Business-to-business transactions: more than a zero-sum game
David Brightman is chief marketing officer at BlackLine, a software company that develops cloud-based services that automate the financial close process. He is also a Chartered Accountant with the ICAEW. The views are those of the author.
Most organizations view business-to-business financial issues as a zero-sum game because they buy and pay themselves. A common analogy is moving money from your left pocket to your right pocket.
In reality, it’s not that simple. For multinational corporations managing millions or billions of dollars in intercompany charges, various complexities (process, tax, and regulatory) can disrupt business performance. Reduced operational productivity, tax leakage, and shrinking statutory positions are just a few of the costly challenges arising from intercompany issues.
This article explores a new approach to these issues called intercompany financial management (IFM) that multinational corporations are using – or should consider – to automate and better manage their intercompany financial transactions.
One of the most pain points of business-to-business invoicing is the process itself, which is undeniably manual and risk-laden. Organizations that grow globally can’t afford to be wrong. Among business-to-business professionals recently surveyed by Dimensional Research, 43% said they were at risk of an SEC investigation and 38% said the potential for tax penalties negatively impacted their overall business results. .
When organizations have individual entities based in multiple countries, and all of these entities interact, accounting and the tax landscape quickly becomes complicated. Although tax laws vary widely from one country or region to another, they also vary depending on the type of service rendered, and tax authorities expect internal transactions to be treated with the same rigor. of design and the same due diligence as transactions with unrelated parties.
Increased scrutiny by jurisdictional authorities puts increased pressure on multinationals to move up the fairness scale and towards greater financial transparency regarding the composition of underlying costs. For many, business-to-business transactions are already huge, with total dollar volumes representing a factor of 10 or more of external revenue. With the rise of cross-border mergers and acquisitions (M&A), financial organizations need to quickly and accurately connect the different strands of business-to-business transactions through a spaghetti-like architecture.
Avoid taxes, pricing errors
Failing to properly manage business-to-business transactions means that a business might not spot transfer pricing surcharges occurring on the same load due to the nature of the pass-through of the load, resulting in double transfer pricing surcharges, even triple. Or a flawed process could lead to base erosion and an anti-abuse tax, known as BEAT, a punitive tax in the United States simply because an entity outside the country does not know that such a taxes exist or how to avoid triggering them.
While it’s common for global companies to consolidate intercompany costs in one country and then allocate them to the relevant entities, this approach can result in a 10% BEAT tax in the United States. On a $1 million transaction, the resulting $100,000 penalty might not immediately attract attention. But if this happens over multiple transactions, the costs can get quite high.
Monitoring the intercompany function allows a company’s finance managers to spot these rising costs and modify the process to avoid BEAT penalties and the costly loss of a tax deduction.
Automate for a clean close
IFM is a new and holistic approach that extends further within finance. By combining business process reengineering with technology, IFM integrates, orchestrates and automates cross-functional business-to-business processes and transactions. It is designed to avoid damage during the critical closing period by clearing intercompany balances in real time while reducing compliance and tax risks globally.
Companies can now automate the intercompany reconciliation equation and reduce up to 90% of valuable accounting hours on financial close processes. They can also improve operational efficiency by unifying and optimization of inter-company accounting, supplier invoicing, tax enrichment, reconciliations, settlements, and journal entry reservation.
While accounting is an obvious benefactor, tax, FP&A and treasury workloads are now optimized. Tax teams can stay abreast of increasingly complex tax and regulatory environments on the horizon while increasing indirect tax deductibility, minimizing tax leakage, and strengthening tax compliance and defense.
The intercompany represents, on average, nearly 50% of a company’s total cash. The opportunity is ripe for leaders to take action to gain real-time visibility into cross-country clearing rules for settlement and significantly improve liquidity. JThe opportunity is ripe for leaders to take steps to gain real-time visibility into cross-country clearing rules for settlement and significantly improve liquidity.