“The landscape is constantly shifting and becoming increasingly competitive,” says Ethan Schiffman, EY Americas Financial Services Tax and Finance Operate Banking & Capital Markets Leader. “On one hand, the legislative and regulatory environment continues to increase in complexity, yet on the other, regulators are more receptive to a combination of organic and inorganic growth. Now we are starting to see US and non-US regulators approve acquisitions, restructurings and dispositions – and all of these are happening in parallel with the continued evolution of digital finance.”
Schiffman expresses the view that, post-crisis, banks have gone to great lengths to demonstrate to their regulators and other key stakeholders that they are “now adequately capitalized, adequately controlled and have the right processes in place to strategically envision what a transformative environment should look like and bring it to fruition.”
And this environment is one that sees many factors in play. According to the EY TFO survey, “Organizations are having to find a balance between driving value, managing risk and reducing cost. But they face challenges retaining and transforming their talent, keeping up with legislative and regulatory change, and future-proofing their technology and data.”
Four inflection points that are coalescing
For the tax and finance functions, Schiffman points to four inflection points that are coalescing:
Changes to the global tax legislative landscape
Tax policy around the world has undergone considerable change and shows no sign of abating. At front of mind for many multinational organizations, including larger financial services businesses, is the imminent implementation of a global minimum tax as part of the Organisation for Economic Co-operation and Development’s BEPS 2.0 project. This is set to have far reaching implications for the tax and finance function.
Digital tax transformation
Regulators are increasingly demanding transparency and access to granular data when it comes to reporting, which is creating pressures in multiple areas. According to the TFO survey, 57% of respondents felt that complying with emerging digital tax filing requirements, such as e-invoices and other electronic transactional filings, will increase the cost of running the tax and finance functions — with 55% saying it will increase workload.
Tax and finance functions do not exist in silos, so it is critical for successful transformation to be viewed from the perspective of broader enterprise-wide change. Yet, according to Stuart Lang, EY EMEIA Financial Services Managed Services Leader, this is an area in which there can be a disconnect.
“I think some tax departments would say they’ve been transforming for a while, but I would challenge that,” he says. “I think they’ve been implementing regulatory compliance for a while. I think very few have been doing what I would call true enterprise-wide transformation. Namely, asking what will this function look like in 5 or 10 years’ time, what is the program of work needed to get there, and, critically, how does this align with and feed into how the organization is transforming as a whole with regard to people, process and technology?”
ESG tax transparency
Banks have increasingly incorporated environmental, social and governance (ESG) considerations into their business models and day-to-day operations. While ESG matters may not always have been an historic focus area for tax and finance functions, the rapidly changing landscape necessitates that the tax and finance team have an active seat at the table to drive a holistic approach to ESG matters, inclusive of important tax considerations such as tax transparency, total tax contribution and the effective tax rate.
The road to transformation
These complex and interconnected issues are challenging enough on their own. Yet banking and capital markets organizations are having to deal with all the above in an environment where they are constantly expected to reduce costs and manage the number, location and mix of headcount year after year.
Organizations that don't have a transformative mindset, that aren't asking themselves what their future state operating model should look like and how they can get there as quickly as possible are going to find themselves at a strategic disadvantage, which could be permanent.
And many are already grasping the need for change. Along with the 87% who are already transforming their tax and finance models, 92% are reallocating budget from routine activities to strategic activities. Yet the road to transformation is far from simple, and banks are pointing to a variety of key obstacles.