Ventana Research Analyst Perspectives

FourQ Builds Confidence and Trust in Intercompany Financial Management

Posted by Robert Kugel on Apr 23, 2021 3:00:00 AM

FourQ is an intercompany financial VR_2021_OOF_Assertion_4_Squaremanagement (IFM) Solution-as-a-Service provider. IFM is a discipline for structuring and handling transactions within a corporation and between its legal entities, and is designed to maximize staff efficiency and accounting accuracy while optimizing tax exposure, minimizing tax leakage and ensuring consistent tax and regulatory compliance. Today, IFM is an obscure topic, but I assert that by 2025, one-half of organizations with 10,000 or more employees will have implemented intercompany financial management to achieve tax, risk management and financial close benefits. Here’s why:

Corporations are made up of multiple entities that frequently buy and sell goods and services from each other. For example, a manufacturer might source parts from different divisions located in multiple states or countries, export the finished product to a country where it has a distribution center, and then install and service the product in a different country with its own local business unit. There may be recurring payments for the use of intellectual property or parts provided under warranty. These transactions give rise to a mass of paperwork as one corporate entity invoices and the other pays. The transactions also can create tax liabilities arising from those sales and purchases. When it comes to tallying up all that bookkeeping to produce the corporation’s financial statements, all those intercompany transactions are supposed to cancel each other out. Usually, they do, but because each side of the transaction is recorded separately, it is also common for there to be errors, slight discrepancies in volume and price, currency translation differences and other adjustments that have to be identified and corrected.

And where these transactions cross national borders, multiple complications arise. The transactions may involve different currencies and be subject to a set of disparate import and export regulations as well as tariffs and taxes. When IFM is not managed properly, value-added tax (VAT) “leakage” can occur in a cross-border transaction when a corporate entity fails to claim a refund that it is owed. Or a company may be deemed to have a “permanent establishment” in a country, and therefore have a taxable presence, if it is not able to document that the volume of its work in that country is below the legal threshold.

FourQ provides a service, OneBiller, that addresses these challenges by supporting a centralization of the intercompany accounting function of multinational organizations, providing an automated intercompany billing and invoice-management service designed to improve administrative productivity and lower costs while reducing global tax and compliance risks.

Ventana_Research_Benchmark_Research_Next_Generation_ERP_08_ERP_fragmented_in_large_companies_20200518 (2)FourQ OneBiller addresses a common set of problems that confront corporations operating in multiple tax jurisdictions with multiple ERP systems. Our Next-Generation ERP Benchmark Research found two-thirds of organizations with more than 1,000 employees have more than one ERP system and 27% have four or more. All those internal buy-and-sell transactions create workloads in each local accounting department, including dealing with errors, reconciling differences in the details of invoices and payments, and filing regulatory and tax documents. These workload issues are compounded when there are multiple countries involved, especially if there are intermediate stops from source to destination for logistical, regulatory or tax considerations.

Larger corporations often establish a shared service organization (SSO) to manage intercompany transactions, including presentment and payment of invoices, because this approach can be more efficient by centralizing the accounting for the transaction, which often goes beyond simple economies of scale. However, unless the process is managed well, an SSO can cause delays in payments and official filings (which can result in fees and penalty assessments) as well as create unnecessary tax or regulatory issues. In theory, the selling and buying events are simply mirror images but that is not always the case in reality. The transactions might be booked by their respective accounting departments on different dates, at different prices, with different terms and conditions. The items on the sales and purchase orders also may not agree exactly or there might be errors in the harmonized system export codes. Corporations can avoid these potential issues through effective process and data management that scales to their volume and geographic requirements.

OneBiller uses automation to reduce the effort involved in matching intercompany transactions and resolving discrepancies. It captures the required attributes of intercompany agreements and streamlines intercompany dispute resolution. And it handles taxes with an integrated tax engine to maximize tax deductibility by reducing stranded costs. Controlled and consistent tax calculations diminish the possibility of errors and make tax defense faster and easier. Moreover, all multinational activities require filings and, increasingly, national governments are demanding tax-compliant invoices be submitted to their tax authorities to limit VAT fraud and errors that reduce their revenue. For corporations domiciled in the U.S., there are complications caused by the base erosion and anti-abuse tax (BEAT) that apply to otherwise deductible payments for interest, royalties and some services used to shift profits to lower-tax jurisdictions.

While in almost all areas of a business being strategic means not getting lost in the details, being strategic in accounting is all about flawlessly managing the details, especially in areas of hair-curling complexity. Being strategic in accounting processes means managing data continuously without human intervention from the start of a process to its completion, one of the pillars of what Ventana Research calls continuous accounting. FourQ’s OneBiller handles the challenging and tedious work of integrating transactional data using application program interfaces (APIs) from a range of sources, such as multiple ERP systems and controlled spreadsheets, and transforms this mass of disparate data into a consistent, consolidated whole. Where necessary, it enriches the data with legal entity information, terms and conditions included in the invoice, and any pertinent tax-related information, such as VAT details, necessary to create tax-compliant invoices and documentation. The system completes the process by generating accurate, consistent and fully compliant intercompany invoices, writing back transactions to the respective ERP systems’ general ledger, accounts receivable, accounts payable and settlements subledgers in the proper form and format, with full details necessary for consolidations, allocations and adjustments. FourQ’s service also provides clients with insights and advice for ongoing process improvements related to regulatory and tax compliance.

Corporations with large volumes of intercompany transactions should assess how well they are handling IFM and consider the benefits of having a third-party service provider assist in the process. Those that have heavy volumes of intercompany transactions should consider using a third-party service to manage the workloads and complexity of the processes required to match and reconcile these transactions, report on the transactions internally and externally, and file documents for regulatory and tax purposes. It is unlikely that an internal IT organization would be able to create and maintain such software in a cost-effective manner. I recommend that these companies consider FourQ and OneBiller for intercompany financial management.

Regards,

Robert Kugel

Topics: Office of Finance, Financial Performance Management, ERP and Continuous Accounting, Revenue, robotic finance, lease and tax accounting

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.