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Four factors driving tax transformation in banks

Across banking and capital markets, organizations are having to find ways to future-proof their tax and finance functions.

In brief

  • Financial institutions face increasing regulatory and legislative pressures, which are creating distinct challenges for their tax and finance functions. 
  • A majority are struggling to ensure that their approach to data and technology is robust and fit for purpose.
  • Many are looking at transformation, with 87% of respondents in a recent EY survey saying they are changing their tax and finance operating model.

The financial services industry has undergone unprecedented change since the global financial crisis of 2008. A significant proportion of this has been due to a rapidly evolving regulatory and legislative landscape, which alone has provided considerable challenges and opportunities in the intervening years.

The banking and capital markets sector itself is also transforming rapidly. The emergence of digitally native financial services providers is disrupting the marketplace and serving as a catalyst for even the most traditional establishments to embrace the evolution of technology. And, more recently, cryptocurrencies and blockchain are making their presence felt, the true impact of which won’t likely be seen for years.

This backdrop is causing banks to reimagine the way they operate. Nowhere is this truer than in tax and finance functions. According to the EY 2022 Tax and Finance Operations (TFO) survey, 87% of banking and capital markets respondents said they are changing their tax and finance operating models.

“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.

Enterprise-wide transformation

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.

According to the TFO survey, the biggest barriers to delivering a tax and finance function’s purpose and vision are:

  1. A lack of a sustainable plan for data and technology (38%)
  2. An inability to identify, evaluate and respond to legislative and regulatory change (32%)
  3. An inability to hire and retain required talent (21%)

It is worth addressing these individually.


Chapter 1

Building a robust technology model

Banks are behind the technological curve.

Data and technology challenge come as no surprise to Anne Farrar, Partner, Financial Services Tax, Ernst & Young LLP. “Tax departments are coming to the realization that the root cause of many problems starts and usually ends with how data is being received and used,” she says.

“The nature of tax is that businesses are always going to receive structured and unstructured data, and they need to be able to manage that and have a platform that is going to be able to disseminate it out to all the people that need to use it. There are so many potential risks when it comes to data and I’d argue many organizations wouldn’t be able to identify all of them, let alone effectively manage them.” 

Farrar also points to the fact that many organizations she speaks with do not have a dedicated tax technology team or a dedicated tax technology budget. “But where does that leave the tax department in terms of levers to create change, especially in the increased regulatory environment and the race for talent?” she asks.

The fact that many banks’ tax and finance functions are increasingly slipping behind the technological curve is reflected in the results of the TFO survey, which indicate that the uptake of technology still seems relatively poor. For instance, only 43% use data warehouses or data lakes extensively; 35% use cloud-based platforms extensively; and a mere 4% use automation, such as artificial intelligence and robotic process automation, extensively.

Interestingly, the expected average spend on tax technology over the coming three years by banking and capital markets organizations is just US$2.7m, which appears startlingly low considering how critical technology will be going forward.

“The notion of the tax department as a tax controller and central hub for information is starting to fall by the wayside because of the digitization of tax requirements,” says Schiffman. “Within two or three years, regulators and taxing authorities could require a direct pipe into banks’ upstream systems. Organizations need to be getting on top of this rapidly evolving imperative now.”

Companies are looking to co-source or outsource instead of investing

Lang believes that this lack of investment is in part because the tax and finance functions have struggled to be heard in the wider environment. “Many tax departments find it difficult to paint a story of why it is important, what the business case for change is, and what solutions are needed to meet the requirements. We have held sessions and brought together Tax and IT and helped Tax to share their requirements — and you see a lightbulb go on in other departments.”

Considering the low level of investment in tax technology, it is no surprise that many banks are considering outsourcing or co-sourcing select tax and finance activities in the next 24 months — with 83% saying they are more likely than not to do so.

Furthermore, many have already identified the benefits of partnering with a provider to build a comprehensive data and technology transformation strategy and solution for the in-house tax function, with 39% citing a reduced tax risk profile and 38% pointing to increased value.


Chapter 2

Navigating regulation and legislation

The legislative and regulatory landscape continues to shift, and the reporting burden continues to increase.

The next major change to come down the line will be BEPS 2.0, which includes the introduction of a global minimum tax rate. This adds to a complex picture that creates a number of considerations for banks.

“Institutions need to work out how they will be impacted and what they will need to do to comply with rapidly evolving and highly complex rules,” says Schiffman. “These are inextricably linked with each other and the conversation around data and technology and talent. The rules are changing so fast in so many jurisdictions in such a hyper-technical way that you cannot intuit what the consequences will be. You need to take real information and create a rules-engine-enabled model to understand and analyze what the impact will be under a base case and for different scenarios.”

Schiffman says this approach will be critical in enabling a tax department to articulate to its stakeholders what the potential consequences of legal and regulatory change are, along with the downstream consequences. “It also serves as the foundation to look at what the forward-looking economic consequences are to the organization. For example, how is it going to change the effective tax rate, the cash tax profile, and the geographic distribution of tax?”

“All of those things, now more than ever, are increasingly important with the drive toward tax transparency and disclosures. And, on top of all of that is being able to make all the necessary changes to your global tax reporting framework to comply with the rules.”

Central to the ongoing legislative picture are the emerging digital tax filing requirements that are expected to have an impact on cost, risk profile and workload. The TFO survey reveals that banking and capital markets respondents expect to spend an average of US$10.1m over five years — which is not an insignificant amount.

Yet again, many organizations are looking at how best to navigate this complicated landscape. Forty-four percent say that the most significant benefit of partnering with a provider to co-source multi-country tax compliance and statutory reporting activities is reduced risk, followed by cost reduction (32%).


Chapter 3

The race for talent

The technological and regulatory landscape is creating a real challenge when it comes to talent.

The TFO survey reveals a desire to shift the talent focus from routine to strategic processes — with 77% of respondents saying that their people are spending an inappropriate amount of time on data and 63% saying the same about tax compliance.

As Talitha Jordan, EY Asia-Pacific Financial Services Tax Transformation Leader, explains: “From a regional perspective, most of the conversations we have with clients are very much focused on talent. In some ways it feels that the talent challenge is also the technology challenge, because upskilling people in the tax and finance functions is going to be critical going forward.”

Indeed, 96% of survey respondents say that tax and finance personnel will have to augment their tax technical skills with data, process and technology skills in the next three years from a moderate to very large extent.

Yet this is just part of a bigger picture around talent, with tax professionals looking for better remuneration, better opportunities and more purpose from their employment.

“I’m seeing people going into completely different industries,” says Farrar. “For instance, they are moving from tax and finance in banking to agile, transformative organizations, such as the tech giants. They’re also starting to look at jobs with regard to quality of life, and that could be hard for financial institutions who are implementing mandatory back-to-office programs.”


Chapter 4

The ESG imperative

Amid all of this, ESG is an increasing priority for all businesses. Yet, the regulations are still being developed.

Time spent by tax and finance functions on governing and reporting to key stakeholders — such as governments, shareholders and the communities in which organizations operate — is set to increase significantly over the next two years.

Indeed, the TFO survey reveals that 81% expect an increase in enhanced tax disclosure and/or public reporting, and 68% expect an increase in global tax policy and controversy matters.

The challenge here is that ESG regulations, in many instances, are still being developed, which makes forward planning problematic. Plus, banks clearly already have enough to contend with right now, without adding to an already heavy compliance burden.

“Organizations will be asking themselves if there is an immediate benefit by taking action or a demonstrable detriment by not taking action today,” says Schiffman. “We know of clients who have made investments into different types of alternative energy opportunities in order to achieve tax-advantaged returns, and in so doing, helped to promote the ‘E’ of ESG. It’s a similar situation with societally favorable projects, such as low-income housing investments that generate new markets and create jobs.”

Looking at US-based banks, for instance, there is a material reduction in their global effective tax rate because of these types of investments. Equally importantly, there is the opportunity to make a real difference while improving the general perception of financial services.


Chapter 5

Future-proofing the tax and finance functions

Banking and capital markets businesses should transform their tax and finance functions now, if they are not already.

Despite that urgency, the survey reveals that 88% of banks are planning to reduce tax and finance budgets by an average of 4.8%.

These cost pressures are nothing new. But having pulled levers such as reducing headcount, relocating certain operations and introducing new operational tools, organizations are having to be far more strategic in their sourcing models. This will likely entail co-sourcing certain tax and finance functions so that people can work on strategic and high-value work that will add value to the wider business and propel it forward.

“Many banks are already co-sourcing key functions across corporate income and non-income tax compliance, tax accounting, transfer pricing and tax planning, and will continue to do so,” says Schiffman. “And, as tax and finance functions experience the many benefits of a co-sourcing model, they begin to explore other areas to expand the model across, such as tax controversy support and payroll operations.”

Take tax controversy — the survey revealed that only 30% of respondents currently co-source this function, but an additional 38% are now considering doing so.

“Ultimately, banks will have to identify their fundamental core tax department functions,” says Schiffman. “These are the components that truly must remain within an organization — and the rest can be co-sourced to be able to drive additional cost savings and bring increased efficiencies.”

Key actions for banks to kick-start tax transformation

As a starting point, banks may want to think about the following:

Banks should start by critically evaluating their current-state tax and finance operating models

“What do you do today and how do you do it? Only once you understand where you are, can you start to build an actionable roadmap for future transformation,” says Schiffman. “The bridge between the current-state and future-state operating model really is the design and implementation of your transformation vision and action plan.”

What levers can you pull?

“Think about opportunities to reduce costs by co-sourcing or outsourcing functions,” says Schiffman. “EY teams have helped clients to implement lasting change that lets them upskill the experience of their team so that they can focus on adding value, serving as a strategic collaborator to the business and performing at the top of their license. Having them do so with enhanced technology that drives efficiencies can help futureproof tax and finance as much as possible in an environment that is constantly changing.”

Keep cost in perspective

Partnering with the right strategic service provider allows banks’ tax and finance functions to benefit from continual enterprise-wide investments in tax data and technology that a single financial institution would be unwilling to make, let alone sustain long term. “We constantly invest in leading edge tax technology and data analytics, so that EY clients don’t have to,” says Schiffman.

Get to grips with your data

“There’s no escaping the fact that data will be absolutely essential in the future,” says Schiffman. “Each and every tax department has to know its data and strive to have timely, accurate and complete information that is fit for purpose. And then when they inevitably receive questions from tax authorities and other regulators – which are coming with increasing frequency – they will be in a position to respond in a way that brings matters to a conclusion as quickly as possible.”

In a complex and fast-moving environment, standing still is not an option for banking and capital markets organizations. Finding the right sourcing model that can help meet the pressures around regulation, technology, talent, cost reduction, risk management and adding value, has arguably never been more critical.


Banking and capital markets organizations are having to transform their tax and finance functions as a matter of priority. This is an imperative in light of incoming regulation and a shift toward an increased use of technology. Those businesses that embrace change and make bold decisions around their sourcing models are the ones that are most likely to manage risks both now and in the future. They’ll also be better placed to seize opportunities as they present themselves.

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