Should tax be keeping pace with transformation, or help shape it?

By

Jay Nibbe

EY Global Vice Chair – Markets

Innovative and forward-thinking go-to-market leader helping EY clients worldwide achieve their goals. Technology enthusiast and part-time wine producer.

11 minute read 17 May 2018
Related topics Trust Tax Workforce Digital AI

The tax function is undergoing transformation at the hands of technological and political trends, and many businesses need to catch up.

How’s your tax function doing?

 

How is your tax function measuring up to the multi-faceted changes taking place within your organization? Are you helping lead it with insights on legislative developments and fresh perspectives on new business strategies to optimize decision making? To the casual observer, tax departments may seem unlikely drivers of the transformational wheel, but the reality is quite the contrary.

The role today’s tax professionals play in large global organizations transcends outdated perceptions of backroom employees juggling data, spreadsheets and forms to ensure compliance obligations are met.

In fact,  your tax professionals today need to be more connected to your organizations than ever before,  adding value to the critical business decisions being made in your organization. Tax departments should be able to respond quickly and proactively to demands for more transparency and information required from tax authorities, many of whom have themselves already dramatically invested and upgraded their digital tools that can gathehttp://www.ey.com/gl/en/services/tax/digital-taxr and analyse corporate account information in real time.  

This means your tax function needs to jump on the transformational bandwagon, upgrading and enhancing its own tax operating models by investing in people, processes and technology that connect directly with both your broader organization and with government tax authorities. These upgrades enable tax directors to harness their own data to drive new insights and efficiency through automation within your organization. And it empowers them to build relationships with multiple internal and external stakeholders to keep the tax function attuned to changing market dynamics.

If your tax function doesn’t transform, it will end up increasingly disconnected from the world around it and struggle to meet its objectives — and by extension, your company’s business objectives.

An effective digital tax strategy for this transformative age will require the right combination of approaches to new technologies, personal skills sets, handling big data, collaborative effectiveness, and management administration, among others.

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Chapter 1

The drivers of tax disruption

Changing markets and regulation

At EY, we see several key trends driving the increasing digitalization of tax administration functions:

Changing markets

Technology changes everything. And when ways of conducting business and engaging with customers change, it can often have unforeseen implications on how that activity is taxed.

 “We see a lot of companies now bundling together goods and services,” says my colleague Nick Muhlemann, EY Asia-Pacific Operating Model Effectiveness Partner. “That might include services that weren’t provided before, such as those related to diagnostics and analytics. The concept of selling a bundle of goods and services creates a whole new framework for taxation.”

Processes are also undergoing changes that may act as a catalyst for corresponding changes in tax administration. For instance, my Singapore-based colleague Edvard O Rink, EY APAC’s Operating Model Effectiveness Leader, asks, “How much value can be attributed to an algorithm instead of people functions?”

“Technology — from 3D printing to robotics and artificial intelligence — will keep changing the way businesses operate, and where and how value is created. This requires new interpretations and applications of tax rules,” Edvard explains.

Albert Lee, EY Asia-Pacific Tax Technology & Transformation and Digital Tax Leader based in Hong Kong, says tax systems are trying to adapt. “A lot of the tax systems were built to tax tangible things, in a world where people didn’t really travel much, when things were more bricks and mortar,” he explains. “But since the world has gone more virtual, and people and entities don’t have clear residency, it has become more difficult to come up with a clear answer to tax jurisdiction questions that were previously straightforward.”

As next generation products and practices race beyond the current capability of tax authorities and corporate tax functions to assess and report on them, new technologies and processes will need to be a priority.

The regulatory landscape

Policy and regulatory trends inspired by these shifting markets can also have an impact.

After all, it’s not just businesses that are rethinking business models and operations as a result of emerging technologies. Public tax authorities increasingly also have access to the assets they need to transform how they collect tax — meaning that those reporting them are forced to move at their speed. “Tax administrations have the abilities to deal with big data, and they actually expect the taxpayers do, too. And what we have found is they are ramping up their audit activity and their audit requests,” says Houston-based Carolyn Bailey, EY Americas Digital Tax Administration Leader.

This, says Zurich-based Clare Franklin, EY Switzerland Connected Tax Transformation Solution leader, has ushered in a significant and likely permanent shift in attitudes about how tax connects to business activity, and the need for transparency around these activities. “This is having a major impact on everything from workforce to supply chain to trade, as businesses adapt to the new demands of enforcement mechanisms,” she says.

This is clearest at the global level, as countries around the world implement the recommendations of the Organisation for Economic Cooperation and Development (OECD) to prevent entities avoiding taxes by using base erosion and profit shifting (BEPS) strategies (which exploit gaps and oversights in international tax codes). The European Union has also taken a number of steps aimed at boosting tax transparency and ensuring digital commerce is taxed in the countries where it occurs rather than where computer servers are housed.

We’ve also seen increasingly regional tax legislation trends affect business administration. For example, flagship tax legislation from the Trump administration has reduced the US corporate tax rate to below the OECD average for the first time in 30 years. These sorts of changes can impact decision-making around where to locate business operations.

More generally, growing public distrust of business combined with improved methods of data gathering, has prompted a broader trend of more scrupulous enforcement in reporting standards. “Tax and customs authorities from around the world are demanding unprecedented amounts of data from businesses,” says my Sao Paulo-based colleague, Sergio Fontenelle Marquez, EY Assessoria Empresarial Ltda, South America. “It’s a whole new world based around data.”

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Chapter 2

The shape of change

Digital tax and data analytics

Technology is changing tax in a number of distinct ways. Some of the most prominent trends that tax managers are engaging with today, and will increasingly have to engage with in the coming years, include:

Digital Tax

Our recent Tax Technology and Transformation survey found that 84% of surveyed organizations acknowledged technology was the most important factor in improving the effectiveness of the tax function. With a shifting external landscape, tax functions will need to internalize this change if they are to keep up. And tax professionals themselves may have to be more assertive within their own organizations if they are to drive this change within their functions.

The reality is that government is already rapidly on the move with digital tax. Filing taxes used to be a matter of laborious self-auditing and then submitting paperwork to government tax authorities for processing. But the digitalization of corporate financial assets means tax authorities of the not too distant future will have a much closer involvement in this process. Indeed, many tax authorities are already going digital. And they expect taxpayers to do the same under the reasoning that once the relevant assets of a company are digital, tax authorities should be able to plug directly into those data sets and collect the relevant information.

“Increasingly, we are finding that governments have more and more information so they don’t actually need to rely on a tax return,” Lee says. “They’ve created rules where they can request huge amounts of information from taxpayers, exchange information with other tax administrators and then run their own analytics to determine how much tax is due.”

Data analytics

Bailey sees the emergence of tax data analytics platforms like our own EYKeySpace as another defining transformational trend facing the industry.

Daren Campbell, our Americas Tax Technology and Data Analytics Leader, recalls how such platforms helped one company managing 350 entities across 70 countries.

Here at EY, we have deployed a data blending tool to transform and consolidate the required information into a data warehouse, speeding up their operations.

“This has not only simplified the tax reporting process and slashed the time required — it also gave the company the capability to deploy analytics to produce rich visualizations that helped find process inefficiencies, identify tax planning opportunities, and manage tax risk,” explains Campbell. “Their analytic capabilities can now keep pace with the rapidly increasing data analytics of any tax authority.”

Robotic process automation (or intelligent automation)

Robotic process automation (RPA) refers to the substitution of human labor (often with repetitive and time-intensive tasks) with digital labor, and may have a significant impact on how tax functions go about their tasks.

New York-based Sharda Cherwoo, EY Americas Tax Intelligent Automation and Robotic Process Automation Leader, recalls how bots helped a client modernize sales and use tax software to gain efficiencies and cut costs.

“We automated the entire process, including the printing of the returns, using RPA. And that whole process saved them over 60% of time — a huge saving. That freed them up to do analytic work, to really look at sales and use tax with their tax planning hat on, adding greater value to the client in the process.”

In China, the Shanghai Tax Services team proposed a robotic process automation (RPA) solution to automate the process for filing value-added tax returns for a EY financial technology client. 

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Chapter 3

The changing tax professional

Characteristics of the tax professional of the future

Historically, the tax function has been a conservative one, reactive rather than proactive when it comes to implementing innovation. Susan Pitter, EY Global Deputy-Tax says a new mindset and a new approach is needed.

“Tax functions collect financial information in real time and then reconcile earnings with taxes owed and file a return, which is a historical document,” says Pitter. “Inherently, their reason for being has been to reflect the past rather than drive transformation for the future. That needs to change.”

Lee sees the current digital stagnation of tax functions as being due, in part, to a lack of experience: “Tax is not used to investing in infrastructure,” he explains. “The tax professional of the future will need technological awareness and skills, and the ability to interact with businesses,” says Lee. “Rather than being the little guy in the dark corner, the tax professional will need better soft leadership skills to be able to sell their vision throughout the organization.”

The four key elements of the future tax professional

In light of these new pressures and challenges, what form can we expect tax professionals of the future to take? Here are four ways your tax professional should change:

  1. Technological competence: If the future of government tax administration will be shaped and enabled by technology, then the next generation of tax professionals will have to be capable users and promoters of a range of those technologies, including analytics, AI, and RPA. Tax functions will have to recruit beyond traditional talent pools for tax law and accounting, and venture into recruiting Science, Technology, Engineering and Mathematics (STEM) students and tech-savvy demographics to staff their tax functions.
  2. Real-time data analytics ability: Another result of the wider implementation of innovative tax technology in your tax operations will be the increasingly real-time access by tax administration directly into your ERP systems. Your tax professional will not just be responsible for filing historical records with relevant tax authorities — they will need the skills to analyze financial data ‘real time’, relying on technology platforms and processes that enable simultaneous analysis to support both risk management and  strategic decision-making.
  3. Sharpened soft power: If you are to effectively transform your tax capabilities, your tax professionals will need to step out of the shadows and develop the ability and determination to influence, persuade and push for change within your operating business units to ensure the economics of the business consider, and plan for, the best tax outcomes.  Tax functions need to align with business plans to embed the value of A CONNECTED TAX function to key stakeholders. They will need to be forward thinking and innovative in their approach.
  4. Ability to respond to emerging trends: The digitalization of tax is just one tiny facet of the enormous structural transformations occurring in every industry and sector as a result of the digital revolution. How will gig economy workers will be taxed? Where do you tax products made and delivered through new, digital channels? What potential regulatory trends may impact the way taxes are collected and managed? The tax professional of the future will need to keep one eye on these and the other on transformations and ensure that your tax function can stay one step ahead of the curve.

We live and work in dynamic times, and all components of successful business will need to play there role in meeting the challenges of these transformative times as well as seizing the unprecedented opportunities they present. Companies transforming their tax function will need to address new operational processes, adopt new technologies and develop new professional skillsets to answer the demands of changing data flows, data analysis and data requirements that are mandates of the global digital economy. It’s not the world it was just 5 years ago, and it’s certainly not the tax department it was then either. But it’s a better, more valued place to be, and those tax functions who embrace these changes and invest in the ‘connected tax professional’ will be best positioned to succeed.

EY’s Connected Tax spotlights the rise of the tax function as a strategic boardroom partner. We help you link the broader business and its stakeholders, tax authorities and the data and information that are transforming business models. Learn more here.

Summary

Businesses are investing in tax people, tax processes and tax technology to better connect tax functions with other operations and government authorities.

About this article

By

Jay Nibbe

EY Global Vice Chair – Markets

Innovative and forward-thinking go-to-market leader helping EY clients worldwide achieve their goals. Technology enthusiast and part-time wine producer.

Related topics Trust Tax Workforce Digital AI