With escalating regulatory pressure, the transformation of companies' tax and finance activities into data-powered operations becomes a crucial business goal. Naturally, funds and multinationals are characterized by their interwoven transnational structures, and therefore the first to experience the challenges of multi-country tax compliance and to benefit substantially from digitalization.
In the current tax environment, even small-scaled entities such as SMEs and startups can fall short of regulatory requirements, as they often lack the resources to employ a dedicated team of tax experts.
Based on the 2023 EY Tax and Finance Operations survey performed across 32 jurisdictions and 18 industries, 96% of businesses are remodeling their tax and finance departments – either by building their own capabilities, outsourcing key tax and finance functions to third-party vendors or a combination of both. By embracing new technologies, companies are one step closer to optimizing the management of their tax and fiscal duties, reducing costs, identifying affordable solutions, remaining compliant and avoiding risks. It does not matter the size of the business. Digital solutions rely on a quick and paperless flow of information, commonly referred to as the “superhighway”, which benefits firms of all scales.
Keeping pace with the ACD's digital evolution
Such information superhighways will be used by the Administration des Contributions Directes (ACD) in the future to modernize fiscal services as well as accelerate their tax collection. The analysis presented by the Luxembourg Finance Minister on 31 March 2023 expressed the need of the ACD to improve digitalization in light of current tax legislative frameworks and increasing demands. With an average of 122,897 monthly visits to the Luxembourg ACD website during 2022, private individuals and businesses alike show a lively interest in the government’s digitalization initiatives. We can therefore expect the modernization of the ACD to gain further momentum.
Of course, such a plethora of digital information can be intimidating if the business structure is obsolete and unprepared to organize the extremely high volumes of information carried by the superhighway. This can give rise to the risk of increased data lakes, where data cannot be directly used, or worse, where information is pulled in the wrong way, leading to a false perception of the truth. Knowing how to store and structure high volumes of information is crucial for companies. This will be possible by taking into consideration the “3 Cs”: 1) coordination, 2) compliance lifecycle management, and 3) control of risk.
As Thomas Sowell pointed out already in the 1990s: “Knowledge can be enormously costly, and is often scattered in widely uneven fragments, too small to be individually usable in decision making. The communication and coordination of these scattered fragments of knowledge is one of the basic problems - perhaps the basic problem - of any society.” In practice, coordination is therefore the number one priority to guarantee the control over all tax obligations for multiple entities across different jurisdictions. It will help with common tasks such as filing tax returns, or spotting specific tax advances and ad hoc requests by the relevant tax administration. While coordination is commonly regarded as useful by most small businesses, it is absolutely fundamental for funds or multinationals operating at a global scale.
Understanding the importance of a well-managed compliance lifecycle is essential. One may wonder what the lifecycle is all about and whether one can tick the “compliant box” by simply filing the required information on time. A common example of the relevance of managing the lifecycle is in instances when the ACD requests information dating back several years. Having the right systems in place will allow companies to access all relevant information in a few clicks and avoid falling into the “data silos trap” where one subject (either internal or external to the company) holds access to information that is not accessible by other subjects within the same company. For example, a key employee, such as a tax director, leaves the business without handing over the background of and access to key data. This type of data silo will limit the ability of the company to react to requests from the ACD, thereby creating barriers in the internal organization and increasing the compliance risk to which the company is exposed.
Finally, a successful control of risk is the direct consequence of the combined efforts in coordination and compliance lifecycle management. The benefits of risk management applies to businesses of all shapes and sizes, regardless of industry. Tax compliance is one of the key areas of risk not only in the eyes of the company’s management, but also in those of the public, including the company’s customers and investors. Having an active risk control framework allows companies to avoid financial penalties, double taxation, unexpected tax assessments and tax audits, while preventing reputational risk.
Such a three-pronged mechanism, the 3 Cs, allows companies to cast light on potential vulnerabilities and engage with companies and tax authorities in a timely manner. This is the power of an adequate operating model in the field of tax and finance.
Will the implementation of new technology make the existing workforce redundant?
Currently there is not enough workforce available to cope with the increasing compliance requirements, therefore we see technology as a competitive asset for employers to increase their staff effectiveness and avoid the risk of losing their competitive edge. At the same time, workforce employability is evaluated with a different set of criteria focusing on mixed skills (e.g., tax/IT, or finance/IT) which will empower employees to leverage new technologies fully while being equipped with the tax technical knowledge to keep up with the ever-changing environment. Consequently, it’s of utmost importance to rely on specialized skillsets and the current available technology, which in combination is creating a flywheel, allowing the business to increase the quality of their compliance output and cut costs at the same time.
Considering the prior mentioned EY survey, co-sourcing with a provider with notable competence in data, technology and shared service centers is the preferred choice when businesses are adapting to the new tax operating models. Of course, implementing new technologies can be daunting for many companies.
However, companies can rely on a growing network of service providers that offer these solutions to businesses of all sizes. The increased automation in repeatable tasks with low added value has also brought about an increase and enhancement in the personalization these providers can deliver to their end users. This makes partnering with a trusted service provider even more beneficial for businesses who need the advice of professionals specialized in tax compliance. On top of that, these service providers can help businesses select the right technologies for their needs and can provide ongoing support and maintenance to ensure that the technologies are working seamlessly. This makes it possible for the business to keep the workforce constantly trained in operating the latest technologies and finally increase their return on investment.
Of the new technologies that can be applied, two have a proven track record of reliability and scalability in the tax and fiscal services industry. For example, cloud computing is becoming increasingly popular and its use in public services has increased four-fold worldwide during the last five years1, as it allows companies and public entities alike to access their financial data from anywhere, at any time. This can be particularly helpful in keeping the internal compliance storage aligned for businesses that have multiple locations or are operating with a hybrid model. It is of utmost importance for startups too, in order to scale up based on business needs.
Another technology in this field is robotic process automation (RPA). RPA involves the use of software to automate repetitive tasks, such as data entry, document processing and document updates. This can be particularly helpful for businesses that have a large volume of financial data to process, as it can reduce the workload for employees and improve the accuracy of financial records.
As the adoption of the emerging artificial intelligence continues to increase, businesses and public authorities acting as early adopters will be able to unlock unprecedented solutions to global challenges, and shape businesses and societies to a new paradigm.
To conclude, digital tax transformation is a momentous opportunity that businesses should embrace as there is a real benefit in taking the steering wheel and becoming an expert in driving the compliance efforts on the new information highways. This is especially the case considering the recent burden on limited tax resources and the continued increase in complexity of the fiscal ecosystem globally.
[1] Public cloud services end-user spending worldwide from 2017 to 2023, Statista, October 2022
Article originally published on Agefi.
