Part 1 of this series reviewed the three, interrelated complexities that plague intercompany service transactions: process, tax, and regulatory. In Part 2, we take a closer look at how process challenges complicate these transactions for global organizations.
When Procedures Are Lacking
Even in large companies, where technology automates many functions, intercompany transactions are often handled manually, increasing the risk of errors, inaccuracies, inconsistencies, and inefficiencies. Any time a process is largely manual—especially when it happens across entities—it’s vital to have consistent, detailed, well-documented policies and procedures.
But that’s not typically the case for intercompany transactions.
Often, intercompany policies and procedures lack sufficient detail, leaving room for errors and misinterpretation. They don’t typically cover every aspect of intercompany transactions end-to-end—starting with the basics of how accounts are set up—or they fail to consider system limitations or in-country requirements and regulations that could impact the process.
For instance, in Russia both the selling entity and the buying entity must sign or stamp every intercompany invoice. For global businesses transacting in Russia, a procedure that doesn’t direct staff to consolidate invoices can result in unnecessary manual work and higher labor costs.
Sufficient policies and procedures are the foundation of the intercompany function. Without them, the consequences can be costly; variances, disputes, unsettled accounts, inconsistencies in how costs are allocated across entities, transfer pricing inaccuracies, settlement delays, and failure to handle foreign exchange properly are some of the many problems that can result.
When entities don’t adhere to consistent intercompany policies and procedures, something as seemingly benign as the timing of booking a transaction can wreak havoc. For instance, global companies often lack a unified calendar for closing the month or quarter. When closing dates don’t align, and there is no policy on invoice cutoff dates, balancing the books becomes challenging. If the UK entity closes its quarter on February 28 and the Italy entity closes on March 31, and a transaction between the two is booked on March 1, it will fall into different quarters for each, requiring manual adjustments to avoid tax filing issues.
Even if detailed intercompany policies and procedures exist, staff members don’t always have the proper training to follow them. When turnover is high, as is often the case with back-office functions, keeping employees up-to-speed on intercompany policies and procedures can be a burdensome task that falls to the wayside.
When Systems Don’t Interact
When a large company grows organically, it’s common to use a single ERP system. But when growth and market expansion happen through M&As, the various entities are likely to continue using disparate systems, simply because the cost and effort to standardize them would be a massive undertaking. This lack of system standardization and integration only adds fuel to the fire of a manual intercompany process.
Consider what happens when a global company needs to book a two-sided entry. With a single ERP system, the seller (the entity billing the transaction) would generate an invoice to the buyer (the entity paying for the transaction), automatically generating an entry in the buyer’s accounts payable module. But if the two entities use different ERP systems, the buyer must book the entry into the AP module manually.
Besides the risk of data entry errors, there’s a degree of judgement involved. If the relevant policy isn’t clear, or the employee hasn’t been trained adequately, the expense might be misclassified. Or if the invoice arrives near month-end or quarter-end, and there’s a lag in booking it, the entry might fall into different periods for the seller and buyer, creating a variance.
When a complex function like intercompany billing requires manual steps to compensate for disparate systems, overhead can escalate, causing higher recurring labor expenses. In the absence of the right enabling technology, the company might waste millions of dollars on resources to perform inefficient manual work.
When No One Has Oversight
Handling intercompany service transactions through a shared service center model is a double-edged sword: The company can reduce expenses by placing those centers in regions with a low labor cost, but it may lose oversight of the function end-to-end. There is no longer a clear view into the policies, rules, and regulations that affect each entity for which the service centers handle intercompany transactions. Whether from insufficient documentation, a lack of training, or high turnover, the odds of inconsistencies and inaccuracies run high. That’s why many organizations create a Center of Excellence for this function, pooling internal experts from accounting, tax, and treasury to create a team charged with oversight of the entire intercompany landscape.
Without a holistic view of that landscape, seemingly small issues can become larger problems and trigger downstream issues.
BEAT penalties are a prime example. While it’s common for global companies to consolidate intercompany costs in one country, then allocate them to the entities involved, that approach can result in a 10 percent BEAT penalty in the US. On a $1 million transaction, the resulting $100,000 penalty might not immediately get attention. But if it happens on multiple transactions, the costs can become quite steep. Having oversight of the intercompany function enables an organization to spot these escalating costs and alter the process to avoid BEAT penalties and the costly loss of a tax deduction.
Organizations that consolidate property lease expenses likewise can run into issues when proper oversight is lacking. In many countries, charging rent expenses across borders isn’t permitted. But it’s a common practice for global companies, especially those that use a single vendor to manage property leases. With oversight and knowledge of the tax and regulatory implications of cross-border rent charges, the company can design a process that avoids keeps the billing in-country and avoids tax problems.
Tackling the process-related challenges of intercompany service transactions starts with replacing costly, inefficient manual steps with automation. If your organization is ready to remove process complexities from your intercompany transactions, contact the experts at FourQ to learn how our OneBiller solution helps global organizations automate, centralize, and optimize this vital function.