9 minute read 7 Feb 2019
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How tax steps up to help businesses manage risk in a changing world

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EY Global

Multidisciplinary professional services organization

9 minute read 7 Feb 2019

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A connected tax function helps organizations identify and manage tax risks that might negatively affect broader strategies.

The story of branded clothing company PVH Corp. is similar to that of countless companies that have moved beyond their local market to the international stage in recent decades.

PVH, which started out sewing shirts for coal miners in Pennsylvania in 1881, acquired Tommy Hilfiger in 2010. The transaction transformed the mainly-US wholesale company into a multinational apparel giant with revenue of US$8.9 billion in 2017. And as the company grew, so too did its complexity.

The company’s tax function has also increased its profile within the organization and become a trusted voice in the boardroom. Where PVH’s tax professionals once had to focus only on US federal, state and local taxes, it must now keep track of tax obligations in 40 countries. PVH has built up regional headquarters in various parts of the world, along with a network of advisers to provide tax advice in specific jurisdictions.

“As soon as you bring in the international aspects of tax it is not just a little bit harder – it is exponentially harder,” says Matt O’Laughlin, Executive Vice President, Global Tax at PVH, who joined the business in 2010. “You have to take this big puzzle and focus on materiality. I am very focused on the regional headquarters, and then we bring in the other countries to make sure they know what the policies are that we would like to implement.”

There is nothing worse than receiving a bad audit outcome in a jurisdiction and it was something that could have been avoided if better communication was part of the process.
Matt O’Laughlin,
Executive Vice President, Global Tax at PVH

Communication is vital for building trust between the tax function and the rest of a business, especially in light of the various regulatory and technological changes affecting multinational businesses today. In a fast-changing tax landscape, multinational companies are scrambling to identify and manage future risks.

A new era of tax risk

Governments have pursued a variety of tactics to bolster revenues still recovering from the global financial crisis from a decade ago. They have reduced corporate tax rates and created incentives to attract foreign investment while simultaneously adopting anti-abuse measures and modernizing policies concerning digital commerce. This accelerated pace of legislative and regulatory change at times seems overwhelming.

At the same time, technology is transforming the way taxes are assessed. Tax returns used to be prepared on paper from historic records. Now some administrations are using real-time data, for example to assess value-added tax (VAT). By using automation and analytics, tax authorities aim to extract insights from the ever-growing amounts of data, including instances of fraud or tax avoidance, according to EY’s Tax administration goes digital report.

Tax audits used to happen after the year end. Now more and more tax authorities are starting to employ simultaneous tax audits in real time.
Ute Benzel,
EY EMEIA Tax Leader

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.

While transparency creates an opportunity for businesses to strengthen trust with tax authorities, the risk of data being misunderstood is real.

“Compliance has become a very strategic exercise as you control the story,” says Jeff Michalak, EY Global International Tax Services Leader. “You can’t necessarily control the information the tax authorities have about you but you can put it in the context of a story, the true story about you so they don’t have misconceptions about what’s happening here.”

Filling the communication void

More flexible cloud-based ERP systems in the future will usher in a new era of data storage and data analytics, enabling businesses to deal with tax authorities on the basis of a “transparent view of everything,” according to Benzel.

This will make tax an increasingly strategic issue for businesses interested in building trust with their stakeholders. Those organizations that can’t explain their tax data to tax administrations in addition to their own C-suite and board of directors face reputational and financial risks down the road.

O’Laughlin of PVH says he attends board meetings every few months to explain which changes are material to the organization, whether it’s BEPS or US tax reform. “I want to clarify things, but not get too detailed so that everybody can understand the 30,000-foot view.”

IBM benefits from a network that it has spent decades building up across the jurisdictions in which it operates, Gordon says.

“We have been very successful in explaining our business to tax authorities around the world,” says Gordon. “In most countries we have a foot on the ground from a tax perspective. We may not have a huge staff in every country, but we have enough to service them.”

Having a local team where they can have a face-to-face contact with the business and tax authorities – that has certainly helped us in many, many cases.
Josh Gordon,
former Vice President, International Tax, at IBM

Finding the right talent

Today’s tax function is increasingly connected to operational, strategic and decision-making functions within the business as tax regulations and policies evolve, and is in close touch with tax authorities in countries where the business operates.

As a result, the skill sets required in the tax department are evolving. Obviously, the ability to monitor and interpret complex and evolving taxation laws and regulations remains a core capability for anyone working in the tax function. However, digital management and analysis, along with communication (with boards and external stakeholders) are becoming sought-after competencies.

Getting your people structure right in the operating model is critical. The focus on technology means that people coming in need to have a more technological background in addition to the technical.
Olivia McTavish,
EY Insurance Sector Account Leader

Going forward, tax functions will increasingly need “digital technologists” able to understand data platforms and identify ways in which artificial intelligence can take over drudge work and enhance the identification of liabilities.

“The data is step one,” Gordon says. “As that comes together, robotics and automation within the tax department will start to accelerate. That will take the lower-skilled work off the team’s plate and let them focus on adding value on a daily basis.”

In terms of communication skills, BEPS “opens more of a political, public relations aspect of tax that never existed before,” says O’Laughlin. “Transparency is key.”

  • Tax is an important consideration for the corporate structure. There are tax implications for everything the modern multinational does, yet not every business treats the function with the respect it requires.

    That’s certainly not true at Steelcase, the US furniture maker with offices and factories in 80 countries around the world. Jim Keane, the firm’s President and CEO was chief financial officer between 2001-2006, and remembers a time when the senior tax official at many big corporates wasn’t sure of a seat in management meetings. Yet Keane also believes that person has to earn that privilege. “You get to be ‘in the room’ by deserving to be there,” he says.

    Some in the C-Suite view the tax function as a black box of complex data to be kept at a distance and summoned at key moments – such as when financial reports are published. Keane half-embraces that concept. “I like the concept of tax as a black box,” he says. “But I need a super-useful front end who can translate that data, making it relevant to our day-to-day operations.” His tax chief, he adds, “doesn’t overwhelm me with data. She distills, ensuring I know everything I need to know.”

    And while Keane is a strong believer in people, he points to the benefits technology can bring. “In the past there were hidden costs and revenues we couldn’t go after, as the potential gains were too marginal. Artificial intelligence will change that, and it’s up to our accounting partners to help identify those costs and create value-creating opportunities.”

Managing tax risk: steps to take now

  1. In a rapidly globalizing world with frequent legislative and regulatory change, there can be unexpected tax implications for broader business strategies. Top executives should consult with their tax departments regularly to understand disruption and minimize risks in order to implement business strategies with confidence.

  2. Increase investments in the tax function to achieve cost reductions in business processes. Strengthening connections between the Tax, finance and even human resource functions can lead to efficiencies and free up resources to be directed to higher value activities.

  3. Enlist your tax executives to identify tax implications and obligations up front as well as analyze benefits such as incentives to help maximize value.

  4. Leverage data analytics to identify the impacts on the business and show how tax affects the broader business strategy [to the C-suite]. This can reduce costs and provide value to the greater business.

  5. Be able to explain tax data tax administrators as well as C-suite executives and boards of directors. Otherwise, the business may face reputational and financial risks down the road.

Summary

Whether it’s talent, technology or regulations, today’s tax function faces many changes. But the tax function that can stay connected with stakeholders while it navigates these developments will be able to keep risks in check and the business on course.

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By

EY Global

Multidisciplinary professional services organization