Editor's note: David Brightman is the marketing director at BlackLine, a company that develops cloud services to automate financial close processes. He is also an ICAEW Chartered Accountant. The views expressed in this article are those of the author alone.

Most organizations view intercompany finance as a zero-sum game because they are essentially purchasing from and paying themselves—a common analogy is moving money from the left pocket to the right pocket.

However, reality is far from that simple. For multinational companies handling intercompany expenses in the millions or even billions of dollars, multiple complexities such as processes, taxes, and regulations can severely harm corporate performance. Reduced operational efficiency, tax leakage, and compromised legal status are just some of the high costs brought by intercompany issues.

Execution gaps: the pitfalls of manual processes

One of the biggest pain points in intercompany billing lies in the process itself—it is undeniably manual and fraught with risk. Organizations expanding globally cannot afford to make mistakes. Of the intercompany professionals recently surveyed by Dimensional Research, 43% said they face SEC investigation risk, and 38% responded that potential tax penalties have negatively impacted their overall business results.

When an organization has separate entities in multiple countries and these entities interact with each other, the accounting and tax landscape quickly becomes complex. While tax laws vary by country or region, they also vary by type of service, and tax authorities expect internal transactions to be designed with the same rigor and prudence as transactions with unrelated parties.

Increased scrutiny from jurisdictional authorities puts greater pressure on multinational companies to improve defensibility and increase financial transparency regarding underlying cost structures. For many businesses, the scale of intercompany transactions is already enormous, with total dollar amounts reportedly reaching 10 times external revenue or more. As cross-border mergers and acquisitions (M&A) increase, finance organizations need to quickly and accurately connect the various pieces of intercompany transactions within spaghetti-like structures.

Avoiding tax and pricing mistakes

If intercompany transactions are not properly managed, companies may fail to detect transfer pricing markups on the same expense due to its pass-through nature, resulting in double or even triple transfer pricing markups. Alternatively, flawed processes may trigger the U.S. Base Erosion and Anti-Abuse Tax (BEAT)—a punitive tax triggered simply because foreign entities are unaware of the tax's existence or do not know how to avoid triggering it.

Although global companies often centralize intercompany costs in one country and then allocate them to related entities, this approach can result in a 10% BEAT tax in the United States. For a $1 million transaction, the resulting $100,000 penalty may not immediately attract attention. But if it occurs across multiple transactions, the costs become quite substantial.

Oversight of intercompany functions enables corporate finance executives to identify these rising costs and adjust processes to avoid BEAT penalties and costly losses of tax deductions.

Automation enables a clean close

IFM is a new holistic approach that extends further within the finance function. It combines business process reengineering with technology to integrate, orchestrate, and automate multi-functional intercompany processes and transactions. It aims to prevent chaos during critical close periods by netting intercompany balances in real time while reducing global compliance and tax risks.

Companies can now automate the intercompany reconciliation equation, reducing up to 90% of valuable accounting hours in the financial close process. They can also improve operational efficiency by unifying and optimizing intercompany accounting, supplier invoices, tax supplements, reconciliations, settlements, and journal entries.

While the accounting department is an obvious beneficiary, the workload of tax, FP&A, and treasury teams is now also optimized. Tax teams can keep pace with the increasingly complex tax and regulatory environment while improving indirect tax deductibility, minimizing tax leakage, and strengthening tax compliance and defensibility.

Intercompany transactions account for nearly 50% of a company's total liquidity on average. The time is ripe for leaders to seize the opportunity to act, gain real-time visibility into cross-border netting rules, and significantly enhance liquidity.