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Compliance challenges abound as taxpayers cope with new law

Corporate tax base facing changes at all levels

Dave Petrocchi, CPA, J.D. | April 2019 Footnote

The Tax Cuts and Jobs Act (TCJA) takes full effect this year, and there is still a lot more work to do.

Despite the assurances of Congress when it unveiled the TCJA, the reality is that U.S. tax reform has not made taxes simpler. The corporate tax base is facing changes at the state, federal and international levels.

These changes are even more complicated in Minnesota because legislation intended to conform the state’s tax laws to the TCJA was vetoed by the governor in May 2018. As a result, Minnesota-based companies need to perform two separate determinations of taxable income. Minnesota is not alone in its lack of conformity, so those businesses filing in multiple states will see additional complications.

Another example of one of the many changes that will increase the compliance effort is the requirement that U.S. shareholders of a controlled foreign corporation (CFC) must include gross income in their global intangible low-taxed income (GILTI), regardless of whether the earnings are repatriated back to the United States. This new requirement will require additional information gathering.

Collecting such information creates a dramatic compliance burden as companies face new resource and data challenges. Compliance efforts could increase anywhere from 25 percent to 100 percent for most businesses, according to EY estimates, and this is especially true for multinationals.

A new normal

The TCJA has created a new normal for businesses as they strive for compliance. During a November 2018 EY webcast poll, we asked more than 2,200 executives about how they are getting ready for the new compliance challenges associated with tax reform. Slightly more than one-third had taken action to implement changes in systems, processes and resources to comply with the new provisions, while nearly half were still assessing what may be required.

Faced with these compliance challenges, businesses need well-trained resources who understand new forms, disclosures and calculation limitations. Of our survey respondents, 32 percent were primarily concerned about just having enough resources, and 23 percent were focused on providing adequate training for their people. For multinational companies, their tax professionals need to perform annual taxable income calculations for every non-U.S. entity. This increased complexity can also extend to state and local tax compliance.

On the technology side, companies are finding that this new normal is well-suited to automation and better data management. These are essential because manual processes cannot support the multiple calculations and necessary filings while maintaining audit-ready workpapers. In fact, 15 percent of our respondents were looking most closely at technology and process changes, and 26 percent were focused on improving their ability to access the required data. Global compliance and reporting processes will need better connectivity among data sets, and new processes will need full documentation to address control risks.

A time for change

The evolving tax landscape has created an opportunity for companies to transform their tax function. The onslaught of tax changes and a continuing mandate to do more with less are prompting tax departments to explore previously untapped capabilities of their enterprise resource planning (ERP) system, optimize it to be more tax-sensitized and develop more direct bridging into tax software.

Rethinking the use of a company’s ERP system, including the role of automation and other technologies, requires tax functions to think about how they’re handling data. Once they collect the right data and confirm it’s ready for use, the data can be fed more easily to planning tools and tax software.

To that end, tax departments need to concentrate on what they can do: Update their information requests to other departments so they’re collecting the required data. With so many changes underway, a tax function can’t reuse last year’s information request. This is also a great time to consider how processes can be improved and made more efficient. What can be done differently to better use technology and reduce the manual touching of data?

Questions to ask

As companies grapple with the changes wrought by tax reform, they will need to look at compliance holistically, considering IRS federal form preparation and filing, the full scope of the U.S. federal and state compliance burden, and the underlying mechanics — new and expanded data requirements, systems, processes and computations.

A holistic effort should consider the following:
  • What data will you need for compliance with state, federal and international reporting?
  • Can your data providers supply what’s needed?
  • Do have enough people with the training, skills and time needed?
  • Have you updated work plans for the additional effort, interdependencies and deadlines?
  • Are your systems able to gather and organize data effectively?
  • Have you updated standard templates for new requirements?
Answering these questions can help companies hit the ground running as they begin gathering information in
earnest. Tax reform and its compliance challenges have opened the door to a revitalized tax function that embraces new ways of thinking. By gaining a better understanding of data requirements and processes, tax departments can become a more strategic partner in the business and be better prepared for future changes. 
Dave Petrocchi, CPA, J.D. is the Upper Midwest tax market leader for Ernst & Young LLP. An MNCPA member, he is a global tax coordinating partner with more than 25 years of experience serving both privately owned and publicly held companies in a variety of industries, with a concentration on multinational consumer products, retail and manufacturing.