This transparency has the potential to strengthen trust between governments and tax authorities, but it also brings new risks, including uneven implementation of global initiatives such as the Base Erosion and Profit Shifting (BEPS) recommendations compiled by the Organisation for Economic Cooperation and Development (OECD) that aim to standardize rules, increase information sharing between countries and improve transparency. Under the BEPS initiative, participating tax administrations were due to begin exchanging country-by-country reporting (CbCR) data in June. This will include information on a multinational organization’s revenue, profits and tax by jurisdiction, requiring tax functions to manage an unprecedented level of transparency.
“Taxpayers will have to provide an integrated, holistic view,” Benzel says. “Tax functions are being trusted by their CEOs and CFOs to collect and disclose sometimes sensitive business information. The challenge for tax functions is how to also use data analytics to understand and share how tax affects broader business strategy. In this way, tax directors are increasingly bringing value to the C-suite.”
Connecting the data dots
Creating a unified, country-by-country view of tax liabilities is easier said than done. Businesses with multiple enterprise resource planning (ERP) systems may find it difficult to access tax and financial data and may not be able to deliver the detailed information that BEPS requires. That’s because the current generation of ERP systems are designed for operational management and the data is often entered in non-standardized ways.
“I have no problem with governments wanting the country-by-country data, however; it isn’t a simple exercise for a big multi-national to easily produce the data,” says O’Laughlin.
For a company like PVH, which has expanded through various acquisitions and does business across the globe, the integration of different data systems is still a work in progress. All the more reason why the tax function should be consulted when an organization is making changes to or implementing a new IT or ERP system.
“I think the digital environment is on us and it surrounds us,” says O’ Laughlin. “Every time that financial accounting wants to implement a new software system, tax needs to be a part of the discussion. We have to make sure they take into account all of the tax requirements, and that is not always so easy, because these IT systems generally don’t provide a great tax backbone.”
“Keeping the IT implementations on track takes up a good portion of my day” says O’Laughlin.
Technology company IBM is familiar with these changes and has come a long way in modernizing its systems in order to aggregate the various data sources, according to Josh Gordon, former Vice President, International Tax, at IBM and now Vice President for finance at the group’s cloud solutions business. IBM, which is present in 170 countries, has tapped into the centralization of data and creation of data lakes for tax purposes, and is then building the required tools.
“We are still in the early stages of that, but it is something we are moving into quite rapidly,” says Gordon. But he cautions that the data is not enough. When tax authorities access ERP systems, “we need to be front and center with the tax authorities to explain it.”
The tax function must strengthen connections to the rest of the business to help put newly disclosed information in proper context because while transparency creates an opportunity for businesses to strengthen trust with tax authorities, the risk of data being misunderstood is real.