It’s not uncommon for a multinational corporation to have hundreds, even thousands of entities, subsidiaries and business units, particularly in today’s business environment. Organizations build or acquire new corporate entities for a variety of reasons: new projects, mergers and acquisitions, financial benefits, tax structuring and more. These reasons have become particularly prevalent in recent years. 

While amassing entities can help organizations achieve their strategic goals, it can also produce potentially detrimental obstacles. Obsolete entities linger, draining resources and capital, and overly complex corporate structures impede all aspects of governance and strategic growth.  

The process of eliminating unnecessary entities and streamlining business structures is known as corporate simplification. It’s a tactic multinational corporations should consider right now as ever-changing regulations complicate international tax reporting and overly complex business structures heighten risk vulnerability and impede timely decisions.  

An overview follows of the landscape, triggers in the global business environment and how the right technology can help organizations move forward. 

The Business and Governance Case for Corporate Simplification 

Overly complex business structures hold governance professionals at all levels back. In the area of executive and board oversight, general counsels and chief legal officers lack up-to-date, comprehensive visibility of compliance status across entities. Meanwhile, CFOs and other financial leaders are unable to assist with tax reporting and financial modeling or see if the organization is in a healthy financial position. 

In the area of day-to-day operations, tax departments cannot easily access tax ID and jurisdiction information for activities like tax clearances or easily adjust to new regulations. Company secretaries fall behind with the latest disclosure requirements and responses to stakeholder requests. Paralegals and legal teams also scramble for accurate, up-to-date data and answers to entity-related questions. Finally, treasury teams lack the data and visibility they need to facilitate M&A due diligence and decisions. 

Enter corporate simplification. Not only does eliminating unnecessary entities free up resources and capital, but organizations can reap several oversight and governance benefits as well. With a more streamlined corporate structure, an organization can: 

  • Spend less time and money on audit, tax and compliance activities 
  • Reduce the risk of inaccuracies and compliance gaps 
  • More quickly spot and resolve issues 
  • Improve visibility, transparency and governance  

A Golden Moment for Streamlining Structures 

Why is now the time to seek greater simplicity in entity management? For starters, international tax reporting is about to get a lot more complicated, thanks to a seismic shift by the G20 nations and the Organization for Economic Cooperation and Development. In July 2021, the G20 announced a plan to level the playing field between tax havens and nations with higher corporate tax rates, as well as adjust for the rise of multinational giants in the digital sphere, such as Apple, Google, Facebook. In the words of the New York Times, these reforms usher in “the prospect of the largest overhaul to the global tax system in a century.” 

Implementation is expected to take effect by 2023 via two pillars, 15 actions and myriad rules and requirements. As just one example, reporting is anticipated to include an annual “country-by-country report.” This will require disclosure of the following for every country in which an organization does business: 

  • Revenue 
  • Pretax income 
  • Income tax paid 
  • Income tax accrued 
  • Number of employees 
  • Stated capital 
  • Retained earnings 
  • Tangible assets 
  • Specific subsidiaries and their business activities 

 The more complicated an organization’s corporate structure, the more time-consuming and error-prone such reporting will be. 

Requirements and Rationalization Beyond the G20 Agreement 

But the upcoming G20/OECD rules are just one reason for multinational corporations to get moving on corporate simplification. Overall, and well before this year’s meetings, the financial and legal stakes have been rising for meeting jurisdictional requirements. 

According to TMF Group’s Eighth Annual Global Business Complexity Index: 

  • Doing business without tax registration now incurs fines in 93% of the jurisdictions surveyed, up from 84% last year. 
  • 45% jurisdictions can suspend an operating license for doing business without tax registration — and this percentage jumps to 70% in more complex jurisdictions. 
  • 27% jurisdictions require an entity to appoint and register a certified accountant, up from 17% in 2020. 
  • 82% of jurisdictions in the EMEA region require an Ultimate Beneficial Owner/Person of Significant Control to be listed in a central register. 

The more entities a company must monitor and manage, the greater the risk of gaps, lapses, violations and fines. 

Cost savings is another compelling argument for legal entity rationalization (LER): “I’ve seen this occur where certain entities have minimum working capital requirements and, through the consolidation of those entities, were able to free up that cash for other purposes in the organization,” said Chris Nelson, Principal of International Tax and Transaction Services at EY. Moreover, he added, “Rationalization makes organizations nimble for business combinations/separations and often ‘pays for itself’ via incorporating afforded tax planning opportunities.” 

 LER can guide multinational companies to potentially costly risks and red flags — for example, are complexities in a corporation’s entity structure: 

  • Incurring unnecessary fees and expenses? 
  • Resulting in duplicative or superfluous resources — e.g., unused software licenses? 
  • Impeding the delivery of goods and services? 
  • Hindering growth? 

In the day-to-day operations of accounting, legal and compliance teams, of course, cost savings result from increased simplicity — the ability to do more with less, faster. “LER also creates efficient business organizations by virtue of streamlining processes and locating inherent operational synergies,” said Denise Guarino, EY Americas Legal Entity Rationalization Leader and Ernst & Young LLP International Tax Principal.  

 The byproduct of [LER], that most companies are interested in and need at this time, is typically significant operational cost reduction from both a hard cost perspective as well as freeing up resources to focus on revenue-generating activities,” Guarino said.  

Leveraging Technology to Simplify the Corporate Structure 

Organization leaders can’t plan for or manage what they can’t see. And legal, compliance and financial teams can’t act decisively, efficiently and confidently when they’re burdened by exponentially increasing administrative tasks. 

That’s where technology comes in. The right solution can help harmonize how people, processes and data work together. This includes: 

  • Entity and subsidiary management tools that consolidates and centralizes key data from internal departments, registered agents, enterprise resource planning/management systems and more 
  • Automation that accelerates routine administrative tasks, increasing accuracy and enabling teams to do more with less  
  • Shared dashboards and real-time reports that let stakeholders access the data they need, when they need it 
  • Data visualization tools that make information easy to understand and share, for more timely, informed decisions 

With siloed systems and manual processes, the task of streamlining structures across the enterprise can feel anything but simple.  

Digital entity and subsidiary management tools accelerate and ease the process, enabling corporate governance teams to do more with less: 

  1. Integration: With traditional processes, corporate governance teams could spend days of scouring spreadsheets, emails, historical records and more — and still end up with an incomplete picture of all subsidiaries and business units. By putting all this data in one place in a centralized corporate record, modern digital solutions reduce time, staff labor and headaches. They also build confidence that organizational leaders are making important entity management solutions based on the most complete and accurate information. And throughout the simplification process, data integration ensures that all departments and teams are working from a single source of truth.  
  2. Registration: To stay in compliance and avoid fines, corporate governance teams must file timely registrations and renewals for every jurisdiction in which they do business. This means that once an organization streamlines its corporate structure, that’s just the first part of the mission. The next step is making sure that all remaining and restructured entities are in good standing. Technology makes this task easier by automating manual tasks, streamlining cumbersome processes and strengthening data accuracy.  
  3. Management: What registrations, renewals and filings are required for each entity and jurisdiction? How much does each filing cost? Digital entity management tools give teams the ability to easily track, retrieve and report on data for entity rationalization discussions, while maintaining security, efficiency and compliance. 

Modern governance technology and corporate simplification work hand in hand. With a more streamlined corporate structure, supported by the right tools and processes, organizations can reduce manual tasks, costly errors, duplicated data ad outdated information and feel confident their activities and disclosures reflect current records and regulations, across jurisdictions. Moreover, they can achieve all the above at a lower cost and greater ROI.​