In its most recent report on trade restrictive measures, the World Trade Organisation called on governments to “resist protectionism and get trade moving again.” However, with protectionism present in many countries around the world, this aim is difficult to adhere to. Britain’s decision to leave the European Union and the rise of economic nationalism in the USA are the most eye-catching developments in a new creeping deglobalisation.
For outward looking businesses, however, there is no turning back the clock. Deglobalisation is just one more business challenge to be confronted in the hunt for international growth. This challenge is particularly acute for middle market businesses who lack the scale to invest in large compliance teams, but have the agility to adapt more quickly than large corporates.
It is against this backdrop that MNC asked RSM’s tax experts to contribute to their latest tax complexity survey. Tax complexity is a serious issue that middle market businesses need to tackle. Craig Cooper from RSM Australia stresses that they “have every right to be concerned at the increase in international tax complexity – but currently it remains in prospect; it is the calm before the storm; the typhoon has not yet made landfall.”
The sources of tax complexity differ around the world. Ross Wilkinson, RSM UK said: “There is undue anti-avoidance, with tax case law overlaid with targeted and general anti-avoidance provisions (UK and new EU tax Anti-Avoidance Directive) and anti-abuse regulations, plus a lack of clarity over the breath and practical application of such legislation.” Mr. Wilkinson holds that “tax complexity is a business inhibitor in the UK and adds compliance costs to businesses.”
Similarly, as Dave Kautter from RSM US states, “the primary source of tax complexity in the U.S. is the sheer volume and intricacy of the tax statutes and implementing regulations. It is estimated that the federal tax statutes contain nearly four million words and the implementing regulations another five million.” According to the National Taxpayers Union, individuals and businesses spend more than 6.1 billion hours meeting their annual federal obligations.
The audit process is also a source of complexity. According to RSM experts, Australia and Kenya have implemented relatively transparent audit processes. However, Paulo Melo from RSM Brazil argues that recent changes to audit processes in that country have made it more efficient: “In the past, audits were isolated, had a retroactive focus and relied on manual conference of documentation. Now, however, audits are mainly made on a remote basis and have a more integrated data flow.”
However, while these tax professionals are working in different markets, under different conditions, their advice was the same – collaborate.
Mr. Kautter highlights the importance of collaborating and maintaining relationships with tax professionals in order to avoid problems: “As a result of this complexity, middle market businesses need to maintain proactive relationships with trusted tax professionals to avoid potential issues – and, if one is audited, to try to reach a common-sense understanding with the local IRS examiners as to the appropriate priorities for a reasonable examination.”
Meanwhile, Mr. Wilkinson highlights another angle to this collaboration, co-operating and aligning commercial drivers with business needs: “Against this backdrop of complexity, it is fundamental to align tax compliance and planning with underlying commercial drivers and needs within the business. A robust defence to tax authority challenges for businesses is for tax management to be guided solely by commercial decisions. It is perhaps an old phrase, however, I believe it remains at the core of being able to navigate the UK’s labyrinthine tax regime that the tax tail should not wag the commercial dog”.
On this view, Mr. Cooper agrees: “Tax complexity (and increased tax related costs) should not dictate where and how business capital is deployed.”
In sum, collaboration makes co-operation much easier. In order to navigate the complex tax environment, middle market businesses should keep tax top of mind but not make businesses decisions solely based on tax issues. Businesses should identify markets that are best for their needs, now and in the future. It is about finding a balance - marrying business needs and capabilities with tax regulations.