Since the global recession, governments across the globe have looked for ways to bolster tax revenue by identifying common areas of reporting failures that lead to lost tax revenues. Governments have looked across national borders to steps taken and methods employed by other taxing authorities. The United States and the IRS are also engaging in this process. It appears that the IRS is prepared to introduce new requirements that will upend decades of established practices for businesses engaging in government contracting.
The U.S. government believes that these new policies and procedures will increase tax compliance and therefore increase tax revenue. However, for government contracting companies and multinational businesses, it will mean that they must adjust their processes and procedures to meet these new reporting and invoicing standards.
It is no secret that the U.S. government is the world’s largest consumer of goods and services. For example, in the fiscal year 2011, the U.S. government’s department of Defense (DoD) procured nearly $400 billion in contracts from private industry. Similarly, the Department of Energy had contracts with private businesses totaling about $25 billion, Health & Human Services at about $19 billion, the Department of Veteran Affairs at $17 billion, and NASA at about $15 billion. Thus, business with the U.S. government is highly lucrative. However, companies that would like to continue this relationship must be prepared to meet new challenges presented by e-Invoicing.
The impetus for electronic invoicing stems from a number of Latin American countries that have successfully increased tax revenues through these measures. While the government recognizes that there will be initial investment costs incurred in transitioning away from paper accounting, the government claims that, in time, there will be overall cost savings. The government also claims that vendors and contractors will benefit due to an expedited cash flow. The government states that processing will move along more quickly and accurately. This will improve business cash flow and result in additional cash savings through error reduction.
The U.S. government is also seeking to close the tax gap through the implementation of country-by-country reporting requirements that will most directly affect multinational corporations. The country-specific reporting requirements are targeted to only impact the largest of companies doing business in multiple nations. The initiative will apply to multinationals with revenues greater than $840 million. A high-level assessment at how the new regulations will apply is that contractors and manufacturers will face mandatory reporting requirements by jurisdiction for assets, revenue, operating income, taxes paid, capital, and employees.
Businesses who may assume that enforcement will not be strict regarding this measure should reconsider. The effort is a joint initiative coordinated among the United States, the G-20 nations, and OCED. The nations of these organizations realize that there is likely additional tax revenue that is being left on the table and these new exhaustive reporting requirements are well suited to close the tax gap. However, multinationals accustomed to the current reporting regime are likely to require significant time to ramp up their compliance efforts with the new reporting standard. Therefore, it is essential for compliance efforts to begin as soon as possible. The U.S. government’s efforts to crack down on offshore tax havens and the failure to report offshore income and assets is increasingly aggressive. This effort coupled with other offshore efforts has provided the U.S. government with more information than any other time in history to crackdown on offshore tax evasion and reporting failures.