Managing Tax Risk with Enterprise Tax Technology May 8, 2014 Thomson Reuters - Key Business Units Financial & Risk Thomson Reuters Financial & Risk is the leading provider of regulatory and operational risk management solutions. These solutions deliver critical news, information and analytics, enable transactions, and bring together communities that allow trading, investing, financial and corporate professionals to connect. Tax & Accounting Thomson Reuters Tax & Accounting is the leading global provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government. Legal Thomson Reuters Legal is the leading provider of critical information, decision support tools, software and services to legal, investigation, business and government professionals around the world. We offer a broad range of online services that utilize our databases of legal, regulatory, news and business information. Intellectual Property & Science Thomson Reuters Intellectual Property & Science is the leading provider of comprehensive intellectual property (IP) and scientific information, decision support tools, and services that enable governments, academia, publishers, corporations and law firms to discover, develop and deliver innovations. 1 Thomson Reuters - Key Facts We are trusted for the decisions that matter most, empowering customers to act with confidence in a complex world individuals use IP & Science products in academic, government, corporate, and legal institutions. of Fortune 500 companies use Thomson Reuters legal research offerings, including online service for legal professionals. of the Top 100 CPA firms, 94 of the top 100 law firms and 95 of the Fortune 100 use Thomson Reuters Solutions 49 of the top 50 banks choose Thomson Reuters Accelus, an audit, risk and compliance solutions offering for corporations and financial institutions. professionals use solutions offered by financial business such as Thomson Reuters Solution 2 Board, CEO & CFO – A Head Full of Challenges & Responsibilities REPORTING ACCOUNTING IFRS PLANNING TRANSFER PRICING AUDIT DEFENSE INCOME TAX INDIRECT TAX OECD COMPLIANCE CHINA INDIA BRAZIL 3 Changing Role of a Tax Professional External pressures mean tax needs to move from heavy focus on Tax professionals have to find ways to shift the focus compliance to strategic, value adding responsibilities Today Resources to focus on strategic areas Advanced tools for analysis and decision making Operational Tasks Automated StrategyStrategy and Planning and Planning Analysis and Optimization Analysis and Optimization Desired Compliance Compliance 4 4 Tax Transformation HOW CAN TAX TECHNOLOGY HELP? DATA REDUCE RISK OF ERROR STREAMLINE PROCESSES, IMPROVE QUALITY AND FREE UP STAFF TIME ACCESSIBILITY OF DATA PROCESSES ELIMINATE KEY PERSON DEPENDENCY IMPROVE VISIBILITY AND CONTROL DEMONSTRATE CONTROL TO AUTHORITIES PEOPLE 5 Tax Technology – Transfer Pricing TRANSFER PRICING AUTOMATION 6 Transfer Pricing – Aggressiveness Poll Targets given to TPOs 7 Transfer Pricing Litigation trends Transfer Pricing Adjustments 2004-2012 FY No. of TP Audits completed No. of Adjustment % Of Adjustment Cases Cases 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 1,061 1,501 1,768 219 1,726 1,830 2,301 2,638 239 337 471 84 670 813 1,138 1,343 23 22 27 39 39 44 49 52 Amount of Adjustment (M US)* 222 416 624 293 1,116 1,983 4,225 8,097 8 *Exchange rate taken: 1USD = 55 INR Source: Ministry of Finance, India – Whitepaper on black money The Transfer Pricing Lifecycle OPERATIONAL TRANSFER PRICING Planning Monitoring Compliance 9 Planning Planning Multiple databases in one platform (covering tangibles, intangibles, royalty, loan) Global Benchmarking platform Technology To Provide Single Cost Structure 24/5 Software Support 10 Planning Planning Tool Available Benchmark and Calculation tool Worldwide Public Data Worldwide Private Data S&P KTMine INDIAN PRIVATE DATA Dealscan Excel 11 Monitoring Litigation Study: LG - Brightline Test • Indian affiliate paid the parent corporation royalties equal to 1 percent of sales for the use of the technology but did not pay royalties for the use of any marketing intangibles LG Korea Outside India Royalty Payment •Revenue proposed that routine AMP expenses should be only 1.39 percent of sales so the Indian affiliate incurred extraordinary AMP expenses equal to 2.46 percent of sales; and these extraordinary expenses created a brand awareness in India that benefitted the parent corporation •Multinationals with affiliates need to monitor: Identify and monitor expenses that constitute intangible development costs; India LG India •Monitor any intercompany royalties to see how the foreign parent benefits from any intangible assets whether owned abroad or in India; •Monitor any intercompany payments from the parent to India as possible compensation for intangible development expenses incurred by India; and • Generally be able to trace through any other intercompany transactions that may affect the identification of who benefits from locally incurred expenses 12 Source: Thomson Reuters Monitoring Headquarter Allocation Gaining Access To Quality Data WAIT… REQUEST DATA FINANCE / IT DEPARTMENTS TAX TEAM 13 Monitoring Operational Transfer Pricing FastCar has entities in Subcontinent, Brazil, and China. Zoom Motors Worldwide (“ZMW”) is a parent corporation headquartered in the US ZMW manages the transfer pricing of its recently acquired subsidiary, Fast Car. 14 Monitoring Capabilities Monitoring 15 Monitoring Capabilities Monitoring 16 Monitoring Capabilities Monitoring Monthly/quarterly/ annually reports 17 Monitoring Capabilities Monitoring 18 Monitoring Capabilities Monitoring 19 Financial Optimization Monitoring • Proactive management of transfer pricing agreements • Real-time compliance monitoring • Support for multiple data sources • Support for forecasting & planning • Analysis by function, country, region, product • Deployable across decentralized organization 20 Monitoring Core Functionality Central hub for all intercompany transactions Tangible Goods, Intangibles, Services, loans and HQ Service Allocations System agnostic interacts with all G/L and ERP systems Collect & leverage non-system sourced data Automatically calculate price adjustments, invoices and journal entries Customized reporting of invoices, journal entries, management reporting Hosted solution / centralized data accessible by provision, compliance 21 Compliance Compliance Compliance Technology Need Documentation •India and Global Reports Benchmarking •Multiple databases to cater to tangible, intangibles, royalty and loan transactions •Leverages searches across reports Time •Time saving Cost •Single cost structure •Cost efficient 22 Case Study: Ford Motor Company CHALLENGES • 4 month process to calculate worldwide true ups: - Challenge getting information - Not correct level of detail (6 to 8 weeks to get proper level – not immediately available) - Excel process (access was advanced) - No uniform approach or process (what accounts used different around the world – what accounts were value adding, cost + markup – pensions) - Many different types of transactions • Out of sync with tax strategy: - Challenges forecasting - Delay of actual results • Costly results: - Overpaying in countries (Russia, Colombia) - Quarter to quarter ETR variances - True ups 23 Case Study: Ford Motor Company BENEFITS FROM OPERATIONAL TRANSFER PRICING: • People: - Able to provide timely information not possible before - Structure process worldwide - Reduced time from 4 months to 4 hours • Dollars: - Reduce audit risks, fines and penalties - True forecast and tax planning (tighten ranges) - Proactively manage internal prices to reduce overpayments • Management Benefits: - Decrease ETR variances quarter-to-quarter - Get information earlier to manage process better - Quicker results allow true ups in provision 24 Concluding Thoughts • Roles are changing for Tax Professionals • Proactive instead of reactive • Positioning of business to take advantage of technology – – – – – – Streamline process Reduce costs Eliminate key person dependency Improve accessibility of data Improve visibility and control Demonstrate control to authorities 25 INDIRECT TAX TECHNOLOGY INDIRECT TAX STRUCTURE - INDIA Tax Type of tax Domain  Taxes on Intrastate sales & purchases of goods (Not Services) VAT Indirect State  Taxes on Interstate sales or purchases of goods. CST Indirect Central/ State(Filing)  Tax on services Service Tax Indirect Central Secondary & Higher Education Cess (SHEC) Indirect Central Customs duty levied on items listed in the First Schedule of the Customs Tariff Act Duties Indirect Central Tax on Manufacture of Goods Central Excise Indirect Central Tax on sales transactions with composite materials and labor Work Contracts (WCT) Indirect State Local tax collected on various articles brought into certain districts for consumption Local Body Tax Indirect Municipal Classification Education CESS Additional Surcharges (taxes) on Excisable goods, Imported goods, taxable services Multiple Businesses, Locations and Tax Complexity Effect  People-based tax codes  IT-based maintenance  Multiple solution silos  Redundant coding/testing  No upside Cause  Multiple legal entities  Multiple systems  Different projects  Different timeframes  Different country scopes Tax Content & Rule Maintenance Tax Calculation Tax Logging Tax Reporting Tax Filing Tax Audit Support Tax Implementation Tax Jurisdiction Complexities  The average global indirect tax rate is 21%.  Brazil, 1-2 tax rate or rule changes --- every day.  China, tax on some services --- non-recoverable to recoverable.  EU, 11 different zero calc’s, but…  EU, 614k+ treatment combinations...  Outside the US, there are: 600+ jurisdictions 3,700+ rates 47,000+ rules  US, there are: 15,000+ jurisdictions 80,000+ rates 159,000+ rules Global Tax Engine INDIRECT TAX TECHNOLOGY – AUTOMATES THE DETERMINATION SAP Oracle PeopleSoft E-Com Legacy Billing Custom Excel Response Request Returns Tax Policy Compliance Data Global Tax Engine Filing & Remittance Audit Defense BENEFITS – TAX ENGINE Vs ERP Capability/Functionality Tax Calculation Framework Rules Functionality and Conditions Automatic Content Updates Easy Fast Configuration and Maintenance Supports Different Systems Detailed Authority Based Reporting for Compliance Returns Easy Access to Historical Liability Data for Audit Defense Positioned for Additional Determination By Country As Required Positioned for Automated Returns By Country By Availability ERP Indirect Tax Technology CASE STUDY: CISCO SYSTEMS CHALLENGES: • Tax Challenges: - Consolidation of taxes (with tax professionals and systems distributed worldwide) - Centralized audit and compliance database ( to manage expansion into new markets) - Real-time global tax determination (for each transaction) REQUIREMENTS: • Technical Requirements: -A single, centralized tax solution (connecting to worldwide systems and support global business volumes) • Business Requirements - Less dependency on IT programming and quick implementation of changes in tax laws CASE STUDY: CISCO SYSTEMS BENEFITS FROM INDIRECT TAX TECHNOLOGY: • Significant increase in accuracy of taxes applied on transactions. • Identification of tax exposures for all transactions worldwide. • Reduction in tax Return processing time line (enabling more time for strategic tax planning and analysis). • Reduce unnecessary IT and tax costs TAX TECHNOLGY OVERCOMING SERVICE TAX CHALLENGES IN INDIA – AN EXAMPLE • Place of Provision of Supply Rules - Passenger transportation services – Embarking on the conveyance (Exemption for North east states) - Transportation of goods - Place of destination • Reverse / Partial Reverse charges under Service Tax - For specified services like Manpower, Rent a cab and works contract - Tracking PAN based S.T registration to determine the status of • CENVAT Recoverability Rule - Automatic determination of recoverability (Ex. Outdoor catering, health services, membership of a club for personal use or consumption of employee.) • Automatic updation of Tax Rate / Rules Sample SAP Customers Sample Oracle Customers Questions?