany accounting, but they’re not there yet. Less than 10 percent said they have a well-developed intercompany accounting system that keeps track of transactions across related entities.
Intercompany accounting -- or the tracking of transactions across various legal entities that are tied into a larger organization -- is getting more critical as tax authorities around the world look to capture more tax on foreign earnings. Authorities in more than 100 countries are collaborating under the Organisation for Economic Development’s Base Erosion and Profit Shifting plan to implement new regulations and policies meant to hold companies more accountable for their cross-border intercompany activities.
In the United States, for example, the U.S. Treasury Department is adopting new country-by-country reporting requirements that are meant to produce more transparency around intercompany transactions. Treasury also is pushing new regulations that will produce substantial new documentation requirements around transactions among related entities in order for them to continue to qualify as equity arrangements eligible for more favorable tax treatment.
Those new initiatives have only “piled on” earlier drivers, such as new audit requirements for related party transactions and ongoing transfer pricing scrutiny, to bring concerns about intercompany accounting to the fore, says Kyle Cheney, a partner in advisory services at Deloitte & Touche. “All these things are putting even more pressure on an already mounting problem,” he says.
Companies cite a number of challenges to getting their arms around their intercompany accounting, such as disparate software systems, complexity in intercompany agreements, intercompany settlement, transfer pricing compliance, and foreign exchange exposure. Cheney says companies need to walk through an orderly process to sort out their intercompany accounting and get it under control.
“We’re recommending creating a governance body that includes tax, treasury, and accounting, with each function working together,” says Cheney. Companies may need to adopt some kind of framework or defined method for working through the issues because of the likely complexity, he says. “It has tentacles throughout the organization.”
Compliance officers would be wise to step up and get involved in addressing the issue, says Cheney. “It’s beneficial for them to be at the table to weigh in on how to put together a team to manage the risks accordingly,” he says. “That’s the big value add for the compliance organization.”