Bringing Calm to the Confusion of Global Entity Management
Cross-border companies are increasingly waking up to the need to take an integrated, global and multi-disciplinary approach to managing the good standing of their portfolio of legal entities in multiple jurisdictions.
Even before the pandemic cloaked everything in uncertainty, general counsel (GC) and their departments were under pressure to expand their support for the front-line business, while their headcounts and budgets shrank. These pressures have only grown.
Today, they are caught between a rock and a hard place. In-house talent needs to spend much more on the more sophisticated (and, let’s face it, more glamorous) challenges of litigation, acquisitions, restructuring and contracts. But boards must also be given a certain level of assurance about the firm’s global tax and corporate governance risks, and they simply are not getting it.
A Carnival of Wonders
These days, keeping on top of the myriad idiosyncrasies, conflicts and unexpected complexities across multiple jurisdictions is simply too great a challenge to be mastered in-house, unaided. There would be no time to do anything else!
Some examples speak eloquently on this point:
- Companies incorporating in Brazil must register with all three levels of government – federal, state and city.(Taxes are levied by all three too, meaning rates differ from city to city and state to state.
- Indonesia’s ownership rules (and the unlocking of a wide range of business incentives, benefits and support) require a foreign-owned business to identify precisely its “regulated sector” – from a list of 386.
- In Colombia, companies must complete tax filings for every municipality in which they conduct a transaction. There are more than 1000 individual municipal sub-jurisdictions.
- Incorporation in high-tech Taiwan still requires numerous applications, paper documents translated into Mandarin Chinese, in-person appearances to open a bank account, and company chops to stamp official documents.
- State bureaucracy is not always the problem. In Malta, Hong Kong and the Netherlands incorporation can be completed within a week, but opening a bank account from abroad will take you more than six months.
Never the Same River Twice
This is far from a static problem. As normal cross-border business activity adds new entities and new jurisdictions, a constant flow of new legislation extends the reach of regulators and sharpens their teeth. The transnational engines of the OECD and EU generate the models. Individual jurisdictions then implement them into local law, almost always with a twist that compounds the complexity and gives foreign investors something extra to think about.
A constant flow of new legislation extends the reach of regulators and sharpens their teeth.
Mandatory Disclosure Rules (MDR), requiring companies to prove a legitimate business purpose for their presence in a given jurisdiction, are now widely adopted – as is the automatic sharing of tax data between jurisdictions under Common Reporting Standards (CRS). The three-quarters of jurisdictions which have now adopted UBO/PSC-style ownership registers will shortly include the US, where the Corporate Transparency Act (CTA) contains far-reaching beneficial ownership disclosure rules. More than 60 countries have incorporated the OECD’s digital economy taxation rules into domestic law, but the treatment of coverage, consequences for non-compliance and requirements for registration and tax reporting all vary widely.
Regulators will soon catch up with digital assets and cryptocurrencies. New legislation and money laundering rules are expected in the next year or so. The same is true for corporate ESG (environmental, social and governance) activity. A new EU regulation protecting workplace whistle-blowers will start to come into force in 2022. The US, meanwhile, is proposing to regulate how businesses report their climate-related risks and management plans.
There is No Accounting for It
Nor is entity management purely a matter of narrow legal compliance. Complex accounting, tax and HR rules take many corporate legal teams (and, I might add, their local advisors) far beyond their comfort zone.
The global minimum tax rate will require every cross-border company to review its operations and monitor events in low-rate jurisdictions, even if it falls outside the OECD’s definition of ‘large’. Local rules (not IFRS or US GAAP), with all their quirks, still dominate world accounting, and more than half of jurisdictions insist firms adhere to them. Complex accounting and tax processes, allied to strict local language requirements, are among the reasons France and Turkey both remain such particular challenges for incoming investors.
Answering the Unanswerable Question
‘Are we up to date?’ used to be a perfectly reasonable question in entity management, but it has become unanswerable for most cross-border businesses. In a regulatory environment this complex and rapidly evolving, good practice is to review the good standing of an entity at least once a year. That is a potentially paralysing workload for many in-house legal teams.
‘Are we up to date?’ used to be a perfectly reasonable question in entity management, but it has become unanswerable for most cross-border businesses.
Trying to muddle through, while hoping for the best? It is surprisingly common, but a formula for disaster. Regulatory and legal failure becomes a matter of when, not if. If that sounds familiar, you have probably been seeing the signs:
- Late filing of things like company accounts is a clear indication that existing processes are due for a rethink.
- Random checks and surprise audits by regulators should not ring alarm bells, but frequent requests for extra information are another matter.
- If you are already receiving penalties, the writing really is on the wall. You need to act quickly.
Whether you have assumed too much or understood too little is beside the point. A fine for the company could be just the start. Individual directors frequently end up in the firing line. Commercial penalties can even include exclusion from a local market entirely – as Uber famously found out in South Korea.
Regulatory jeopardy often comes in concentrated form. The jurisdictions that are hardest to navigate are frequently the most punitive.
Web of Confusion
Seeking help at the jurisdiction level, while common, carries its own dangers and disappointments. Acquisitions or expansion into new jurisdictions always carry a more-or-less urgent need for local know-how. Engaging another local service provider seems logical at that moment. In time, the result is a patchwork of local service providers – some might call it a hodgepodge – which quickly comes to manifest many of the features of the original problem.
From the centre’s perspective, this collage of local service providers can only ever deliver a fragmented service. Duplications, overlaps and inconsistencies – all inevitable – drain executive energies and drive-up costs. With so many gaps in the fabric and disconnects in the processes, things inevitably still get missed and the penalties keep coming.
Worse, of course, is the fractured view this approach still provides. GCs still have to struggle to refine the competing voices, perspectives and cultures into the compliance risk information they really need – transparent, certain, consistent, and which can command the confidence of the business and its board. It is an uphill struggle.
As general counsel and legal department leaders look out on this confusing terrain of shifting threats and sticking plaster ‘solutions’, they could be forgiven for shedding a tear. The entity structures of a business are its legal foundations. They must be maintained in a rigorous, consistent and orderly way. But that effort should not be allowed to drain the life out of the company’s in-house legal experts.
Surely there must be more elegant, holistic way to do this? One that brings simplicity, consistency and timeliness to the way the full range of entity management support services are delivered and documented in any jurisdiction?
Lisa Wilcox, Global Head of Entity Management
Lisa Wilcox is the Global Head of Entity Management for TMF Group, having joined the group in 2017 first as a Country Leader for Canada, where she oversaw the delivery of Canada’s three service lines: entity management, HR & payroll and accounting & tax. Prior to joining TMF she spent 20 years with Scotiabank, both within Canada and internationally, leading large teams in the provision of fiduciary services and working with clients on tax-efficient cross border structures. As Global Head, Lisa focuses on the development and enhancement of entity management solutions to ensure TMF’s clients’ entities operate compliantly around the globe and stay current with changing legislation.
TMF Group is an international provider of administrative services. Its 9,100 experts provide legal, financial and employee administration through the Group’s 120 offices worldwide.