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I have often seen many multinational organizations quoting the increase in top-line figures as an important indicator of growth for a company. Often the management forgets to focus on the bottom line (profits) and something that is below the bottom line (i.e.taxes). While you as an organization is growing at a fantastic pace in terms of your sales, you may be bleeding in cash flows by contributing more than necessary to the government treasury in taxes and thereby leading to direct impact on the shareholder’s retention or earnings (EPS).
Here are top 5 best practices for an MNC to follow to manage their taxes and tax risk to avoid surprises (jurisdiction agnostic points)
- Treat your tax manager/ director as a salesperson: Your tax manager is an important asset in your organisation’s ecosystem. It is often said that a 1% saving in taxes is equivalent to the effort of salesperson for a 30% increase in the sales. Tax savings does not mean avoidance or evasion of taxes. Savings means legitimate tax planning as provided by the law along with the prevention of any tax leakages, which may make an organization to pay more than required taxation in terms of percentage. For example an organization is required to pay 30% in taxes on the profits, however, it pays 35% due to certain disallowances which heavily impacts the cash flow of the organization. Keep taxes under control by recruiting the right tax brains and setting the right expectations.
- Compliances on priority: With increasing transparency, digitalisation, exchange of information, a non-compliant MNC would not have a greater future in the business. If you want to be in business for a long-term, adhere to the laws of the land and respect it to the T. Non-compliances are like roadblocks and potholes on a highway of doing business. It is a call to take how would you like to navigate through the journey of business. Mitigate risk, comply and plan is the best way forward.
- Transfer Pricing: 70% of the business is now cross-border. You need to take your transfer prices under control. Use Transfer Pricing as an efficient supply chain management tool, so that as a management you understand where your business creates value and how much taxes you pay globally. The right level of taxes for the right level of value creation. Use planning in the global tax arena to take benefit of different tax regimes with absolute substance. The absence of planning in transfer pricing could lead to double taxation at various levels in your MNC business. Mismanagement in transfer prices is considered as one of the topmost concerns for global Boards.
- Business with substance: Undertake business only with substance and with a proper legal form. Gone are the days where one could use tax havens and only legal structures to back up business logic. Business has to follow strict substance and bonafide purpose. One cannot have tax reasons for doing certain business transactions.
- Do not fall prey to Tax Advisors gimmicks: Kindly remember that tax advisors are available for the Company’s benefit and to provide clarity and thoughts on certain areas of tax practice. Due to increased competition, the tax advisors have become salespersons with targets, thereby selling various schemes and tax structuring ideas which could put the company into taxation risk and long drawn future litigation, which would again benefit the advisors, as they have a tax, legal representation arm. Beware of such tactics, as such advisory ideas come with a long list of disclaimers. Everything that shines is not gold. Use your analysis and risk mitigation thought process before you engage into any taxation innovative ideas and schemes.
There could be many more practices, which could be treated and amongst the best for an MNC, however, it depends on the industry that you function, the country that you operate and the management that drives the company. The above mentioned 5 aspects are a key or basics to the current environment of taxation.
In case you have any further thoughts, you may like to contact the author.
CA. Akshay Kenkre