Multinationals are challenged by changing tax laws, accounting practices, valuation methods and penalties as administrations around the world clamp down on tax avoidance

1. TAXES
Introduction
Multinationals are challenged by changing tax laws, accounting practices, valuation methods and
penalties as administrations around the world clamp down on tax avoidance. The emerging
scenario is an opportunity to improve efficiencies by simpler accounting, institute internal controls
and better documentation to prevent audits. Global consulting companies are a window to the
best practices that can guide tax compliance in this world.
CORPORATE TAX COMPLIANCE
I ntr oduc ti on : Multinational companies are expected to narrow the hiatus in the reporting for
corporate tax and financial statements to comply with emerging regulatory mandates for greater
transparency.
Body: Multinational companies are adapting to new accounting standards, issued by a variety of
regulatory bodies, for the purpose of narrowing the differences in pre-tax income reported for tax
compliance and financial reporting purposes. Tax compliance and financial statements each
have, historically, had their own standards reflecting the purpose they serve. The data for them
has also been housed in different IT systems. Going forward, multinationals will invest in a time-
consuming and elaborate process of developing applications that will help to convert financial
information into equivalent tax reporting data. This will begin with reporting all worldwide income
of US multinationals in US GAAP before it is converted into income for tax purposes. The tax
liability is then attributed to legal entities overseas after adjustments have been made for their
legal status. The US corporate tax liability is determined after taking into account the relevant
foreign tax credits. Nair and Co assists US multinationals with knowledge of international
accounting standards and expertise in process change before they successfully make this
transition.
VALUE ADDED TAX (VAT) / GOODS AND SERVICES TAX
(GST)
Introduction: Multinationals should design a global internal control system, controlled from a
single point, for compliance with VAT / GST laws across the entire supply chain.
Body: Multinationals deal with several jurisdictions, within and across countries, for their
compliance with VST / GST as these taxes are levied on the incremental value added across
several geographies. The adoption of VAT / GST has grown worldwide (outside of the USA) as
Governments recognized the cascading or the compounded effect of tax paid on the after-tax

2. value of inputs on final goods prices. The processes for VAT compliance span the entire order-to-
cash and purchase-to-pay cycle; an error at any on stage could trigger an investigation, an
assessment and possible penalties. An overarching control system with visibility into the entire
supply chain, adapted for the laws of each jurisdiction, will help to detect errors before they have
a material effect on the finances of the company. The reconciliation of the billing data for VAT
with the accounting information of companies helps to uncover any latent risk from errors in tax
compliance. Such a system is best designed from a single point, equipped with a database of
laws of each jurisdiction, and authority to institute and test controls for effective compliance with
the VAT / GST laws. Nair and Co assists in building a centralized system for compliance with
VAT / GST.
EXPATRIATE TAXES
Intro: US Multinationals deal with the added complexity of compensating their expatriate
employees for increasingly higher taxes which apply to US nationals and permanent residents on
their overseas income.
Body: US nationals and permanent residents pay taxes on their worldwide income regardless
of its geographical source. Overseas income and housing expenses up to a threshold are
excluded. US expatriates are also entitled to credits for the income taxes they pay overseas.
However, credits for payroll taxes are available only if tax treaties specifically provide for them.
Foreign governments are also prone to tax allowances expatriate employees receive as
compensation for higher living costs in overseas locations. In recent years, the effective tax rate
for expatriates has trended upwards as a higher applicable rate is applied based on the entire
income including all housing expenses instead of the excess over the tax exempt threshold level.
In addition, housing exclusions have been reduced. Multinationals can lower their costs of
compensating their employees for higher taxes by taking advantage of special provisions under
treaties signed with specific countries. They can also choose tax equalization plans over tax
protection plans for compensating their employees. Tax protection plans compensate for higher
taxes in some countries and let employees keep the benefit of lower taxes in others. Tax
equalization plans are designed to equalize the effective tax rates for all employees across the
world. Multinationals will offset the higher costs in some countries with the lower costs in other
countries. Nair and Co can bring its vast knowledge of tax regimes around the world to minimize
the tax related costs of compensation.
PENALTY MITIGATION
Intro: US Multinationals face a higher risk of penalties as expanded adoption of VAT increases
the probability of an error. The tax administrators have been granted recourse to books of

3. companies which they could find to be inaccurate from a tax compliance perspective. Disputes
over valuation of traded goods and services for transfer pricing are more likely.
Body: US Multinationals have to pay inordinate penalties for non-compliance with VAT
regulations besides interest on delayed payment for understated taxes. Since VAT is charged at
several stages of the supply chain, the jurisdictions and their tax rates change as well as the
person responsible for the tax liability. The likelihood of error increases especially if companies
don’t have automated systems for compliance. Failure to register for VAT compliance, delays in
payments or understated taxes can attract huge penalties. US multinationals have to also report
any of their overseas activity of any kind, whether a minority investment, an overseas bank
account or a subsidiary, to avoid penalties regardless of their tax liability. As tax administrators
gain greater access to the books of companies, prepared by accountants, they are more likely to
find them incorrect from a tax compliance perspective. Similarly, disputes over the valuation of
the traded goods and services increase the risk of penalties. The key to mitigating the risk of
penalties is incontrovertible documentation and the reputation for preparing it. Nair and Co can
help multinationals realize this goal.