By Ian Lavis on behalf of Praxity Global Alliance
Marked differences in regulation around the world are set to deepen in 2019 as politics and geography impact accounting professionals and their clients.
Many firms with global interests may already be feeling the burden of complex and ever-changing regulations issued at domestic and international level.
But some regions of the world are likely to face far more regulation than others in 2019. These differences are particularly marked either side of the ‘big pond’.
In Europe, there are growing calls for more regulation in finance and “fairness” in tax especially when it comes to taxing digital corporations, whereas in the US, things are moving in the opposite direction, with less regulation to encourage growth.
Across the Asian region, banking and corporate regulation is becoming more stringent and the expectations of revenue authorities around issues such as transfer pricing documentation are increasing.
Differences in how regulation is implemented geographically could pose a significant challenge for accounting firms with clients operating in different jurisdictions.
Role of accountancy bodies
Regulation of individual professional accountants is primarily conducted at a national level, with professional accountancy organizations playing an important role in working with governments to ensure that such regulation is effective, efficient and in the public interest.
Accounting professionals are thus required to keep abreast of updates from relevant regulatory bodies such as the Securities and Exchange Commission in the US and the Financial Reporting Council in the UK, as well as adhering to government regulations and domestic and international accounting standards.
At global level, experts predict greater regulation will affect all accounting professionals in the coming years. In a report on the future of accountancy entitled ‘Drivers of Change and Future Skills’, the Association of Chartered Certified Accountants (ACCA) says increased regulation and stronger governance will have the greatest impact on the profession in the years to 2025.
ACCA predicts intergovernmental tax action to limit base erosion and profit shifting (BEPS) “will affect all members of the profession” while “fairness in tax will continue to rise in prominence” around the globe. The association also points to greater emphasis on tax transparency and greater government tax action and information sharing.
In an article published by the International Federation of Accountants (IFAC) back in 2017, researcher Muhammed Azizul Islam, Associate Professor at QUT School of Accounting in Brisbane, Australia, says “increased regulation is imminent because of massive tax avoidance, transfer pricing, and money laundering as exposed via the Panama papers”.
If anything, pressure for increased regulation in many parts of the world has intensified since then following the publication of the ‘paradise papers’ and calls for greater regulation of the digital economy.
So, will 2019 be the year when regulation really bites? There is certainly mounting pressure in some parts of the world – notably in Europe and Australia – for more to be done to respond to financial scandals and to regulate big tech firms.
Increasing regulation in Australia and Europe
In Australia there is strong political impetus to tackle perceived tax avoidance by multinational businesses through new laws, increased reporting and greater transparency measures.
Greg Travers, Director of International Tax Services at William Buck, predicts tech firms to become more regulated over the next twelve months. “Australia has tended to implement new BEPS related tax measures in advance of other OECD countries. It’s highly likely that specific tax measures for entities operating in the digital space will be targeted by new legislation in Australia over the next 12 months.”
In Europe, new regulation under discussion includes a turnover-dependent income tax for internet companies and tighter restrictions on money laundering.
A form of digital tax is fraught with difficulty due to the question of which tax authorities should be entitled to the potential income on the taxes – the country of origin in which concepts are developed and data servers operate, or the recipient country in which users are located?
The EU Commission believes the recipient country should have a tax share. It proposes a temporary interim tax of 3 percent on the digital revenues generated by companies like Google and Amazon with a global turnover of more than EUR 750 million in the respective countries.
Steffen Ahrens, a Partner at German firm FALK GmbH & Co KG, and an expert on regulatory matters and reporting standards in Europe and the US, says giving recipient countries a tax share in this way “means the concept of the allocation of ‘Permanent Establishments’ must be revised”.
He says taxing only larger companies is “quite obviously another system violation” that needs to be addressed, adding: “The fair taxation of large corporations such as Google, Apple, Facebook and Amazon is a difficult undertaking. The seemingly simplest and quickest solution is often not the best.”
A clampdown on money laundering is also under way and may prove easier to implement. A new EU Money Laundering Directive must be transposed into national law by the member states by 10 January 2020, but already is deemed to be legally binding across the EU. Action is also being taken to increase transparency in Europe. National transparency registers are to be networked Europe-wide via a central European platform by 10 March 2021.
Significant differences in the US
In the US, it’s an entirely different story. Commenting on “significant differences” in the regulatory climate around the world, Jeff Brown, Chief Risk Officer at Moss Adams in Seattle, US, says: “It seems there is a lot of pressure for changes to come into effect in Europe, Australia, South Africa and other places, but in the US, it feels different.” He adds: “Under the Donald Trump administration, there has been more focus on capital formation, which in some situations means ‘don’t let regulation get in the way’.”
Another factor behind the differences in regulatory approach is the depth of financial crisis experienced around the globe. “There hasn’t been a financial meltdown [in the US],” Jeff Brown explains. “I don’t think there is going to be a significant increase in regulation focused on the accounting profession in 2019 in the US.
“It sometimes takes a failure to change the tone in the regulatory environment. In the US we have not had that for a little while, but something is going to happen at some time in the future. If there is a failure in financial reporting, for example, regulation will change focus.”
However, he stresses the importance of controls to protect against bad practice, adding: “It would concern me if the US regulatory environment softened too much. They do need to have things in place to protect against the bad actors.”
One area where regulation is likely to grow across the world in 2019 is data protection. In the US, California has passed a consumer protection act and other states are likely to follow suit, while in Europe the EU’s General Data Protection Regulation (GDPR) is already having a big impact.
Muhammed Azizul Islam believes accounting professionals could also face greater regulation emanating from increasing social and environmental concerns fuelled by greater public pressures and stakeholder expectations.
While increased regulation isn’t always welcome within the profession, it is by no means a bad thing. Muhammed Islam suggests regulatory changes that respond to social and environmental concerns should be seen as an opportunity.
In IFAC article, he says: “The regulatory concern for different social and environmental issues, along with the associated measurement and reporting complexities of these issues, has allowed accounting professionals to open their minds to the possibility that accounting has the capacity to change. The important implication is that all professional accountants will be expected to look beyond the numbers, which will, in turn, enhance collaborations among members of multiple professions, including accountants, doctors, lawyers, environmental scientist, sociologists, and so on.”
Jeff Brown adds: “Regulation is difficult to deal with but also creates opportunities. Regulation can lead to areas where additional levels of assurance may be desired. For example, if through regulation an attestation was required related to cybersecurity protocols it would provide an opportunity to expand existing service offerings.”
Need for education
Whatever the level of compliance required in different parts of the world, it is likely accountants will increasingly need education areas most likely to be regulated in the coming years such as digital technology, tax regulation, new forms of corporate reporting and integrated reporting.
“There is also a real need to educate clients on the changing global regulatory landscape, including why countries continue to act inconsistently to tackle common issues like profit shifting. Understanding the factors underlying the approaches taken in different countries can be key to effectively managing tax and regulatory risks,” says Greg Travers.
Knowledge of digital technologies is the key competency area where professional accountants have skill gaps, according to ACCA. The association says accountants lack knowledge in transformation of new disclosure regulations, new forms of disclosures, and awareness of the interconnectedness of financial and non-financial reporting.
In future, it seems professional accountants will need the skills to provide more all-inclusive corporate reporting, which not only tells us about the numbers but also tells us more about the narrative of the organization.