Why tax functions need to evolve for businesses to grow sustainably in an ever-changing landscape

Organizations must continuously review their tax strategies and incorporate their tax agenda into their overall business strategies. 

In brief

• Tax functions must evolve and transform, in tandem with the changing business landscape.
• External and internal challenges demand for higher tax compliance standards.
• Espousing the ESG agenda in tax reforms is imperative for sustainable growth.

Some people call it change, some say it is about adapting, while others call it evolution. All these terms are very much relatable to how tax functions must deal with the tax environment today.   Tax functions have evolved significantly, especially in recent years, driven by the changing economic landscape, enhanced tax transparency, the exchange of information between tax authorities, the use of technology and the digitalization of businesses and the increased importance of tax collections to governments. Disruptions such as the COVID-19 pandemic have also forced tax functions to be more nimble than ever.
 

The need to evolve
 

Tax functions (i.e. tax departments or tax teams) of organizations need to evolve and transform, in tandem with the changing business landscape as well as other external and internal factors. Amongst the external factors impacting organizations are geopolitics, supply chain issues, the use of technology as well as government policies. Internal factors include manpower and talent requirements, business risk factors and cost savings measures. The 2022 EY Tax and Finance Operations Survey, which covered 1,650 executives across more than 40 jurisdictions and a dozen industries, found that organizations have to balance between driving value, managing risks and reducing costs. This clearly shows that tax functions need to evolve to cater to the current dynamics and to be future-ready.
 

The challenges of today’s tax function
 

In the current environment, various challenges are being faced by the tax function. Some of these challenges are in attracting and retaining talent, keeping up with rules and regulatory changes and ensuring that the business is able to adapt and be aligned with the advancement of technology and data. International tax developments and global tax reforms such as the Base Erosion and Profit Shifting (“BEPS”) 2.0 initiative as well as other complex legislation, are forcing tax functions to review their ability to cope with such changes and the increased demands on their time. With greater scrutiny by tax authorities and the need to ensure high compliance standards, tax functions are playing a bigger role to ensure proper compliance processes are set in place and that risks are  identified and managed on a timely basis.
 

Tax functions need to have a clear vision, strategy and approach. They need to implement solutions and be ready to face frequent legislative changes, by having the right people and managing risks objectively.

Environmental, social and governance (ESG) and the role of the tax authorities in enhancing compliance
 

Tax plays a key role in the economic growth of a country and towards creating a sustainable and equitable impact to the environment and society. The tax functions of today need to understand the importance of ESG and must be able to support and further their organization’s ESG agenda. On the other hand, the government will need to ensure the tax system is fair and equitable to build trust and encourage greater and more cooperative compliance. Focus on increasing tax revenue alone will not be sufficient as consideration will also need to be given to the sustainable growth of the country and the lowering of tax compliance costs to nurture a tax system that is fair, equitable and able to attract new investments. Tax collection should be optimal and yet, it should not be burdensome to taxpayers to comply with tax rules and regulations. Taxpayers must also feel that they are treated fairly and that a fair share of tax is being paid by all.  For this reason, it is important for the tax authorities to crack-down on non-compliance and the shadow economy.

Governance and oversight of tax matters by boards and senior level management have gained importance and the Malaysian Inland Revenue Board’s introduction of the Malaysian Tax Corporate Governance Framework (TCGF) and Guidelines on 11 April 2022 to assist companies in designing and operating their TCGF and to encourage companies to voluntarily participate in the TCGF program is timely. Overall, ESG principles have become an important agenda for businesses, and this is impacting how they operate, how talent is recruited, how customers or the markets perceive the organization and how their tax functions operate.

Benefits of effective tax functions
 

Tax functions that are agile and future-ready are crucial. Some key benefits from having effective tax functions are as follows:

• Better cash management
• Less time taken to perform compliance requirements.
• Effective use of manpower
• Ability to transform and digitalize processes and reporting
• Decreased penalty risk
• Improved reporting and management
• Enhanced collaboration with external stakeholders
• Ability to provide strategic inputs into other business areas to manage tax risks upfront and to continuously monitor changes in facts and circumstances
• Reduced audit and investigation risk and tax costs
• Greater tax certainty

Conclusion
 

It is important for organizations to review their tax strategies and incorporate their tax agenda into their overall business strategies. Any transactions that the company is embarking on need to take into consideration the tax implications and it should be ensured that all tax considerations are addressed, prior to the execution of the transaction. Tax functions play a key role in this. In addition, the tax function should utilize technology and data analytic solutions to enable them to operate in a dynamic and informed fashion.
 

The tax functions of tomorrow will need to be sustainable, able to withstand challenges and must be agile in facing the ever-changing environment.  Ultimately, tax functions must ensure that they are seen to be a value-adding strategic partner to the business and not a mere compliance or supporting function.