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Tax landscape shifts for middle market firms

As tax compliance and reporting grow more complex, companies can minimize risks through vigilance, efficiency and organization.

Today, new technologies mean that a company can be multinational — even global — from day one of its formation.

The internet, cloud computing and other new technologies mean the business playing field has been leveled.

Consider:

  • Inbound companies can move quickly to enter markets where a local player has proven a workable business proposition.
  • Disruptive businesses move more rapidly than ever thought possible.
  • The trajectory from idea to operation to global corporation can be made in days or weeks, not years.

Like the world of business that it mirrors, the world of business tax is becoming unrecognizable from the one of just a few years past.

The landscape as we know it today — and the new vista that will emerge — is being shaped by a convergence of trends and forces that are impacting tax departments at a faster pace, higher volume and greater complexity than any company has experienced before.

“It is a period of extraordinary technical change and public and tax authority scrutiny, which must be effectively managed if the enterprise is to meet all obligations and manage its risk exposure.“


Tangible tax changes are now occurring month by month, week by week and often day by day: tax transparency is becoming the “new normal.”

Information on the cross-border tax rulings granted to a company in one European Member State will be available for all other revenue authorities to examine and, if the European Parliament has its way, will need to be disclosed in the company’s financial statements.

And business fears that potential new rules on what constitutes a permanent establishment (PE) may be used by some countries to justify an overly aggressive approach to finding (and then taxing) PEs.

These are just some of the new realities that companies must now deal with.

Not just multinationals

The impact of such change is not limited to the world’s largest multinational companies.

Increasingly, middle market companies (which we have defined for this report as those with annual revenues below a threshold of US$3b) are under public, media, tax authority or even internal scrutiny.

The rising use of technology and data analytics means that governments and tax authorities can consistently lower the threshold where this increased scrutiny occurs.

Consider Schedule UTP (for the reporting of uncertain tax positions) in the United States, where the original asset threshold for filing dropped from US$100m in 2010 to US$50m in the 2012 tax year and to US$10m for 2014.

Alongside new transparency and disclosure requirements, reputation risk has also become a phenomenon that many thought would pass quickly, but instead continues to draw companies large and small into its sights.

All these factors put tax higher on the corporate agenda than it has ever been.

Outside national markets, some middle market companies also find themselves the focus of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD), where the minimum threshold for country-by-country reporting of financial data (which is to begin in 2017) has been set at €750m or the local currency equivalent.

Challenges mounting

Middle market companies are telling us that they are already facing significant pressures in how they manage their tax compliance and reporting responsibilities.

Eighty-nine percent of global respondents to our survey have experienced a revenue authority review or audit in the last three years; 76% have experienced growth in the overall number or aggressiveness of tax audits; and 64% report an increase in cross-border focus by tax authorities.

But not all stress points come from outside the enterprise: 73% say their organization has undergone some form of restructuring in the last three years while 67% report conducting some form of finance transformation exercise.

And a lack of internal processes and controls was the leading perceived cause of tax risk among survey respondents.

In our report, we seek to highlight not only how middle market companies address their tax operations — and compliance and reporting needs in particular — but to identify the skills, competencies, processes and technologies they will need to meet future obligations.

Lessons learned

All multinational companies, however large they may be today, have experienced the process of learning and then mastering new tax challenges as they pass through the growth cycle from domestic company to small multinational to truly global company.

Throughout our report, we seek to isolate and describe the lessons they’ve learned through their journeys.

We suggest that middle market tax functions support a minimum of four of The EY Seven Drivers of Growth (people, behaviors and culture; digital, technology and analytics; operations; and risk) — and many also contribute to the funding and finance driver.

These seven drivers represent the key business challenges companies must address and master to accelerate their growth.

That the middle market tax function contributes so much to so many of these drivers is a testament to the growing importance of effective tax management.

A way forward

This is an incredible time to be running or working in a tax department — a time when tax has risen far up the agenda of corporate leaders, governments, media and the public.

It is a period of extraordinary technical change and public and tax authority scrutiny, which must be effectively managed if the enterprise is to meet all obligations and manage its risk exposure.

Tax is a double-edged sword: get it (and keep it) right, and an effective tax function can provide not only support to the wider business but also a real advantage over and above competitors.

But get it wrong, and the pains — audits, disputes, penalties, inefficiencies, reputation risk — can be significant.

Having access to insights from those who have already trodden the same path can help in this period of evolution.

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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