Enhance Tax Efficiency with Quantitative Analysis Technology

Modeling tax scenarios using quantitative analysis tools in addition to automating and streamlining data gathering and computational processes can reduce risk, support decision making, and help validate savings opportunities for multinational businesses.

After the 2017 Tax Cuts and Jobs Act, U.S.-headquartered multinational enterprises (MNEs) doing business in multiple jurisdictions started facing more complex and wide-reaching tax rules than ever before.  Compound those complexities with the continuous changes across the world including the OECD Pillar Two framework and its gradual adoption in many non-U.S. OECD member countries, the tax landscape is at its most complex level ever.  What is more, planning opportunities that reduce taxes in one or more jurisdictions can often trigger unintended tax consequences elsewhere. 

Regardless of where business is conducted or in what legal form, or in which jurisdiction the business is organized or headquartered — companies that operate both within and outside the U.S. should take note: The potential quantitative impact of tax planning for cross-border businesses is not intuitive.  What could be thought of as tax savings opportunities could prove detrimental or end up being neutral when considering a multinational enterprise’s total tax liability.  Having the ability to nimbly, quickly, and reliably estimate the full quantitative impact of transactions, acquisitions, dispositions, planning, or operational decisions is of the utmost importance to the tax function.

Consider this scenario: U.S.-headquartered MNEs will often look at options for restructuring their global value chains (how their operations are divided into separate activities and where those activities are conducted) to address economic, regulatory, or other business requirements or changes. In doing so, businesses may want to locate activities in countries with low tax rates or that have attractive tax incentives — however, businesses must also consider the potential tax consequences this may have in the U.S. and other jurisdictions in which the business operates. Often times, the downstream negative tax consequences may include incremental taxes created by anti-deferral regimes, foreign tax credit limitations, interest deduction limitations, and/or the potential imposition of a Pillar Two top-up tax.     

How do tax leaders enable reliable tax planning forecasts in the midst of this complexity? Technology can help. Using a robust quantitative analysis tool like BDO’s International Tax Horizon  can help tax leaders identify potential tax issues, opportunities to reduce an organization’s total tax liability, and areas where streamlining and standardizing processes may reduce costs.

Overlapping Rules Complicate Tax Planning for Multinational Businesses

Aligning business operations in the most tax-efficient manner possible while at the same time meeting business needs and goals is a tax leader’s main objective. For multinational businesses, this is complicated by complex tax rules and regulations, as well as disparate tax laws and policies of multiple countries that often unexpectedly overlap. These overlapping areas may include:

• Anti-deferral and anti-base erosion regimes, which are intended to prevent controlled foreign companies from shifting certain types of income to jurisdictions with lower tax rates. In the U.S., these regimes include subpart F, global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT), and others. Many foreign countries also have anti-deferral regimes.
• Minimum taxes, limits on deductions, and other rules implemented by countries that adopt the OECD’s base erosion and profit shifting (BEPS) initiative and similar initiatives in the European Union. For example, the OECD’s Pillar Two framework sets out complex rules that aim to ensure large multinationals pay a minimum tax rate of at least 15% in each jurisdiction they operate.
• Taxes imposed on related party transactions such as payments of dividends, interest, royalties, etc., which can negatively impact treasury operations and cashflow management.
• Rules governing tax attributes, including the computation and utilization of foreign tax credits, net operating losses, and research and development credits.
• Indirect taxes such as sales/use, VAT, and trade taxes, which may be impacted based on changes to supply chain structures, transfer pricing policies, and other factors. 
• Taxes imposed by states and localities, which vary in their approaches to taxing income earned abroad and can often be overlooked. 

With global tax policies evolving, tax leaders must analyze and model potential changes and planning scenarios (including changes to growth forecasts and profitability levels) with a holistic tax lens. 

Using Quantitative Analysis Technology Can Help Drive Strategic Value

According to BDO’s Tax Strategist Survey, tax teams are looking to new technology to enhance efficiency and elevate strategic insights. By adopting a total tax liability approach, strategic tax planning that uses integrated quantitative analysis technology and begins early in the business decision process can add value to any business growth initiative, such as:

• Acquisitions, divestitures, and other reorganizations (including IPOs), where tax impacts can influence the structure of the transaction, where to place debt, and whether to treat the exit event as a stock or asset sale.
• Post-acquisition business integration, as part of which tax can play a strategic role in capturing postmerger synergies to enhance free cash flow.
• Expansions into new geographies, products, or services, where tax can inform on which incentive programs or jurisdictions are most aligned with expansion goals.
• Value chain management, the tax impact of which is driven by the location of intellectual property and other factors.
• ESG strategy, by aligning ESG goals with the overall tax structure.
• Other business initiatives, such as operational efficiency, workforce, and digital transformation strategies.

BDO’s Quantitative Tax Services use Horizon 

Tax teams need access to quality forecasting and planning technology that is reliable and integrated. BDO’s comprehensive and dynamic international tax modeling tool, International Tax Horizon, is used by BDO tax professionals when providing tax compliance, forecasting, and planning services and gives multinational businesses a comprehensive view of their international tax profile with an emphasis on U.S. calculations. Horizon gives dynamic and real-time visibility into key tax calculations, such as Subpart F inclusions, GILTI, foreign tax credit eligibility and utilization, foreign-derived intangible Income (FDII), and Section 163(j) limits. Horizon can help manage tax risk by allowing tax leaders and their teams to better: 

• Visualize the components of their organization’s total tax contribution and effective tax rates under current state as well as potential planning scenarios.
• Understand the triggers that impact their organization’s tax liabilities, including the effects of projected business growth.
• Identify issues and highlight beneficial tax elections and other planning opportunities.
• Drive process efficiencies by facilitating an organized approach to gathering data and other key information from the wider tax, finance, and business teams. 
• Communicate the tax impacts of business decisions and policy shifts to the C-suite, finance and business management, directors, and other stakeholders — resulting in greater tax transparency.