Multinational companies face very real challenges in meeting their compliance duties. The resources required to ensure compliance with local laws and regulations in multiple markets or jurisdictions are substantial. This is true throughout the different stages of a businesses lifecycle and can be reinforced by the economic environment. Every business needs to consider how it meets those resourcing needs as effectively and efficiently as possible.
Global compliance challenges throughout the business lifecycle
For businesses that are experiencing high demand, growing and expanding into new markets with only a small sales presence, the challenge is that they are unlikely to have the expertise locally or centrally to ensure efficient and effective compliance activity.
More mature businesses may instead need to streamline operations. They may be considering developing a shared service centre model. They may be removing transactional work from local offices and so reducing experienced headcount but will almost certainly still need compliance support.
Changing economic conditions, such as the falls in revenue caused by the COVID-19 pandemic, may also force business to consider alternative operating models and ways to reduce costs. This can mean a loss of local compliance knowledge within the business.
In each of these cases, central in-house teams face increased workloads and pressure. Individuals meant to fulfil more strategic, central roles find themselves spending more time handling operational tasks that their skills, knowledge and experience are not suited to. The consequences for the business can be increased risks of compliance issues and reduced cost-effectiveness.
The compliance focus and costs
Since the financial crisis of 2008, governments and regulators have focused intensely on corporate compliance and revenue-raising opportunities. Detailed awareness and knowledge of local developments is vital. For example, in 2017, the Business Registrations and Licensing Agency (BRELA) in Tanzania gave three months’ notice of potential sanctions, including late filing penalties, for locally registered branches of foreign companies that had failed to file required annual accounts. Organisations lacking local intelligence could easily be caught out.
Compliance regimes will keep evolving in response to local and global challenges including the desire to tax global corporations in ways that reflect their revenue-generating footprints. Multinational businesses need the flexibility and expertise to keep up. Compliance breaches remain costly not only financially but also in terms of the potential damage to corporate reputations and brands.
Global compliance and corporate transparency
Customers and shareholders also expect multinationals to ‘do the right thing’ and pay their fair share of taxes. This expectation has grown during the COVID-19 pandemic, when the idea that ‘we are all in it together’ has changed attitudes to corporate social responsibility and environmental, social and governance issues.
Investor groups are putting more pressure on large, listed businesses to behave ethically and become more transparent about their activities especially in terms of compliance with local laws, regulations and tax regimes.
In response, many organisations are aiming to be good corporate citizens globally – with the most ambitious aiming to meet the highest standards wherever they operate. This is to be welcomed but represents a substantial challenge. Not only does a business need the right, high quality processes but it must also monitor the core compliance process themselves. The resourcing and costs involved inevitably put in-house teams under additional pressure.
Balancing global and local compliance
As highlighted earlier, central teams usually have more strategic rather than operational capabilities. They are unlikely to have the required operational knowledge of local laws and regulations in every jurisdiction where the business operates. Nor is it cost-effective for strategic, central teams to be used to meet local compliance requirements.
The other key challenge for central teams is that managing at arm’s length is difficult and risky. Too much local autonomy can lead to contraventions of wider transfer pricing and tax policies, for example. Too little local autonomy can result in dysfunctional operations.
Can outsourcing solve these issues?
Turning to an outsourced service provider in each country or market will certainly provide the local knowledge and expertise that is so important. But in some regards, this simply shifts the problem rather than solving it. Each relationship with a local provider still requires oversight and management which will fall to the same central teams with already busy agendas.
A realistic solution is to use an outsourced provider capable of delivering effective local compliance across every market but managed by a single team. The advantages are self-evident. Firstly, a single relationship to manage for the central in-house team means more efficient and streamlined communications and processes. Secondly, this type of outsourcing enables the rapid provision of additional local compliance knowledge and expertise in new territories.
The outcome is effective global and local compliance that is cost-effective to manage and flexible enough to meet the changing needs of your business. This approach can reduce overall costs, reduce risk and contribute to achieving the business’s CSR and ESG goals.
If you would like to discuss your global compliance needs and challenges, we look forward to hearing from you or you can find out more about how we can help here.
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