Compliance and reporting outsourcing in Russia
Russia continues to be a priority market for many multinational groups (MNE) and remains one of the most profitable markets in the world for Western investors. Yulia Timonina and Karina Arakelyan of EY describe the trends in compliance and reporting and how they affect Russian taxpayers.
A recent corporate survey showed that 35% to 40% of MNEs still plan to increase their investment in Russia (CEEMEA Business Group Corporate Survey, April 2014). Now more than ever, MNEs operating in Russia need a high level of control, transparency and responsibility in respect of compliance with domestic regulations relevant to financial and tax reports.
Global trends in compliance and reporting
In the context of the continuing trend towards globalisation of businesses, MNEs are facing increasing complexity in dealing with and conforming to reporting requirements across numerous regions.
One of the key tasks for financial and tax administration personnel is ensuring compliance with relevant laws and requirements when preparing and submitting reports to avoid disputes over the complete and accurate presentation of a company's financial position to local supervisory and inspection bodies.
Governments continue to pursue day-to-day legislative change and tax reform at a national level. Additional layers of complexity are added as governments strive to balance tax competition with raising sufficient revenue to fund ongoing spending commitments. The effective deployment of tax function resources within MNEs may be even more important than their overall number. The divide between current and future tax-risk management models will not be easy to bridge. Enterprises will need to flawlessly execute a well-thought-out, well-resourced strategy and at the same time remain flexible enough to deal with today's changing economic and tax environment.
Many companies take it upon themselves to prepare reports meeting the requirements of the particular jurisdiction in which they operate, or hire different consultants in each country of operation, which affects the optimisation of internal processes and controls within companies and gives rise to additional costs and inefficiencies.
EY surveyed more than 200 finance and tax executives from Fortune Global 500 and Forbes Global 2000 companies on the subject of compliance with legislation in preparing and submitting reports. The purpose of the survey was to identify the main approaches taken to organising the process of preparing and submitting reports, including:
Corporate tax statements
Statements for indirect taxes
Financial accounting and reporting
Tax accounting and calculation of tax provisions
Most of the respondents indicated that the historical approaches they have taken to the organisation and preparation of financial and tax reports in countries in which they operate are inadequate in the current tax and financial environment. For example, 64% of respondents pointed to unplanned tax audits and 45% to unexpected tax assessments.
Furthermore, almost two thirds of respondents stated that changes to regulatory requirements will lead to serious problems in the reporting process. A more rationally organised, efficient and controlled reporting process in accordance with the requirements of the jurisdictions in which companies operate might help reduce these risks and unforeseen expenses.
Significant changes in the global tax environment, such as, for example, those suggested in the OECD's BEPS action plan, as well as continuing amendments made by individual jurisdictions to their local legislation, are resulting in an environment where local tax authorities are increasingly focused on the collection of tax payments and the exchange of tax information with other jurisdictions. Financial, reputation and business risks related to taxes, compliance and reporting significantly increase in this new environment.
At the same time, in financial terms there is a trend towards reducing or redistributing in-country financial resources which have traditionally supported local reporting processes in favour of global or regional centres. These cost-reduction measures may expose companies to additional tax, compliance and reporting risks locally, since local-country resources are vital to successful compliance with tax and regulatory requirements (as indicated by 64% to 78% of survey respondents). Moreover, insufficient resources to cover the tax function are cited as the primary source of operational tax risk by three fourths of the respondents of the EY 2014 tax risk and controversy survey.
To balance both financial and risk management needs, companies have been searching for a new approach to the management of compliance and reporting worldwide. Many companies surveyed have outsourced (partially or fully) one or more of their compliance and reporting processes or intend to do so in the next few years. To make the approach both effective and successful, companies are developing new ways of partnering with outside providers to ensure that key skill sets are available in-house, whilst the expertise, know-how and scale of outside service providers are accessed where appropriate. The survey showed that companies that use outside service providers for one or more compliance and reporting processes have found this effective in achieving many key elements of efficiency, control and value.
Increasingly, companies realise that they must transform compliance and reporting to deliver greater efficiency, control and value and to mitigate risk in an increasingly global and sometimes hostile tax and regulatory environment. Companies are increasingly using the experience of internal purchasing specialists worldwide to secure a higher standard of services from such global service providers. This is often done by co-ordinating and signing contracts which cover multiple countries and in many cases by concluding global-level agreements.
Russia: Response to global trends
Russia makes ongoing efforts to create a more transparent and effective business environment, but the Russian tax and legal system remains complex. The pace of regulatory and tax change is accelerating, significantly impacting companies' compliance and reporting requirements in Russia as well as the level of tax-related risks for companies operating in the Russian market.
Following a trend of increasing integration into the world economy, Russia is, in many aspects, in line with global trends in the area of taxation. For example, two of the top three tax-risk areas named by worldwide respondents of the EY 2014 survey – transfer pricing and indirect taxes – are clearly hot topics in Russia. The third risk – permanent establishment – is also now resulting in tax assessments in Russia.
Historically, specifics of the Russian tax and legal system dictated that companies operating in Russia would concentrate their tax function, including compliance and reporting obligations, in-house. This was driven by various factors, including specific factors influencing labour markets and business culture to keep such functions in-house, as well as by the availability of reasonably priced accounting software specific to the Russian market that allows users to address the majority of Russian statutory and tax compliance and reporting requirements.
The recent global trend of MNEs redesigning their operating models worldwide, including finance transformations, is having a significant impact on operating models for finance and tax. This is especially relevant for Russia because of significant differences in statutory and tax reporting rules and requirements (for example, tax and accounting are still closely focused on the availability and execution of primary documentation).
Although Russia is a significant market for many MNEs, Russian subsidiaries and branches are generally forced to adopt new transformation models. The ability to adapt these models to Russian requirements varies from company to company. In the new reality, companies need to rely on data generated in shared service centres, frequently located outside Russia, as well as use global accounting systems not necessarily fine-tuned for Russian rules and needs. On the one hand, this creates additional operational Russian tax risks and on the other hand changes the whole tax and statutory reporting process for Russian subsidiaries. Much more often than before, we see that full or partial outsourcing to an outside provider of one or more compliance and reporting processes is viewed as a solution in the new environment. It is our expectation that in this area Russia will increasingly follow the global trend.
Russian-headquartered companies are also responding to global trends. Recently many Russian companies have made rapid progress on the international market, moving into new regions. This has resulted in greater and more complex tasks for financial and tax administration personnel based in Russian groups, whose duties include co-ordination and monitoring of the relevant areas of business of companies operating in foreign jurisdictions. Financial managers have to determine and rationalise the range of reports to be prepared within each particular company in a group. It is also necessary to allocate responsibility and accountability, set timeframes and specify disclosures to be made in reports. Financial and tax directors must additionally make sure that their model allows for the effects of permanent changes (changes in the law, in the financial sphere and in the business environment) which affect the reporting process.
The management of compliance and reporting processes by Russian-headquartered companies is often more a product of piecemeal evolution than of conscious design. However, in view of the rapidly changing tax environment both in Russia and worldwide, Russian MNEs will very soon inevitably face the need to centralise the management of compliance and reporting requirements to conform to evolving requirements. For example, new CFC rules that are likely to be introduced in Russia from 2015 will require many Russian-based groups to centrally collect and process information about foreign subsidiaries and their profits, which immediately increases the importance of real-time control over the financials of foreign operations at the headquarters level in Russia. Country-by-country reporting and increased cross-country exchange of information will have a similar effect.
We expect that in the immediate future many Russian MNEs will need to review their approach to organising the reporting process in their region(s) of operation in line with global trends.
Partner, CIS global compliance and reporting leader
Tel: +7 495 755 9838
Yulia Timonina is a partner and a head of global compliance and reporting practice for EY in the CIS.
Yulia has 17 years of experience in tax compliance and reporting projects, including global compliance and reporting projects, development and implementation of tax strategy and tactics for multinational and Russian head quartered companies, corporate taxation consulting to large foreign and local corporate investors, advisory on structuring of investments and tax support of transactions and post transaction integration, coordination and project management of large multi-country and multi-service line engagements.
Yulia graduated from Moscow State Institute of Electronics and Mathematics (Technical University), has Diploma with honors in Applied Mathematics; New Economic School, Master's degree in Economics.
Tel: +7 495 660 4876
Karina Arakelyan is a tax manager in global compliance and reporting team at EY in Moscow.
Karina has more than seven years of experience within the areas of tax compliance, corporate tax and VAT advisory, tax planning and optimisation; continuously involved in multinational tax compliance projects of EY global tax operate and has specific expertise providing compliance services to Russian clients and multinational clients carrying business over Russia. She has more than six years of experience advising multinational companies in retail and consumer products and professional services firms sectors.
Karina graduated from Russian State Tax Academy (Economic Department).