14 minute read 16 Nov 2023
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Why financial institutions should transform tax and finance functions

EY research shows banks, asset managers and insurance companies are reimagining their tax and finance functions.

In brief
  • The financial services industry is navigating economic pressures and regulatory challenges, leading to the need for innovative tax and finance operations.
  • EY 2023 TFO survey reveals that 97% of companies are overhauling their tax and finance operating models due to talent, technology, legislative and cost factors.
  • BEPS 2.0 and increasing demands for real-time tax reporting mean FS businesses will need robust systems, adequate data handling and skilled personnel.

The financial services (FS) sector is at an inflection point. Significant economic pressures – including high interest rates and persistent inflation – have been in play since mid-2022. These pressures have created considerable uncertainty that was exacerbated when, between March and July 2023, three small- to mid-sized US banks failed.

Alongside this, FS businesses across all sectors operate in an environment in which regulation continues to be more demanding and institutions are facing competition from digitally native challengers and newcomers that are often more agile.

To compete, FS businesses need to continually innovate and optimize both their enterprise-wide operating model and the products they offer their clients. “It’s wholly understandable that 2023 has been the year where EY clients have really focused on what their future-state operating models should look like,” says Ethan Schiffman, EY Americas Financial Services Tax and Finance Operate Banking & Capital Markets Leader. “How do they want to be best positioned for today and tomorrow?”

Many FS businesses have been stung in the past by transformations that haven’t delivered as promised. Indeed, according to EY research, banks are struggling to transform, with 38% of leaders saying transformations underperform against key performance indicators. In parallel, two-thirds (67%) experienced at least one underperforming transformation in the past five years.

Part of the challenge is that different functions within FS businesses are transforming at different rates. This includes tax and finance functions, which have been on a continual transformation journey in recent years, as revealed in the 2023 EY Tax and Finance Operations (TFO) Survey.

According to the survey, 97% of FS organizations are transforming their tax and finance operating models – up from 82% in 2018, when the survey was first conducted. The key drivers for change were identified by those taking part: talent, technology, the pace of legislative change, and cost.

Schiffman says FS businesses are at different stages of transformation. “On the one hand, we have clients who have taken the initiative and are on a transformation journey, and are starting to gain the benefits from transformation, such as the ability to be more agile and to transform their data and turn it into a strategic asset,” he says. “But there is a larger group who are at a far earlier stage in their transformation journey, who will really bear the brunt of relentless change unless they pick up the pace.”

It is also important to note how FS is an exceptionally broad industry, and the drivers highlighted above impact different sectors to varying degrees. This article looks at the broader FS landscape and will focus on three key sectors within:

  • Banking
  • Insurance
  • Wealth and asset management
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Chapter 1

The bigger picture

Financial services businesses need a plan to prepare for global minimum taxes and demands for data.

As far as the legislative landscape is concerned, a key area of focus across the financial services industry is Pillar 2 of OECD’s Base Erosion and Profit Shifting (BEPS) program, currently being implemented in a growing number of jurisdictions. Across the board, 82% of FS respondents in the TFO survey expect a moderate or significant change resulting from implementation of a global minimum tax under BEPS 2.0 – yet, despite this, only 32% have completed an impact assessment.

“BEPS 2.0 is no longer a concept that organizations can talk about casually – they need to come up with an actionable plan to deal with it if they’re going to avoid tax controversy,” says John Thomopoulos, EY Global Financial Services Tax and Finance Operate Leader and Global Banking & Capital Markets Tax Leader. “What is really concerning here is that, while organizations might not have an implementation plan, they certainly should have done an impact assessment – yet the numbers are disturbingly low.”

The shift to real-time or near-real-time reporting of indirect tax also creates challenges.

“The approach that global taxing authorities are taking – with the expectation of companies being obligated to provide more information on a real-time basis – means it isn’t good enough for tax and finance functions to take the old-school approach of just assigning more people to it. It requires a new way of thinking and working,” Schiffman says.

Organizations increasingly have to ask themselves if they have robust systems to gather and analyze the relevant data and whether their professionals are positioned to handle an increasingly complex global tax picture.

Yet the TFO survey shows that 66% of FS businesses say the biggest barrier preventing the tax and finance functions from delivering on its purpose and vision is the inability to execute a sustainable plan for data and technology.

As for talent, Schiffman says many organizations need to catch up. “Even in sophisticated global financial-services businesses, with large multinational tax departments, there may be just a small handful of people who are only conversant, let alone fluent, in what BEPS 2.0 means,” he says.

This sits against a backdrop of the global race for talent – and FS organizations are not alone in struggling to attract, retain, and develop talent for their tax and finance functions, as well as creating a clear talent path. Indeed, 56% of survey respondents overall admit to struggling with at least three talent challenges.

The survey also reveals that 51% of FS businesses say their tax personnel need to augment their tax technical skills with data, process, and technology skills in the next three years from a moderate to very large extent.

Finding the right balance of talent to handle all the current (and future) challenges will involve recruiting new talent, upskilling and reskilling existing talent, and looking to co-source with external partners.

BEPS 2.0 is no longer a concept that organizations can talk about casually – they need to come up with an actionable plan to deal with it if they’re going to avoid tax controversy.
John Thomopoulos
EY Global Financial Services Tax and Finance Operate Leader
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Chapter 2

The banking and capital markets perspective

Banks with big global footprints face risks of having the right people and data to manage BEPS 2.0.

The 18 months from the start of January 2022 through to mid-2023 proved particularly challenging for the banking sector. It had to withstand ongoing economic volatility and unexpected events such as Italy imposing a windfall tax on banks and the credit ratings of several US banks being cut. In addition to the failure of three small- to mid-sized US banks.

In this environment, some businesses might be tempted to delay tax and finance function transformations, but that would be imprudent.

Many banking organizations have global footprints, which means they have to be keenly focused on the impact of global minimum taxes. This is reflected in the TFO survey data, which shows that 50% of banks expect a “significant impact” on their tax-planning strategies and business operations once BEPS 2.0 is in effect. This is higher than the 39% for all survey respondents and for other FS areas, such as insurance, at 34%.

Considering how tax reporting intersects with data and talent, Thomopoulos is concerned about how banks will navigate the challenges they face. “It’s something of a perfect storm,” he says. "Banks need to upskill their existing professionals to deal with these BEPS 2.0 rules. Yet the rules are so new and counterintuitive, it’s difficult to frame them in regard to data, the operating model and how to work with other areas of the organization." 

Complicating the situation for banking respondents is that they are operating with an average of 26.3 enterprise reporting systems (ERPs), which is significantly higher than all FS respondents at 18.8, especially wealth and asset management with 10.8. This presents a serious risk from a data perspective.

“What it tells us is that clients have different, and oftentimes, disconnected data sources that they need to draw from to be able to do their job,” Schiffman says. “This could be critical when it comes to indirect tax, which is moving towards a more real-time reporting model, and to gathering all the information required for BEPS 2.0 reporting.”

The risk to banks from all the above is highlighted by the fact that 34% of banking respondents have had a significant or highly significant operational tax incident in the past 12 months (alongside 58% who have had a somewhat significant incident).

“What that means is that there was some type of an error within the organization that either had a cash tax impact, a financial statement impact, or some other type of operational risk,” Schiffman says. “It transcends the tax department, and it impacts the enterprise.”

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Chapter 3

The insurance perspective

Insurance companies lag other businesses when it comes to assessing global minimum taxes impact.

The insurance industry has experienced turbulence in recent years for several reasons, including the introduction of new accounting standards for the recognition of results from insurance policies and changes to long-duration term insurance rules in the US.

“Change in accounting standards, the significance of legacy systems and products and the significance of unstructured data sources drives further complexity,” says Dale Judd, EY Global Tax Insurance Leader. “There’s been a lot of work that organizations have had to do, and a lot of money they’ve had to put into standardizing and building their new processes and operationalizing those changes.”

While insurance shares commonalities with other FS sectors about reporting, data and technology, and talent, there are some nuances around BEPS 2.0. Most notable in the TFO survey data is that only 19% of insurance businesses have completed an impact assessment on both effective tax rate modeling and data requirements.

Some larger global clients have been able to get their hands around the broader BEPS 2.0 implications and are much further along with planning.
Talitha Jordan
EY Asia-Pacific FSO Tax Transformation, Tax and Finance Operate Leader

“This may be due to their federated models,” says Talitha Jordan, EY Asia-Pacific FSO Tax Transformation, Tax and Finance Operate Leader. “Some larger global clients have been able to get their hands around the broader BEPS 2.0 implications and are much further along with planning, whereas those with smaller overseas operations and less centralized tax functions, who perhaps believe they won’t be as affected, haven’t prioritized it as much.”

“This creates a scenario in which some insurers are well out in front of the pack while others are coming from a long way behind, with implementation of BEPS 2.0 underway,” Judd says.

Federated models and a lack of centralization also play into how insurance businesses manage data and technology, alongside the fact that most insurance spend in the technology space has been around the front end rather than the middle and back office.

“The federated model means there isn’t a centralized command and control function,” says Brianne Schoonover, EY Americas FSO Insurance TFO Leader. “Businesses in different countries operate differently, and in part that is due to the disparate nature of the insurance rules, the products and the buying triggers for insurance across each geography.”

However, this also means that very few insurance companies (5% in the survey) have a completely standardized and consistent way of working, and approach to tax compliance across the jurisdictions in which they operate.

While they may be in no rush to change firmly entrenched ways of working, insurance organizations cannot disregard the shifts in reporting, as it will significantly impact how they handle tax data and the talent they require to deliver on any new operating model.

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Chapter 4

Wealth and asset management

Smaller global footprints mean less global minimum taxes concern – but the right data is needed.

Global stock market volatility continues to be a dominant theme in the wealth-management arena – geopolitical instability, persistent inflation and rising interest rates are just three key factors that continue to create pressures.

For Lynne Sneddon, EY Global Wealth & Asset Management Tax Leader, weak markets through 2022 were a concern for asset managers in equity and fixed-interest markets, but the picture felt more stable by mid-2023. “Many managers entered 2023 expecting continued weakness, but it’s been more of a mixed market, and some have fared better than others, depending on their strategies. However, any optimism managers might be feeling hasn’t changed the sentiment around cost and pressures on margin.”

Sneddon also highlights the shift from public to private markets as another major trend, with asset managers acquiring alternative assets to create a more diversified mix.

Per the 2023 TFO survey, when it comes to BEPS 2.0, asset managers were more likely than others to say the changes would have a “minimal” impact on their tax-planning strategies and business operations (29% compared with 16% across FS and 8% of all respondents).

However, perceptions of minimal impact shouldn’t be delaying readiness to assess the impact of BEPS 2.0. First, asset managers need to be sure they won’t be impacted. And they need to be clear there aren’t any data gaps.

In addition, 76% of asset managers say there’s no sustainable plan for data and technology, a sharp increase from 39% in the previous TFO survey in 2022.

A lack of a plan


Of asset managers say they lack a sustainable plan for data and technology, up from 39% in 2022.

Part of the challenge is that if asset managers are going to spend any money on technology, it will typically be customer-facing, such as on apps and dashboards,” says Mitchell Weiss, EY Americas Financial Services Tax and Finance Operate Leader for Wealth and Asset Management/Private Equity. “But that shouldn’t be at the possibility of putting the tax and finance functions at risk.”

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Chapter 5

Co-sourcing grows as the popular choice

FS businesses are finding the right balance for them between internal and external resources.

The TFO survey shows FS businesses have clearly understood the need to transform, with 97% saying they prioritize changing their tax and finance operating models. This is up from 87% in 2022 and 82% in 2018.

“Those tax and finance teams that have agile, flexible operating models will be best positioned to address the changes that are happening right now and prepare for the future,” Schiffman says. “Those that are rigid, segmented and operate on a siloed basis are the ones that are potentially staring into the abyss.”

And key to any transformation, FS businesses will need to consider the balance between using in-house or external resources. Co-sourcing may well play a critical role here, with 96% of FS respondents saying they are more likely than not to co-source select tax and finance activities over the next 24 months – up from 64% in 2020.

This shift is indicative of the sheer scope of the work involved in transformation and the fact that businesses recognize they simply cannot manage everything internally – or that it doesn’t make sound business sense.

“Transformation can’t take place solely within the four corners of an enterprise,” Thomopoulos says. “In order to grapple with all of the challenges of today, which are only going to get magnified tomorrow, you need to have the right strategic transformation partner.”

It is evident, however, that legislative, technology and talent challenges are affecting different FS sectors in a variety of ways. So, each will have to establish their own co-sourcing journey. “Asset managers have always run a heavily outsourced model, and not just in tax,” Sneddon says. “They typically outsource as much as they possibly can in the back office, middle office, and even some front office, so their needs may well be very different to an organization less familiar with the co-sourcing process.”

The reality, however, is that transformation, irrespective of scope, is a major undertaking, and it is perhaps unsurprising that many FS businesses opt to work with a globally integrated partner to navigate change successfully.

Those tax and finance teams that have agile, flexible operating models will be best positioned to address the changes that are happening right now and prepare for the future.
Ethan Schiffman
EY Americas Financial Services Tax and Finance Operate Banking & Capital Markets Leader


Financial services businesses are grappling with overhauling their tax and finance operations. Factors like post-COVID-19 economic stressors, heightened competition from digital natives, and challenging regulations have put the sector on edge. Many financial institutions have faced underwhelming results from their transformation efforts. The EY 2023 TFO survey underscores the urgency: 97% are transforming their tax and finance models, driven by talent, technology, legislative changes, and cost. Yet, challenges persist, particularly around BEPS 2.0 implementation, real-time tax reporting, and the ever-growing need for data and tech proficiency. As ESG and other significant changes loom, a holistic approach becomes imperative, breaking departmental silos and emphasizing efficient transformation.