Have we appropriately adjusted internal controls to changing circumstances?
COVID-19 also may introduce new or different risks across control environments. Many companies are necessarily reducing spending in accord with revenue reductions. Meanwhile, the creation of new business models introduces new processes and a new network of potential risks.
For tax, the question becomes: Is the existing/historical control environment for tax accounting and reporting still adequate, given changes in personnel, roles and responsibilities?
To respond to this question, the CFO and the head of tax may ask: Are we still able to perform tax accounting and reporting processes and conduct timely and effective review of the tax provision? Do we have access to the right information and right competencies? Is our remote work arrangement prepared for the scope of year-end reporting? Do we need to supplement our resources, perhaps with temporary support or outside advisors to ensure we’re addressing the right issues?
Set 2: How are we addressing ongoing change in the global tax environment?
Even before the arrival of COVID-19, businesses were already facing an onslaught of evolution in global tax policy. Beyond COVID-19: Have we evaluated and accounted for latest developments related to:
US Tax Cuts and Jobs Act (TCJA)
Although passed in 2017, significant final and proposed Federal interpretations continue to be released. Ongoing change is also evident at the State level, as local jurisdictions, conform or diverge from the TCJA, in additional to addressing chronic or COVID-19-driven budget gaps.
Businesses must also contend with the OECD’s continuing efforts to address base erosion and profit shifting (BEPS). And although delayed by the arrival of COVID-19, the OECD just published several new documents on it's BEPS 2.0 framework which aims to coordinate multinational taxing rights as well as introduce global minimum tax rules.
Digital services taxes
While BEPS initiatives progress, numerous jurisdictions are taking or considering unilateral measures to evolve their tax bases to an increasingly digital economy. In particular, many jurisdictions are introducing digital services taxes levied on certain cross-border earnings based on customer location (i.e., “market” based approach).
Multilateral instrument (MLI)
Many countries are moving forward with execution of the MLI developed under BEPS. The MLI modifies thousands of bilateral tax treaties and implements standards to protect against treaty abuse and enhance cross-border dispute resolution. The MLI also provides for greater tax data sharing and thus raises the bar for how companies must prepare to defend transfer pricing and other tax positions. The MLI impacts and effective dates vary based on each jurisdictional relationship.
EU Mandatory Disclosure Regime (MDR)
Yet another important development requiring close attention is the EU’s requirement to disclose to EU Member States a wide range of cross-border tax arrangements. Taxpayers and intermediaries must implement policies, procedures and processes to identify and capture details of tax transactions they will need to disclose. On complex arrangements, taxpayers will need to coordinate disclosures with their advisors. Penalties for non-compliance vary by country and can be significant.
Profound change in not only tax laws and policy but also fundamental business operations is a recipe for controversy. In the US, for example, the IRS is now cycling to reviews of 2017 and 2018 returns. These were two years of high complexity as companies interpreted the just-enacted TCJA. Tax departments should be ready to respond to inquiries and defend positions. On a global basis, new tax laws responding to COVID-19, combined with decreased tax revenues and increased spending on stimulus and health care introduce significant tax complexity which may lead to increased tax controversy activity. Tax departments may anticipate additional inquiries from tax authorities and potentially increased volatility in tax accounting for uncertain tax positions.
Driven by disruption the world is experiencing an active transactions market. On the buy side, opportunists see low interest rates and attractive, often distressed, assets. The sell side, meanwhile, is replete with companies seeking to restructure or reshape to deliver sustainable results or merely survive. Capital markets have been active as companies navigate political uncertainty and access ample liquidity supplies. Initial public offerings and Special Purpose Acquisition Company (SPAC) transactions have been robust.
Strategic transactions increase the likelihood that tax departments, already facing a significant set of challenges, may be called upon to devote resources to assist in planning, executing and/or integrating transactions. Careful attention to the tax elements of a transaction is critical to ensuring the deal achieves its desired outcome and that systems and controls are in place to manage tax risk.
One final area deserving of close attention is accounting standards. The agencies setting these standards, such as FASB and IASB, continue executing on agendas to improve the quality of financial reporting. Recent changes have targeted revenue recognition, lease accounting and financial instruments. Other changes related to goodwill impairment (US GAAP and IFRS), income tax simplification (US GAAP), accounting for convertible debt instruments (US GAAP), debt-equity classification generally (US GAAP and IFRS), accounting for estimates (IFRS), improvements to financial statement disclosures (US GAAP and IFRS) and several other topics are in different stages of proposal, adoption and execution. Heads of tax need to assess the tax accounting and tax compliance impacts of any adopted accounting standards or interpretations, looking not only at group reporting but also statutory reporting.
Closing 2020 and preparing for beyond
As 2020 comes to a close, CFOs and heads of tax should work closely to understand, evaluate, account for and disclose the varied business and tax matters encountered during the year. Though by no means comprehensive, the above questions provide a solid framework to engage in open discussion on the dynamics impacting companies’ tax accounting and reporting this year-end.
Seven steps to take now to accelerate tax accounting work ahead of the year-end close cycle
Many elements of the year-end tax provision can be concluded well before the end of the year. This year, businesses should consider taking steps to pull work out of the year-end close cycle, to reduce stress and risk related to remote work. Below are a few tangible steps that can be taken now:
- Develop a year-end close calendar and align expectations, communication protocol, and timing with your external auditor.
- Address changes in personnel and roles and responsibilities to avoid gaps in processes and controls.
- Complete the analysis of any COVID-19 impacts on your business.
- Complete a technical analysis of tax law and regulatory developments.
- Complete provision-to-return calculations, including confirming applicable tax rates, substantiating deferred tax balances and analyzing deferred tax asset realization.
- Complete a technical analysis and tax accounting for any significant transactions.
- Complete analysis and documentation of transfer pricing.
Evaluate and account for the tax accounting impact of newly adopted accounting standards and interpretive guidance.
Future articles will offer additional questions on topics likely to shape an active 2021 again for tax.