final sponsored
2019 was a year for exploration—discovering broken financial processes and implementing solutions to help build a better business for your clients.
Now, as we look to 2020, what are the anticipated trends of our ever-evolving industry? And how do we tackle the increased complexity of global tax compliance?
The Future of Tax Compliance
As we’ve seen in recent years, the IRS is requiring greater compliance to report payments made to foreign entities. In response to this, the U.S. government has complied in full by hiring and training over 3,000 IRS examiners with process verification and tax audit efforts.
Because of this, we’re now seeing an increased burden on the accounting staff with new layers of complexities, paperwork, and management. In the past, many companies might have forgone streamlined processes in the hope of not being audited. However, today, this cavalier attitude can not stand. It only takes one compliance failure to cause an issue, and it’s only a matter of time before disaster strikes.
The 2020 Trends in Global Tax Compliance
1. Increasing Focus on Audit Preparation
While the IRS has indicated that they are abandoning a form-driven audit approach in favor of focusing on the substance of transactions, it still hasn't materialized. Instead, audits are still about ensuring that all information is complete and accurate—what IRS examiners are looking for is pristine forms. And, if your clients are facing an audit, it’s essential to be prepared.
First, select a sample of your company's tax documentation and review it alongside your vendor contracts or statements of work. Based on the documentation you have, make sure that the withheld amount is correct. Next, verify that you’re making timely deposits for withholding, and then review any payment and withholding reports.
Finally, verify that all tax forms used proper coding. Previously, the IRS did not impose any penalties as long as income and tax amounts were reported correctly on the 1042-S form. Now, things have changed—the IRS is prioritizing improper coding and issuing massive penalties for inaccuracy.
2. Navigating Complex Tax Reporting Challenges
Especially when it comes to withholding, US agents are ONLY following the withholdable payment—a payment of US-source fixed, determinable, annual, or periodic (FDAP) income.
Here’s a real-world example, imagine you're making an interest payment to Apple Inc. General knowledge is that Apple is a U.S. corporation, but let’s assume you don't have their W-9 on file. In this situation, the IRS will have to presume that Apple is a non-participating foreign financial institution, which is a non-compliant taxable entity. In that case, the IRS would have to impose 30% withholding, simply because there is no other documentation to prove otherwise.
And that doesn’t even touch the FDAP payment exceptions.
Most payment exceptions apply to standard Accounts Payable functions. Effectively connected income or non-financial payments, like services, rents, and royalties, do not require withholding. But payments such as interest, dividends, and bank fees could be defined as withholdable. Some organizations might manage these complex compliance rules through a third-party, but a small payables operation might find greater efficiency with a software-based solution.
3. Optimizing Operations with Automation
Complicated compliance is increasingly problematic for growing global businesses. Even with adequate training, the logistics of communicating with individual suppliers (including international ones) can be cumbersome and fraught with error. One solution is to enable payees to input their tax data through a supplier portal and store content digitally.
In 2020, we'll see an increase in intelligent software being implemented to collect tax details digitally. These solutions will provide a guided interface that asks suppliers a series of questions about their status—leading them to the correct form by leveraging over 1,000 different rules. From there, the forms are then digitally completed by the payee. These solutions will be directly integrated with the payables process and will have the ability to calculate withholdings and automatically deduct the amount from the payment based on the suppliers’ country, according to their tax form selections.
The future of finance is ever-evolving—the tax code is always altering, and IRS requirements may follow suit. Streamlining your operations is the key to ensuring optimum flexibility so that you can continuously adapt to new changes.
2019 was the year of removing the burden of broken processes from finance professionals—2020 is about optimizing those solutions to move your clients toward global success.
The end of the year is coming. Hear from the experts at KPMG LLP on creating compliant processes for handling tax requirements when dealing with domestic and international suppliers as you close out 2019 and head into 2020.
In this webinar, Laurie Hatten-Boyd, Principal at KPMG LLP, will explain how tax requirements impact organizations with global supplier bases and the legal and financial penalties for non-compliance.
Register now to learn how to master:
- IRS tax rules as they relate to paying global suppliers (including Chapter 3)
- Steps for avoiding legal and financial penalties
- Conquering complex W8 and 1042s situations
- Ensuring proper withholding
Register for the Webinar “Hot Topics for Global Tax Requirements in AP: Featuring KPMG.