Beyond bricks and mortar: Why property tax should be on the radar of all tax leaders
Large enterprises spend an average of 90 hours per week managing property tax processes and handling up to 10,000 separate tax bills per year.
Introduction
It’s rare for a multinational not to own (or lease) real estate. Depending on the industry concerned, properties can be in the form of e.g. plants, warehouses, R&D labs, offices, data centres, or plots of land. As always, it’s the international footprint of multinationals that makes the management and ownership structures of these properties particularly complex.
Managing property taxes is often more burdensome than expected. A recent survey showed that large enterprises spend around 90 hours per week on property tax processes and may deal with 500 to 10,000 tax bills each year. And it’s not just about workload. 41% of companies said they incurred late penalties on at least 25% of their real estate tax bills, with penalty rates commonly between 5–15%.
Most tax leaders do not have visibility on the property tax footprint of their organisation. Sometimes for good reasons, they may already have enough on their plate. Tax operating models are often designed in a way that this above-the-line tax is excluded. Indeed, often, it will be under the responsibility of local teams, like local finance or local operations teams. Worst case, it is an obligation that falls between the cracks, and is not properly managed at all…
In this article we explain why it pays off for tax leaders to have at least minimal visibility over the global property tax footprint of their organisation.
The property tax challenge explained
Most countries do levy real estate or property taxes. They come however in very different formats, with highly diverse calculation and payment modalities. Some are at the federal level, others are regional or at a city / local level. Some are levied on a yearly basis, others have a different periodicity.
If that’s not enough, the ownership details also determine the exposure to these taxes, whereby sometimes also lessees become subject to property taxes. The nature of the real estate concerned adds another layer of complexity, given that unexpected exposures can arise (think about properties that are immovable by destination vs immovable by nature, or the exposure of say data centres and telecom masts).
Depending on the industry concerned, multinationals may have hundreds of properties, scattered around globally. Some will be very obvious, whereas other types of real estate may be flying below the radar (idle plots of land, or more nuanced types of immovable assets). The teams that are closest to these properties and potential exposure to tax, are local teams, like finance or operations. At the same time, they are not tax experts, nor is tax a priority for them. That is why property tax often gets the stepmotherly treatment.
Why the global property tax footprint should be monitored by group tax
There is however a lot of value in monitoring the global property tax footprint. First of all, for tax leaders, it pays off to have a good view on the so-called Total Tax Contribution (TTC) of their organisation. Property tax is an important part of it. Such TTC is useful for internal purposes, as it is a northstar metric towards senior management including the CFO, and reveals a lot about the value protection and value creation of the tax function. On top of that, such TTC has a very known sustainability and ESG value towards external stakeholders, whereby best-in-class teams organise voluntary reportings on this topic.
Secondly, we all know what happens when sh*t hits the fan. Indeed, when filings are missed, payments are late, or the property tax obligations are fulfilled in a low quality or non-compliant fashion, there is exposure to reputational, financial and criminal implications. Controversy will arise. And yes, in such case, it will ultimately end up on the desk of the tax team and the head of tax in particular.
41% of companies reported late penalties on at least 25% of their property tax bills, with fines often between 5–15%.
Furthermore, proactive tax leaders want to know the “taxes under management” in a comprehensive manner. More and more there are spill-over effects between the different tax sub-domains, so it pays off to keep an exhaustive overview of all taxes. There can be incentives that require action by tax specialists that could reduce the footprint (e.g. R&D related). There can be important exposures or impacts toward strategic projects, like M&A or group rationalisation projects (including direct / indirect transfer of ownership), for which the property tax situation should be known. Process efficiencies (including automation) can be identified that benefit the entire organisation. And the best tax leaders are constantly hungry for more data, as they understand that this is the new gold for the tax function that will unlock tremendous value and intel going forward. You can only manage what you measure.
This does not mean that the tax function should be the end-to-end responsible for property taxes. They should however have a minimum visibility and ideally real estate tax is included in their control centre overseeing global tax operations.
The minimum level of property tax control explained
As said above, it is not realistic to assume that tax leaders and their teams are involved in the end-to-end process when it comes to property taxes. However, there are minimum metrics or indicators that tax leaders should be aware of:
- An inventory of the assets that are subject to property or real estate taxes, with at least the most material ones included
- A view on the most material property tax exposures (materiality levels to be set depending on industry, company size, risk appetite, tax operation maturity, …)
- An evolution of total property or real estate tax exposure over the last 3–5 years, at aggregated level, and break-down for most material exposures (to identify outliers or unexpected spikes / drops)
- A view on missed filings / payments, questions from (tax) authorities, and pending controversy
- A view on related tax incentives with materiality cut-offs (e.g. exemptions obtained due to R&D reasons, tax holidays, …)
- The number of filings or payments to get an understanding of workload
Forward-thinking tax leaders do start small. They expand the overall visibility year-over-year based on their priorities, needs and overall identification of risks and opportunities when it comes to real estate taxes.
How the Loctax Control Center for Global Tax Operations unlocks value
Loctax is a comprehensive control centre for all the tax operations of a multinational and can manage all the different obligations a multinational is exposed to globally. This includes property or real estate taxes.
The platform allows to operationalise processes employing workflow engines. With such workflows, tax leaders can keep an eye on property-related filings and payments whereby depending on the tax operating model the desired levels of tax involvement can be orchestrated. Comments and Q&A can be tracked in end-to-end audit trails, and the obligation output (returns, assessment notices, working papers, and the related data therein) can be captured, whereby it will organically populate an interactive and deeply verticalised structured tax repository.
Intel in the form of trend analysis, outlier detection and overall process and compliance transparency can be unlocked from the documents and data that are captured. Such data obviously becomes available for business support and increases the overall data-readiness of the tax function. M&A and exit readiness get boosted.
It is needless to say that such structured data set is the basis for applying next generation technologies like AI, whereby tremendous incremental value can be unlocked, both from a business support, risk management and overall planning and efficiency perspective.