10 minute read 15 Sep 2020
Business people brainstorming after lockdown

How COVID-19 is accelerating transformation and the five-year plan

By Kate Barton

EY Global Vice Chair – Tax

Helping organizations develop smart tax strategies. Passionate about diversity, women in business and tax tech.

10 minute read 15 Sep 2020

The global pandemic shocked businesses in the short term. It’s also increased the transformation of operating models in a permanent shift.

In brief
  • Tax and finance functions need to be flexible in times of crisis.
  • COVID-19 is catalyzing the transformation of operating models.
  • Co-sourcing can be a good option for managing change.

Across the globe, businesses entered 2020 contending with rapid, sweeping changes. Many were still adapting to US tax reforms even as they modeled the so-called BEPS 2.0 proposals affecting digital taxation by the OECD, a framework covering more than 135 jurisdictions. Global trade was in flux as long-standing free trade pacts were upended, replaced with a complex array of new tariffs, duties and bilateral agreements. Meanwhile, governments were digitalizing, demanding data files in place of filing papers, and tax controversy was on the rise, fueled in part by rigorous tax authorities sharing more and more of this data with each other.

And that was before the COVID-19 global pandemic layered on additional complexity as governments raced to support economies and businesses and businesses were forced to contend with keeping workforces – and to the extent possible, their bottom lines – safe and healthy.

In 1991, the EY Worldwide Corporate Tax Guide summarized the tax laws in 106 countries in just 381 pages. It now takes 1,936 pages. And those pages don’t even count the lengths to which governments have gone to support their economies in the midst of the COVID-19 global pandemic.

All of this leaves the tax and finance functions of businesses large and small struggling to operate effectively and efficiently.

“In the last five years we’ve experienced the most dynamic policy and legislative activity since the beginning of international taxation,” says Jeff Michalak, EY Global International Tax and Transaction Services Leader. “That goes back to the 1920s and 1930s, when the League of Nations first helped design the tax rules. The shift has been massive.”

Faced with such fast-moving changes, tax and finance functions have had to be flexible. Suddenly, the three-to-five-year plan – a mainstay of strategy expected to guide the allocation of resources for everything from personnel to international expansion to technology – has come under pressure.

“This is a very challenging environment in which to lay out a long-term plan,” says Rob Weber, EY Global Business Tax Services Leader. “You have a lot of competing interests, and the more international and global the footprint of the company, the greater the complexity. These companies needed a plan that demonstrates where they were going in the long term, but with the ability to pivot quickly in a volatile environment. Resilience and versatility had become critical.”

A challenging landscape made even more complex

Organizations themselves were acutely aware of the challenge. The 2020 Tax and Finance Operate (TFO) survey, which quizzed professionals from more than 1,000 companies on how they were reacting to the emerging operating environment, was completed before the onset of the pandemic. The responses revealed key pressure points: talent; regulation; data and technology; and cost reduction. Ninety-eight percent of respondents revealed they were re-examining their tax and finance function due to deficiencies in their operating models.1

But if all that regulatory and technological change had already coalesced into a burning issue, the global spread of COVID-19 threw gasoline on it. Companies were forced into firefighting, and changes to regulations and working practices that would once have been considered over months and years had to be acted on in weeks or even days.

“This pandemic has really magnified the challenges companies are facing and thus it has triggered an accelerated transformation process,” says Dave Helmer, EY Global Tax and Finance Operate Leader. Helmer says the sudden shift to remote work forced businesses to reckon with challenges they have connecting their workers to data and technology, which is often stored on computers at the office. The sheer volume of legislative change to support business and enact stimulus and the implicit pressure to reduce costs as businesses were forced to adjust to the economic fallout of the pandemic only served to make businesses realize that they need to accelerate their operating model transition.

“People were looking at multi-year transformations,” Helmer says. “Now they’re looking at 6 months.”

Many companies had an even more pressing concern: simply getting the cash required to keep the business afloat. Again, the tax function had a key role to play here, with the onus on monetizing tax assets, accelerating deductions and deferring income. Many companies faced a trade-off – whether to stabilize in the short term by getting cash immediately, incurring a higher accounting tax rate for the next three to five years; or deferring that cash in favor of a better accounting tax rate. And all these decisions were made without any clarity of how the financials would shape up for the rest of 2020. Let alone 2025.

Forward planning remains critical

With such mounting concerns, one could be forgiven for dismissing long-term considerations as an abstract luxury. All of which begs the question: has COVID-19 torched the five-year plan? In short, absolutely not. Companies still need to lay out that long-term view. What the pandemic has done is simply change how the plan has to function.

With change now veering towards the fast and furious, the effective approach lies in more nimble tax planning, with aggressive attention paid to the shifting tax and political climate around the world. Central to this is the in-built potential to rapidly change direction, reflecting the agility required of the business overall in such a moving environment.

In fact, the tax strategy has to be embedded far more deeply into the broader business. Gone are the days when tax and finance were an unobtrusive back-office function. They must now sit squarely on the radar of the C-suite, who will require frequent updates on key information from tax and finance to be able to make the decisions that will steer the business.

As Michalak explains, “You can't have the key decision-makers sitting around talking about how they’re going to change the business model, and then at the tail end call tax and say: ‘Hey, here’s what we’ve decided to do – do you have any comments?’”

An adaptable tax and finance office, with a considered but flexible plan, can play a key role in improving profitability across the business. Reducing costs in the tax and finance function can help the company drive higher bottom-line profit. Meanwhile, the department can add value by way of tax insight and planning, and by answering questions about the tax implications of the various scenarios being modeled and adjusted on a regular basis.

It also reduces risk across the organization – with tax controversy and enforcement set to explode around the globe, having access to tax data, understanding and assessing the shifting state of play, and making sure the company is proactive in dealing with controversy will be key.

Future-proofing the tax and finance function

While these transformations are necessary, it doesn’t follow that they’ll be straightforward. Tax functions were already having to juggle multiple challenges before the pandemic. Respondents to the EY TFO survey revealed they spent more than a quarter of their time (27%) ensuring they were compliant; 22% in tax planning; 21% in being a business partner; 16% managing costs; and only 13% providing valuable insight to the wider organization.

Significantly, considering increasing digitization across the tax landscape, 65% said the biggest barrier to achieving their tax function’s purpose and vision is the lack of a sustainable plan for data and technology.

It’s unsurprising then, that with companies now facing the pressures of change and catching up to both the vast benefits and crushing demands of data and tech, many are examining the benefits of working with trusted external providers. Indeed, in the EY TFO survey, 73% of respondents said they are more likely than not to co-source some critical activities in the next 24 months in order to add value, reduce risk and decrease cost.

The co-sourcing model is becoming increasingly popular. Here, critical value-adding elements remain in-house, while the high-cost, high-risk or compliance-based elements of the work are outsourced to specialist partners.

“Could the average business build its own unique tax tech platform that can interface with 180 countries?” asks Weber. “Probably not. Working with a firm that has its own platform and shared services would enable it to operate far more cost-effectively, and to redeploy those dollars back to a most critical part of the business. Where does it want to be the best? Do that internally. Where does it want to be the most cost-effective? Outsource.” Many companies see the value of being a member of a multi-tenanted tax technology platform – whereby they leverage the incredible expense of building a global tax platform of a Big 4 by outsourcing their tax day-to-day operations.

Whether they choose to work with partners or go it alone, all businesses must now see their tax and finance planning as nimble and evolving. A plan committed to paper and simply left on the shelf to gather dust is no longer fit for purpose.

“That plan must now be a living document,” says Weber. “Companies still need a framework that outlines the critical path and the next three to five years, but it needs to be versatile and agile to adjust as they go. Understand that six months from now the plan could look very different. And in 12 months, even more so.”

  • Five action points for responsive planning

    Jeff Michalak, EY Global International Tax and Transactions Services Leader, highlights five key action points for responsive planning:

    • Ensure that tax approach is structurally connected to the business, on the radar of the key decision-makers in the wider organization, and that communication is both regular and two-way.
    • Tax controversy management processes and structure should assume an even higher priority, as should cost structure.
    • Businesses should check whether they have the right people, processes and tech to be as efficient as they can in executing the established priorities.
    • Build a connection to the broader tax policy direction and approach of tax authorities in relevant jurisdictions. Awareness of this bigger picture is critical.
    • Build agility and flexibility into the plan. When things change, the plan will need to as well.

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The three-to-five-year plan – a mainstay of strategy expected to guide the allocation of resources for everything from personnel to international expansion to technology – has come under pressure from COVID-19.

About this article

By Kate Barton

EY Global Vice Chair – Tax

Helping organizations develop smart tax strategies. Passionate about diversity, women in business and tax tech.