10 minute read 17 Mar 2022

As authorities demand increasing transparency, companies with a scalable operating model will achieve cost-effective compliance.

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How future proofing helps business tame customer tax reporting rules

By Ian Bradley

Partner, Financial Services, Business Tax Consulting, Ernst & Young LLP; EY Global Director of Customer Tax Operations and Reporting Services (CTORS)

Helping our clients transform their businesses. Passionate about inspirational leadership, continuous learning, and living the best life.

10 minute read 17 Mar 2022
Related topics Tax Tax compliance

As authorities demand increasing transparency, companies with a scalable operating model will achieve cost-effective compliance.

In brief
  • A growing number of tax authorities globally are leveraging regulations such as FATCA to increase transparency.
  • Organizations with outdated people, process and technology models risk being unable to comply with jurisdictions’ ever-increasing demands.
  • Businesses adopting a scalable and futureproofed target operating model, which normalizes change, will be able to achieve compliance in a cost-effective manner.

Rules that oblige certain businesses to report the financial transactions of their customers, investors and policy holders (henceforth termed “customers”) are numerous and becoming increasingly stringent. A growing number of authorities across the globe are seeking and gaining ever-greater transparency by leveraging laws and regulations such as the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), which require companies that hold, manage, administer or invest money or financial assets on behalf of third parties to share their customers’ information with tax authorities.

While this landscape is becoming more complex, it is clear this reporting requirement will continue to intensify. A solution that will work for today might not be fit for tomorrow.
Failure to adapt in this environment risks financial penalty, reputational damage and adverse customer experience. Businesses that adopt an agile, transformative mindset, anticipate change and improve their processes, people and technology accordingly will achieve compliance in the most effective and cost-efficient way possible.

Scalable and futureproofed processes, which can flex with every change in reporting requirements, are the key to success, according to Anish Benara, EY Asia-Pacific Financial Services Partner at Ernst & Young Tax Services Limited.

“After more than half a decade of FATCA and CRS, you would assume the regulations are stable by now, organizations would have perfected their implementation, and customer tax reporting would be regarded as business as usual,” he says. “But in reality, this is not the case.”

Initially, impacted organizations scrambled for compliance, largely developing manual processes that met the immediate obligation. Over time, they began to look for ways to improve the efficiency of those systems, often by adapting legacy technology to provide a degree of automation. Then as they entered the “business as usual” phase, many looked to generate cost savings, moving some of the more labor-intensive manual processes to offshore centers. However, when the COVID-19 pandemic hit, the latter strategy fell apart.

To make things even more difficult, new guidance is being issued regularly, the volume of transactions is increasing, and requirements are also becoming more challenging to meet. Take the Cayman Islands, for example, where authorities have recently introduced new CRS compliance forms which are required to be submitted annually in addition to an annual return. Meanwhile, other jurisdictions, such as Singapore, now expect financial institutions to have a self-review toolkit in place to ensure their internal controls are fit for purpose.

As a result, organizations increasingly recognize that, although there is an important manual aspect that can’t be erased, adaptable technology and processes have to be front and center. And the optimal solution is to have all three.

The process challenge: embedding continual change

In order to fully embed customer tax reporting and accept it as business as usual, James Guthrie, EY EMEIA CTORS Leader, says organizations need to take a wider view of compliance, anticipating the direction of travel rather than simply satisfying tax authorities’ current requirements. Equipped with this wider view, companies can then embed processes that are designed to normalize change – swiftly updating every time reporting requirements evolve.

Guthrie uses the analogy of “digging up the road” to explain the inefficiencies experienced by organizations stuck in project implementation mode. “When it comes to creating customer tax reporting processes, ideally you only want to dig up the road once,” he says. “Otherwise, you end up with duplicated effort, excessive disruption and unnecessary expense.”

The introduction of CRS and the EU’s Mandatory Disclosure Regime (MDR) illustrates this point. When these measures were initially introduced, companies fell into two broad camps –– those that adopted discrete systems designed to only capture reportable information for EU countries, and those that included data for all countries and all customers, just in case these measures were adopted more widely in the future by other jurisdictions.

“Those organizations that took the narrow view, flagging their non-EU customers as generically unreportable, had to dive back into this mass of raw data and spend time and resource making sense of it every time a new country adopted MDR or CRS,” says Guthrie. “The companies that futureproofed their systems, however, processing every customer from every country from the outset, simply had to flick a switch every time a new jurisdiction went live.”

Futureproofing onboarding processes are key, but they are by no means the only process-oriented challenge facing tax teams. According to Benara, only a few organizations have fully documented the end-to-end customer journey from onboarding to tax reporting. Only when this is achieved, he says, can organizations map operational procedures to reporting requirements and enhance their processes.

Another process challenge lies around an apparent lack of internal controls and monitoring, and processes to reduce risk. For example, Benara points out that while many organizations have achieved robust internal controls around anti-money laundering (AML) and “know your customer” (KYC) risk, comparable controls do not yet exist for multiple types of risk associated with FATCA and CRS.

The people challenge: managing key person risk

Although an over-reliance on manual input has proven unsustainable, people still play an important role in the process.

In an increasingly automated environment, where technology takes care of many manual tasks, it is still vital that companies have the right professionals – internally or out-sourced with a strategic collaborator – with the right skills and focus to deal with exceptions, oversee day-to-day operations and plan strategically for the future.

Instead of relying on a team of hundred personnel in an offshore hub, customer tax operations are increasingly the responsibility of a small number of key personnel. “In this environment, companies need to evaluate what risks they will be exposed to should key personnel leave, and create a plan to address those risks,” says Guthrie.

This small but relatively senior team of tax practitioners will have end-to-end line of sight of the process, and possess the experience and seniority needed to deal with exceptions, and errors and also to shape the strategy to meet future requirements. This knowledge and experience take time to acquire.

Guthrie explains that a decade ago it would have been relatively easy to recruit a replacement member of staff with the right skills from a competing organization because it was common for several institutions to use the same back-office systems. This is not as easy now because systems are increasingly tailored to meet the needs of specific organizations.

Rather than focusing on recruitment, greater emphasis should instead be placed on staff retention and capturing mission-critical knowledge centrally, to ensure a smooth transition if a team member does leave an organization.

The technology challenge: the economics of automating manual tasks

On the technology side, the inability of legacy technology to capture the data needed to achieve compliance is the key challenge. Labor-intensive manual intervention and exception processing is therefore required to fill the data gap, with the workload increasing every year as the volume of clients, transactions and jurisdictions increases.

In this environment, legacy in-house reporting systems may be unable to meet the massive reporting challenge and struggle to perform. This can result in a mismatch between what an organization reports to the tax authorities about its customer and the customer’s individual tax return. This can lead to investigation of the discrepancy by the tax authorities and negative customer experience.

“In the tax world, technology is all about automating manual tasks,” Guthrie says. “If you can imagine a world where we start from scratch, we would definitely focus our efforts on automating the tasks that are uneconomical to execute manually.”

“Uneconomical” is the key word, and it points towards a delicate balancing act between the cost of manually processing customer tax operation tasks and the cost of purchasing or developing technology in order to automate such tasks. This balance is also continually shifting as the cost and effectiveness of technology improves, driven in part by greater market adoption.

Best practice today increasingly involves the automated collection and processing of tax data using technology designed to cope with the ever-changing demands of tax authorities, combined with the right processes and personnel.

There is also a growing tendency for large organizations to buy third-party technology solutions, or to outsource the automation aspects to a strategic collaborator that develops and operates their proprietary technology on the client’s behalf. This is because the cost, effort, and risk involved is significantly lower than if a company builds its own solutions.

Onboarding is by no means the only area of customer tax reporting that is ripe for automation. Other processes include:
  • Storing and interpreting customer data to determine what information is reportable.
  • The ongoing maintenance of data, which includes ensuring all relevant tax information is up to date.
  • Reporting – grouping customers according to their country of residence for tax purposes and sharing that information with the relevant tax authorities.

Transforming for an agile solution

A transformation mindset is essential. By aligning with external parties who have the right depth of specialist knowledge, creating a “federated” solution, it is possible to combine process, people and technology in a truly agile approach that reduces cost pressures, addresses risk, removes key person reliance and avoids outlay on new technology.

Companies looking to improve their customer tax reporting target operating model should first scan the horizon and understand the full extent of their reporting obligations, now and in the future. Reporting requirements are not going away, in fact they’re not even going to stabilize in the near future. There’s a long journey ahead: the complexity of reporting obligations is only getting greater, the number of regimes is only going to increase, the cost of delivering this responsibility is only going to go up and the technology is only going to become more sophisticated and more challenging to keep up with.

Equipped with this information, a company can understand which elements of its operating model are within their competency or aligned to their core business, and which elements can be co-sourced or outsourced to a strategic collaborator.

One word of caution, though: if there is a business case for working with a third party, these parties must understand the way that people, processes and technology are intrinsically linked – a third party which cannot bring tax technical, tax operations and technology knowledge to the table is just a vendor, not a strategic collaborator.

For example, working with a software supplier or a third-party training company might be a good first step, but is unlikely to deliver a holistic solution. Third parties should have an intimate understanding of how the business operates and how this filters through to its evolving reporting obligations in multiple global jurisdictions. An organization can then identify the critical elements of its target operating model that should be retained in-house and also decide which should be co-sourced or outsourced.

The decision depends largely on budget and the complexity of the organization. There is no one-size-fits-all approach. But for transformation-minded organizations, the optimal solution often comes from finding a vendor that brings the right depth of knowledge and expertise to share and lighten the reporting and withholding burden.


Whatever path is chosen, in the current environment where customer tax regimes are becoming stricter and more widespread, cost-effective compliance can only be achieved with a target operating model that leverages scalable, sustainable and futureproofed processes, people and technology. That requires standardization and more automation to complete routine tasks. Finally, aligning strategically with third parties can bring knowledge or systems that are not “core” to the organization’s main area of business.


Organizations that adopt a holistic attitude to compliance, predict future customer tax reporting demands, and embed change as “business as usual” are well placed to address risk and secure the best possible customer experiences.

About this article

By Ian Bradley

Partner, Financial Services, Business Tax Consulting, Ernst & Young LLP; EY Global Director of Customer Tax Operations and Reporting Services (CTORS)

Helping our clients transform their businesses. Passionate about inspirational leadership, continuous learning, and living the best life.

Related topics Tax Tax compliance