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The role of tax accounting in a high-stakes tax environment

Results from the EY 2023 Tax Accounting Executives Survey show firms are evolving their tax accounting functions to address new challenges, but more is needed.

In brief
  • How is your tax accounting function leveraging technology to streamline processes and provide greater insights to stakeholders?
  • How might you modify your tax accounting processes considering the increasing focus on liquidity? 
  • Are you prepared to react to questions that arise in a new age of tax reporting with more reporting and disclosures requirements and greater transparency?

How EY can help

In today’s tax environment, the role of the tax accountant is critical. Global tax policies are in flux, tax reporting and compliance requirements are becoming more complex, and an uncertain economy and high interest-rate environment have heightened the need for effective cash management. These dynamics have raised the profile of the tax accounting function, which is often where data and reporting concerns first appear. With tax decisions increasingly connected to companies’ business strategies, transforming tax accounting processes is one way to keep up with the changing times.

 

Results from the EY 2023 Tax Accounting Executives Survey (the Survey) show that companies are evolving their tax accounting functions to address new tax challenges, but more and faster adaptation is needed to overcome, if not stay ahead of, these challenges. The Survey highlights companies’ current tax accounting priorities, as well as the growing role of data, technology, artificial intelligence (AI) and data analytics in improving accuracy and decision-making and in creating the kinds of efficiencies critical to success in the months and years ahead. This article highlights several focus areas for businesses to consider, as well as some market-leading practices based on EY analysis.

 

Understanding and addressing today’s tax accounting challenges

 

Ongoing regulatory changes continue to put pressure on tax accounting — consider:

  • The Financial Accounting Standards Board (FASB) is drafting an Accounting Standards Update, Improvements to Income Tax Disclosures, which will expand considerably tax disclosures, requiring compilation of additional data points and implementation of new processes and controls.
  • Multiple sustainability/environmental, social and governance (ESG) disclosure standards (Global Reporting Initiative, World Economic Forum, etc.) include tax matters (e.g., country-by-country reporting (CbCR), total tax paid and the company’s tax strategy statements) in transparency reporting.
  • The Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has introduced a new complex global minimum tax system with significant new data and technology requirements for multinational companies with revenues of EUR750 million or more.
  • The European Union public CbCR directive, also applicable to multinational companies with revenues of EUR750 million or more, requires companies to prepare public CbCR to enhance transparency on tax matters.

It is no wonder that nearly half of the respondents to the 2023 EY Tax and Finance Operations Survey, which took the pulse of 1,600 tax and finance professionals across 32 jurisdictions and 18 industries, said the lack of a sustainable plan for data and technology is the biggest barrier to achieving their vision for a modern tax and finance function. A recent EY article details how tax complexity, real-time data demands and talent challenges are impacting today’s tax departments and discusses how data and technology can help transform an organization’s tax department. 

 

All these challenges are even more acute for the tax accounting function, which commonly faces short close timelines; inconsistent and redundant data issues; and increased scope, quality and precision expectations from audit committees and boards of directors. In today’s complex regulatory and resource-constrained tax environment, automation, centralized and coordinated data, and analytics are essential to improving tax accounting efficiencies.

 

The case for centralized data and analytics

 

As new regulatory requirements come online, it is increasingly clear that digital tax reporting is providing local taxing authorities with increased access to organizations’ data, resulting in more targeted tax examination efforts. Accordingly, the tax accounting function must have access to consistent, timely, complete, accurate data that can be used, reused and integrated into a variety of reporting requirements and calculations.

 

Data risks may be further exacerbated as pressure increases to shorten the financial reporting close timeline, i.e., the time the accounting team has available to finalize tax provision calculations and prepare the financial statements for a particular period. As noted in the Survey, nearly half of respondents expect close timelines to be shorter. Companies with complex accounting structures, large volumes of transactions or a multitude of subsidiaries have inherently more data risks.

 

Additionally, many Survey respondents say they are currently spending too much time on tax provision preparation and review. Executives responding estimated that their tax provision teams were spending approximately 50% of their time on preparation versus 38% ideal. Similarly, Survey respondents expected their tax provision teams to spend around 33% of their time reviewing tax provisions while the actual estimate time is 38%. 

Companies often duplicate data collection, processing and calculations across reporting requirements (e.g., tax provision, tax return and tax controversy) and for internal scenario modeling due to inconsistent data models between a variety of data sources. Time may be wasted and risk amplified when different workstreams access and manipulate data within organizational silos. Improving data coordination and removing redundancies can create valuable efficiencies. Many companies are already beginning to use a combination of tools to streamline their review processes and create more efficient controls, but continuous improvement is essential to stay ahead of new reporting demands.

“We are seeing companies standardize their data collection process and storage, and they are identifying changes to enterprise resource planning (ERP) systems to capture data at the source as much as possible,” says Adam Sweet, EY Americas Channel 2 Tax Accounting and Risk Advisory Services Leader. “These steps can help streamline efforts to manage reporting and compliance and may reduce longer-term risks.”

The power of technology and data

Recent advances in technology have revolutionized the way leading-practice tax functions acquire, use and manage data. The tax accountant of today should understand and embrace technologies to meet the challenges of the rapidly changing landscape. Survey respondents recognize the need for embracing technology, with over 70% citing increased automation as one of the top two priorities for their tax accounting organization over the next two years. By automating data collection and analysis and integrating predictive analytics and dashboards into their processes, tax functions can better identify anomalies and trends to help highlight risks and focus areas and can allocate time and resources more efficiently.

Data acquisition and management

The recent introduction of data integration tools, such as Alteryx and Microsoft Power Apps, has allowed tax functions to unlock a variety of productivity and efficiency improvements. Efficient tax functions are no longer manually transforming data to upload into a provision tool or opening tax spreadsheets one by one to extract data. Instead, they are configuring data integration tools to automate manual steps and complete routine tasks in seconds, often eliminating hours of low- or no-value work.

Application programming interfaces (APIs) are another development affecting how data is gathered and processed. APIs enable system-to-system transmission of data and the automation of otherwise manual process steps. Tax provision tool vendors have APIs that allow automated upload of trial balances and output of tax journal entries. Companies are developing BEPS 2.0 and sustainability reporting technologies that use APIs to move data from provision tools and ERP systems into a tax warehouse to enable new calculations and reporting.

“APIs provide a way for different systems to connect automatically, thereby eliminating user interface risks and improving efficiencies,” says Kathy Ford, EY Americas Tax Accounting Annuity Center Leader.

More recently tax processes are integrating AI to sift through transaction details, apply global tax rules and understand information in a variety of data models. Similarly, more tax functions are implementing collaboration platforms to centralize global data gathering and management and improve controls around tax reporting processes.

Data visualizations for effective tax rate (ETR) reporting

A large majority of respondents to the Survey indicated they must regularly report their current and forecasted ETR to their audit committees, boards and CFOs — with 86% having to report to the audit committee or board and more than 90% reporting to the CFO. As part of their attention to ETR tracking and reporting, leading companies are turning to data visualizations using tools such as Microsoft Power BI to enhance their stakeholder communications. While data visualizations have been used for many years to view historical data trends, visualizations can have an even greater impact when incorporated into forecasting, real-time review processes and the company’s tax planning. For the tax accounting team struggling to explain to management the drivers of changes in the ETR from period to period, data visualizations that use data from provision tools or quarterly models can help bridge the knowledge divide. Seeing the buildup of the ETR by component or jurisdiction or visually comparing two periods to determine what is causing a change in ETR can enable quicker analysis and deeper insights to inform stakeholder communications. 

Use of automation for cash-tax considerations

In addition to reporting obligations and stakeholder communications, companies are navigating an uncertain economy and high-interest rate environment. Indeed, nearly three-quarters of the respondents to the Survey said there is an increasing emphasis on cash tax within their companies. As a result, many are paying greater attention to their cash tax positions and are focusing more on cash tax management. An EY-Parthenon analysis of 5,000 large global companies found that companies with better cash management were 19% more resilient than their peers, and leaders in cash management were 25% better at managing initial shocks, such as market volatility and business shortfalls, because they had additional liquidity as a buffer for affected operations.

Nearly
75%
of the respondents to the Survey said there is an increasing emphasis on cash tax within their companies.

Managing cash tax inflows and outflows requires an understanding of the cash taxes paid across the organization — often including more than 100 national, state and local tax jurisdictions. Companies also will soon be required to provide more transparent disclosure related to income taxes paid. The Accounting Standards Update being drafted by the FASB will require businesses to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and, in certain circumstances, to disaggregate the information by jurisdiction.

The combination of increased emphasis on tax cash management and additional cash tax disclosure requirements is compelling companies to seek technologies that will help them track and collect cash tax payments and related receipts. Key areas to consider for improving insights into cash tax include:

  • Leveraging ERPs to extract cash tax data to satisfy tax reporting requirements and to align processes with cash flow
  • Using data collection tools by tax departments to collect cash paid and receipts in real time, improve the efficiency of quarterly and year-end reporting, and provide support for tax audits
  • Applying AI to review payable details, summarize cash tax-related items and assist the company with its cash tax forecasting based on past trends
  • Employing analytics to identify inconsistencies and provide trend analysis

Questions to consider

  • How is your tax accounting function leveraging technology to streamline processes and provide greater insights to stakeholders?
  • How might you modify your tax accounting processes in light of the increasing focus on liquidity?
  • Are you prepared to react to questions that may arise in a new age of tax reporting with additional reporting and disclosures requirements and greater transparency?

Summary 

 With global tax policy evolving rapidly and stakeholder expectations rising, the complexity of tax accounting is only going to accelerate. In this environment, tax accounting professionals can add value and build trust by leveraging technology and analytics to improve the quality of reporting, identify risk areas and communicate tax information more effectively to their many stakeholders. Centralizing and coordinating data and incorporating automation and analytics can help improve tax accounting efficiencies and lead to broader efficiencies for companies.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.