Why it is important for tax and finance departments to transform now
Tax and finance functions need to evolve to become strategic business partners to meet the challenges of the evolving tax landscape.
Tax and finance departments are under intense pressure due to a multitude of challenges. These include rapidly evolving legislative and regulatory landscape, changing talent pool characterised by a shortage of accounting and tax experts, and swift advancements in data and technology.
These challenges are leaving a lasting impact on tax and finance operating models in organisations. In conversation with Elaine Yeo, EY Asean Tax and Finance Operate Leader, we discuss some of the hurdles associated with this transformation of the function.
How have global developments in the last few years impacted the transformation of the tax and finance departments?
There has been a multitude of legislative and regulatory changes, particularly in the realm of international tax laws through the introduction of global minimum tax rules in Pillar Two of the OECD/G20 Base Erosion and Profit Shifting (BEPS) 2.0 project. According to the 2023 EY Tax and Finance Operations (TFO) survey, 94% of CFOs and tax leaders in Southeast Asia (SEA) expect a “significant” or “moderate” impact from BEPS 2.0. The implementation of tax reforms inspired by BEPS 2.0 bring about new and intricate compliance responsibilities.
The increased adoption of electronic invoicing (e-invoicing), heightened and expectations for environmental, social, and governance (ESG) reporting, and greater importance of transfer pricing due to shifts in supply chains are also placing added strain on the resources of tax and finance departments. Organisations are therefore considering functional and digital transformations aimed at harnessing the potential of data and technology to enhance the efficiency and quality of reporting and compliance. Traditional methods of consolidating and distilling data manually are no longer effective or efficient. It has become essential for organisations to utilise technology solutions, including predictive and analytical tools.
In addition, tax and finance departments must transition into strategic, value-adding partners for the business. For example, beyond fulfilling compliance and reporting obligations, how can they play a pivotal role in securing green finance options to fund sustainability-related infrastructure, technology and innovation in the organisation?
What are the challenges that tax and finance departments face amidst such global developments?
The challenges can be categorically summarised as:
1. Environment and process
Staying up-to-date with the ever-changing requirements of regulatory and statutory compliance places significant strain on existing processes and resources. Furthermore, global organisations are grappling with greater complexities in their international trade and cross-border transactions due to geopolitical tensions and alterations in tax regulations. The costs associated with compliance and risk management are expected to rise considerably over time. Organisations will also need to align their broader growth strategy and their commitments to compliance and sustainability.
2. People and culture
The 2023 EY TFO survey revealed that CFOs and tax leaders are grappling with a range of talent issue such as motivating talent and avoiding burnout within the teams. Seventy-four percent of the SEA respondents saw a need for their employees to augment their tax technical skills with new data, processes and technology abilities in the next three years. Over a third admitted they do not have enough highly skilled professionals capable of monitoring, evaluating and implementing tax legislative and regulatory change around the world.
Given rapid changes in technical laws and regulations, employees must acquire new skills that extend beyond technical tax expertise to areas like data management and income tax accounting. Additionally, new skills sets are needed to adapt to and effectively utilise technologies.
Closing the skills gaps in teams requires significant effort. Overhauling teams and introducing new approaches can be daunting and are often met with opposition. Consequently, effective change management becomes paramount.
3. Data and technology
Is there accessible and pertinent high-quality data that can be utilised? Does a single, reliable source of data exist? Is there a technology solution that can effortlessly unify the finance and tax life-cycle instead of maintaining separate, isolated functional or process workflows and tools? These are some of the questions that weigh on the minds of CFOs and tax leaders.
Limited technology budgets has always been an issue, so it is important to prioritise essential projects over others. Another notable hurdle is the absence of a well-defined and coherent technology strategy and roadmap that extends across various business functions, aligning with the broader organisational strategy.
The ability to effectively harness the right data is absolutely pivotal for success. It not only facilitates improved, quicker and more informed decision-making within the business; it also enables more effective responses to tax authorities and regulators in an era characterised by heightened tax transparency. This is evident in the 2023 EY TFO survey, where 39% of respondents from SEA identified the lack of a sustainable plan for data and technology as the primary obstacle to providing high-value counsel on the overall direction of the business.
How can organisations manage these challenges that the tax and finance departments face?
Organisations should initiate their transformation journey by conducting an assessment of their existing operating model, processes, data infrastructure, technology capabilities and resource capacity. This initial step is crucial for understanding the implications and impact of any transformation on the organisation. It will become the foundation for developing a business case for change.
When shaping a future-proof operating model, it is important to view technology and tools as enablers. Technology should address gaps in data availability and quality while enabling real-time reporting and predictive data analytics. The transformed operating model should encompass well-defined business processes supported by a robust governance framework that outlines roles, responsibilities and controls.
While building an in-house modern tax and finance function that is equipped with the right personnel and future-ready technology may be a viable option for some organisations, a co-sourcing arrangement may work well for others. A vast majority of the 2023 EY TFO survey SEA respondents are inclined to co-source specific tax and finance activities within the next 24 months. This highlights a preference for partnering with third-party vendors who invest in dedicated personnel, data capabilities and technology to help manage the complexities and demands faced by modern tax and finance functions.
Co-sourcing is widely regarded as a means to reduce the time spent on routine and repetitive compliance tasks, allowing employees to focus more on strategic and value-added work. Businesses also see co-sourcing as an efficient and flexible way to match skilled talent and technological resources with fluctuating workloads, including special projects and unexpected events such as the COVID-19 pandemic. Many regard the ability to develop their teams and provide opportunities to work on more strategic activities as the most significant benefit of co-sourcing multi-country tax compliance and statutory reporting activities.
Co-sourcing can also serve as a transitional arrangement, particularly in response to the evolving landscape of BEPS 2.0 regulations. For instance, an organisation might engage a third-party vendor to oversee its tax accounting and provision activities until its operations stabilise.
What final advice do you have for organisations?
We find ourselves in an extraordinary period characterised by rapid and substantial changes in tax regulations and financial standards. It is important to take action now – organisations that have embarked on transformations are likely to find it easier to adapt to evolving laws and regulations. Their tax and finance functions are also better positioned to offer enhanced strategic value to the organisation.
Having said that, it is crucial to adopt a strategic approach to talent management. Forward-thinking businesses must be capable of attracting, nurturing, and retaining professionals who possess expertise not only in tax matters but also in utilising technology to deliver valuable insights across the entire enterprise.
There is also a need to reassess strategies for collaborating with other functions to establish a comprehensive technology strategy that seamlessly integrates with upcoming advancements. Transformation will help to drive agility and establish clear roles and responsibilities between the wider finance operations and tax teams. Both teams must align on the overall enterprise goals and work harmoniously to meet additional global tax reporting and compliance requirements such as BEPS. Training and development programmes, including change management initiatives, will be key.
The transformational roadmap is unique for each organisation, hence it is important to engage important stakeholders and external expertise, where necessary, to provide guidance on a smoother implementation that aligns with best practices in the industry.
This In conversation with article features Elaine Yeo, EY Asean Tax and Finance Operate Leader.
