As authorities around the world shift to near or real-time assessment, what can companies do to meet the demands of digital tax reporting?
In today’s health-obsessed world, we need to ensure that the tax function undergoes a fitness test and has a plan in place to build endurance for what’s coming. In our increasingly connected global economy, almost every enterprise has experienced the aches and pains of digital disruption.
The world of tax has not been spared, particularly as authorities change how taxes are assessed and collected. Tax authorities want their laws enforced and are concerned that they are not getting their fair share of taxes. In addition, tax authorities are using technology in new and different ways to enhance their collection efforts.
The growing ease and speed of data transmission is increasing the type and volume of information that must be shared with tax authorities. Meanwhile, authorities have increased requirements for tax transparency around the globe, including more disclosures about individuals’ bank accounts, reports explaining business activity and taxes paid on a country-by-country basis and more detailed accounting of transfer pricing activities, to name a few.
In a growing number of countries, tax authorities are no longer asking for a tax return to be filed. Instead they are using the real-time data they receive to assess tax, and the taxpayer must quickly agree or disagree with the assessment.
All of this is really causing companies to pause and consider: Is the tax department fit for what lies ahead?
Tax authorities have invested heavily in modernizing their own systems and are performing advanced analytics on the endless data they are collecting. Compliance itself is moving upstream and the audit is following. Cheryl Belles, Digital Tax Administration Leader says, “We are seeing a fundamental shift – from a regulatory and enforcement environment traditionally focused on outputs in the form of tax returns to one increasingly focused on the inputs – the data itself.”
Many businesses are scrambling to catch up; if they are not sure they understand what their own data says, they risk having governments reach a different – or incorrect – interpretation. Government is now the first to say what a company owes (as opposed to the company putting forth its estimate of its tax burden via a tax return). The company now must accept the real-time assessment or very quickly refute it showing where it is wrong. This is a big change!
As financial and other business data is reported ever more quickly to tax authorities, it’s becoming crucial for the tax function to engage with key stakeholders and to further align with the business, its supply chain and its customer interface.
With tax data more visible and critical to manage across business units, tax needs a more enhanced relationship with the company’s IT function. How a company’s ERP system is configured matters for tax – and in a digital collection world will matter even more. For example, 70% of companies around the world are on SAP. Companies will need to migrate to S/4 HANA by 2025, which will be a sizable undertaking for most companies.
This creates an opportunity for companies to ensure that their enterprise system is configured in a way that enables the tax function to handle the growing number of tax administrations going digital around the world. “It’s critical that companies develop a trusted data and technology strategy that efficiently drives today’s compliance, reporting, planning and audit defense,” says Dave Helmer, EY Global Tax and Finance Operate Leader, adding that this strategy must also be “future-proofed” for continual technology and regulatory change.
Companies are still burdened by complex legacy systems, says Hong Kong-based Albert Lee, EY Tax Tech Transformation Service global co-Leader. “Having tax properly integrated is one of the main challenges facing organizations. The more integrated, the more accurate and efficient tax will be,” he says. “Investments to improve are often made in customer-facing systems or in areas where the regulations require it. Now is the time, as more and more tax authorities are becoming digital.”
The digital revolution has also given companies new responsibilities towards consumers. Businesses are now expected to gather and protect data relating to their customers and, in some cases, provide that information to tax authorities.
It’s a tricky balance, because businesses are justifiably cautious about providing commercially sensitive information to third parties, but ever more information is being demanded by tax authorities. It is important to first understand the rules, and then to design customer portals and other systems that comply with these requirements
A fresh approach
To address these pressing issues, many businesses are discovering they need to transform their tax operating models by investing in the right people, processes and technology. This was clearly evidenced in a recent EY survey, Reimagining the Future of Tax and Finance, where 84% of the 1,700-plus respondents stated that they were currently making changes to their tax and finance target operating models.
In transforming these models, Helmer believes it’s critical that the enterprise first agrees on a shared view balancing risk, value and cost. After these priorities are fully understood, the company can then select those activities where the company must have a high degree of influence and control and thus be “best in class”, and those where it should be “best in cost” and deliver the activities with the highest degree of efficiency.
Traditionally, tax departments were historians. They prepared tax returns based on the previous year’s activities, reconciling income with expenses, claiming incentives and credits, and making corrections as necessary. The tax return they filed was literally a look back.
Today, tax authorities, enabled by their own digital transformation, want more information in real time. For instance, more governments now require electronic invoicing and detailed general ledger data – a trend that will only accelerate. Belles says, “The e-invoicing trend is really the foundation of government efforts to become fully digital. Once the tax authorities have complete visibility of all transactions, they don’t need a tax return from you to determine how much they owe.”
Latin American countries have been pioneers of this approach, and other countries are following their lead. For example, Brazil has rapidly increased the regular data submissions a company must make over the last five years. Now a company must comply with 29 submission requirements, many of them monthly. Mexico, meanwhile, requires companies to keep information in digital form so authorities can access it on demand.
In this digital world every company needs a tax technology road map. Is the company going to build its own platform or will it co-source to a firm and be a member of a multi-tenanted technology platform? This is a big decision and needs to be carefully considered.
The role of AI and other cutting-edge technologies
To help manage shifting tax risks and create more opportunities for tax teams to show the C-suite how tax connects – or should connect – to their broader business decisions, businesses are developing their own digital tools. Artificial intelligence (AI) in particular is helping tax departments both meet increasing demands for transparency-related compliance and reporting obligations and improve their own processes and efficiencies, leading to cost savings.
“The real value in AI for tax is the combination of deep tax expertise with the technology to produce an innovative result of higher accuracy and scale that neither can achieve alone,” explains Richard Clough, Global Chief Data Officer for Tax.
“Focusing AI capabilities on improving the overall ‘fitness’ of data the tax function needs will result in more accurate tax analysis of both opportunity and risks in the large pool of business data required by tax authorities,” Clough says. This will help tax directors make their function’s data needs better known to their colleagues in the C-suite, increasing understanding of the important role the tax function can play in strategic decision-making with increasing need of new commercial opportunities to be examined through a tax lens.
The exponential increase in data volume and the significant decrease in time available for analysis, due to real-time assessments by governments, is forcing a change in the business processes and tools used in the collection and analysis of tax data. Manual techniques are no longer adequate – AI enhances the human element by making initial classification decisions and identifying outliers. Self-scoring capabilities of AI allow for more focused reviews by the tax professional.
Businesses should take every opportunity to improve the security and accuracy of the data they provide to tax authorities or other government agencies. They also need to understand how the tax authorities are analyzing and using their data – and have the same analytical capabilities as those authorities.
Introducing AI presents opportunities for organizations to improve their compliance, to change and streamline their approaches or to undertake new activities that were previously prohibitive.
“Individual AI tools can provide significant value when applied to specific challenges,” Clough says. “But the benefits of AI are most apparent when multiple AI technologies are brought together to provide a holistic solution to a wider business issue.”
A 360-degree view
Transforming the tax function enables the organization to develop innovative approaches that connect the tax function with all business processes and build value.
“For example, we helped a company deploy a data blending tool to transform and consolidate the required information into a data warehouse, speeding up their operations,” adds Daren Campbell, Americas Tax Technology and Data Analytics Leader in one of our videos chronicling the Future of Tax.
“This has not only simplified the tax reporting process and slashed the time required,” says Campbell, “it has also given the company the capability to deploy analytics to produce rich data visualizations that help find process inefficiencies, identify tax planning opportunities and manage tax risk.”
Technology also increasingly allows business planning to take on a new dimension by highlighting the potential impact on tax. For example, advanced analytics – applied to data available from across the organization – can allow rapid “what-if” analyses of the tax impact of any business decision and any change to a business model, enabling better business decisions. With one out of three countries around the world changing their tax laws right now, a company’s ability to have state-of-the-art tools to do real-time scenario planning globally is critical.
As tax functions transform, they not only better manage risk and build digital trust, they also enable their businesses to build a more cost-effective and efficient future in the new world of connected tax. These dividends to the business are like a leaner, stronger body that results from eating right and regular exercise. Like any fitness regimen, the key to success is taking the first step.
How to make your tax function digital ready
- Consider changes to the tax operating model (tax co-sourcing, shared service centers, etc.) as part of any IT or finance transformation, and develop a digital strategy that addresses how to manage emerging risks and support the business while driving higher strategic value. A tax technology road map is essential – are you going to build or buy?
- Have a plan for staying up to date with new regulations around digital reporting requirements – both content and format – which are changing almost daily. Many changes will require significant IT lead time, so it is important to know what’s coming up in the next 18-24 months. Enterprise-to-enterprise technology should work collaboratively so that both front end tasks such as documentation, validation, classification and monitoring and back-end responsibilities to withhold and report tax function seamlessly.
- Take care in storing highly sensitive tax-related data and adopt best practices on standards and procedures that ensure that your tax data is accurate and complete; data controls on all data coming into the tax function will improve its “fitness.” Apply policies and protocols relating to data management, analytics and tax controversy that address the changing landscape of government and tax authority requirements.