From a tax department point of view, robust entity management is vital. Across all your legal entities you will want to perfect your tax strategies and ensure that you are optimizing your approach, without risking breaches of regulatory requirements.
Your corporate structure plays a key role in your entity management efforts, particularly when planning effective tax strategies, ensuring they meet with regulatory requirements or supporting transfer pricing. Being able to clearly visualize your corporate structure enables you to make better decisions across your organization, but particularly in relation to your tax planning.
This article explores how dynamic chart structures can solve corporate structure roadblocks and why that’s so vital for tax departments. Let’s dive in.
Why is Having a Clear View of Corporate Structure Important to Tax Departments?
There are several reasons why tax departments need a clear and comprehensive view of corporate structure.
The Importance of Corporate Structure for Tax Strategies
Pre-2008, tax strategies were all about financial efficiency – structuring your organization to make the most of the legitimate tax loopholes and havens that existed.
Following the global financial crisis, there was a cultural shift, as public opinion turned against the perceived ‘profit at all cost’ mentality of the financial sector. Today, more than 135 countries are collaborating to put an end to corporate tax avoidance strategies as part of the OECD’s (Organization for Economic Cooperation and Development) Base Erosion and Profit Shifting project (BEPS).
Whether you’re managing local or international entities, you need to ensure – firstly – that your organization is structured to meet regulatory requirements as well as to optimize your tax efficiency. Undertaking a tax restructure can ensure your organization is set up to capitalize on favorable tax regimes in certain countries – but you need to make sure that however you are structured, you’re compliant with the new, stricter regulatory landscape.
Then you need to be able to evidence your approach should any auditor or regulator investigate. Having complete, accurate and easily-accessed data relating to your various legal entities underpins this. Successful legal entity management, that enables you to minimize the risks in your legal entity structures, is dependent on a clear comprehensive and up-to-date picture of your corporate structure.
The Role of Accurate Corporate Structure Data in Transfer Pricing
Transferring goods, services and intangible assets between companies in a multinational group is a popular approach for achieving tax savings. According to the Tax Justice Network, over a third of international trade takes place within corporations, rather than between different companies.
These intra-company sales make use of legitimate tax optimization techniques to avoid paying more tax than necessary. This is done by selling goods or services to a company in their group that’s based in a jurisdiction where less tax will be applied to the profit made – and are above-board.
They do, though, come with some potential pitfalls:
- If the transfer is between countries which are both OECD members, the price must be set fairly, as if the two companies were unrelated. If the transfer price appears to have been set unreasonably low, or if there is any suspicion of transfer pricing manipulation or fraudulent transfer pricing, you will potentially fall foul of regulations.
- You need to ensure you get the location for your transfer right. In some cases, this will be obvious – it’s usually a territory where the business wants to achieve sales, and where the corporate tax incurred will be less than if the sales were made direct from the parent company. Ireland – with its low rate of corporate tax (just 12.5% compared to 35% in the USA) – is a popular choice for US corporations to transfer to.
In other cases, the choice of location will be more specific to your business; a strategic decision based on your goal of optimizing your tax outlay.
Getting transfer pricing right demands that corporations have access to certain essential information – the data that will give your tax, legal, treasury and compliance teams the insight they need to decide on the best location and price for your internal sales, and to determine whether any restructuring is necessary to achieve your aims.
How Dynamic Structure Charts Can Help
Capturing information on all your various entities and diagramming the relationship between them is an effective way to see what your current structure looks like, where entities are located, where there are any gaps or duplications, and where you may fall short of regulatory requirements.
The next evolution of entity diagrams and organizational charts is the dynamic structure chart. A dynamic organizational structure chart can support your decisions around tax strategy and planning by:
- Identifying the impact of any M&A activity on regulatory compliance or tax liabilities
- Highlighting potential shareholder dominance issues
- Clarifying management structure
- Enabling you to identify opportunities for greater operational efficiency
- Helping you to better plan
Dynamic structure charts make this possible by:
- Storing your corporate record in a secure cloud that enables you to interactively visualize your corporate structure
- Creating a single, audit-ready source of truth to highlight subsidiary-related information, such as ownership and structure, which can support effective decision-making
- Grouping different subsidiaries by function, or revealing each legal entity’s ownership structure in detail according to any manner of data, including tax status, voting rights, shareholders, participation, and interests
- Making your structure data a ‘living’ source of information, linking your structure chart to all available information and giving your team, as well as the compliance and legal teams across your business, the data they need at their fingerprints
Using Dynamic Structure Charts to Inform and Support your Tax Department
Being able to clearly visualize the corporate structure makes it easier to make informed decisions about your organization. Diligent Entities, our market-leading entity management software – now includes brand new dynamic structure charts that allow you to do just this, providing the single source of truth you need to support your tax efficiency strategies. Find out more and request a free demo on our website.