7 minute read 26 Apr 2018
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How tax teams can innovate to keep up with disruption

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US Americas

Multidisciplinary professional services organization

7 minute read 26 Apr 2018

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To help their organizations succeed amid continual disruption, tax departments must embrace innovation.

Disruptive innovation is cutting a wide swath across industries and around the world, creating entirely new markets and fundamentally changing the way the world works. It’s no wonder that tax departments find themselves in the path of disruption as well.

Tax teams must keep up with their own organization’s rapidly digitalizing, globalizing business lines and operations. At the same time, they face myriad governments digitalizing their tax administrations and updating tax policy for a virtualizing, borderless business world.

“The tax function is moving to a just-in-time mode of operations,” says Channing Flynn, EY Global Technology Industry Tax Leader. “Tax is awfully inefficient today, but as this all settles out over the next 10 years, we should end up with a much shortened tax timeline, greater clarity and less controversy.”

New tax riddles

Innovation, the digitalization of business models and hypercompetitive global markets are propelling business at unprecedented speed. From sharing-economy businesses to FinTech start-ups to autotech innovators, disruptors are not only moving fast and wide but also upending old ways of doing things.

To compete, established businesses are compelled to innovate — and fast — to the point where continuous innovation is often a strategic priority.

In turn, innovation challenges corporate tax departments to keep up with borderless, cloud-based transactions and their indirect taxation, or with globally commercialized intellectual property and its implications for indirect taxation.

For example, when it comes to value-added taxes/goods and services taxes (VAT/GST), the supply chain is becoming longer, more complex and subject to ever-changing rates across multiple borders.

If [tax executives] can obtain tax-ready information, they will be able to devote the bulk of their time to strategic tax analysis.
Richard Suhr
EY Global Digital Leader of Advisory Services

Income tax questions also arise, such as this common riddle: where is taxable value being created during a conference call among various offshore software development centers, the marketing department in the target market and a C-level decision-maker on another continent?

With the prospect of even more disruptive technologies and digital business models on the horizon, there’s a lot at stake.

Consider these scenarios:

  • In leading businesses today, employees can turn on their laptop, open up a dashboard and view in real time or near real time what has been happening in the global supply chain.
  • CFOs are spearheading finance transformations in their organizations, often consolidating decentralized functions into regional centers of excellence and shared services.
  • Enterprise resource planning (ERP) systems are capturing a wealth of transactional data from operational units and business lines — the source data so valuable to record, analyze and report tax.

What is wrong with these scenarios is that too often the tax team is not in them. It is still a silo or two away from this near- to real-time data.

For example, only about half of the organizations undergoing finance transformations have been including tax in the scope of that process, according to our analysis.

Collecting internal data and mapping it to government tax data and third-party sources remain a manual exercise in most tax departments.

“Currently, tax executives spend a large part of their time just gathering data,” says Richard Suhr, EY Global Digital Leader of Advisory Services. “In the future, if they can obtain tax-ready information, they will be able to devote the bulk of their time to strategic tax analysis.”

Tax authorities are innovating, too

Global digital economy dynamics have presented the world’s tax authorities with an essential challenge: how to levy taxes, collect them and preserve their national treasuries in this new business environment.

Policy issues may have dominated the headlines over the past five years, as the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) project tackled perceptions of cross-border tax avoidance and promoted greater transparency about exactly who is paying how much tax and where.

A tax team writes on a whiteboard

In the background, however, tax authorities have been digitalizing their IT systems in ways that could revolutionize taxation.

Those administrations in the vanguard, such as Brazil, Mexico and Russia, are said to be well ahead of even some of the biggest global businesses in digitalizing their operations. Almost every government in the world, however, has achieved at least some level of digitalization.

Indirect taxes such as VAT and customs duties have been first in line, with direct income taxes falling subject to similar treatment over time.

“Advanced governments are beginning to look at your data in a way that I’d say 99% of corporations do not,” says Carolyn Bailey, EY Americas Digital Government Tax Transformation Leader. “If tax departments wait to catch up, it’s going to be really hard, and the tax authorities are going to be in the driver’s seat.”

The upside for governments could be increased tax collections. Russia’s Federal Tax Service has reported that its tax digitalization efforts led to a 12.2% increase in VAT collection in 2015.

With these kinds of results, and with tax administrations across the world sharing leading practices and capacity building in addition to tax information, the momentum behind digital taxation is growing.

However, many tax authorities face steep challenges. In more established tax administrations, such as the US, complex legacy systems, multiple jurisdictions and entrenched bureaucratic processes have proved a hindrance.

If tax departments wait to catch up, it’s going to be really hard, and the tax authorities are going to be in the driver’s seat.
Carolyn Bailey
EY Americas Digital Government Tax Transformation Leader

Building the future of smart

Another big disruptor to the tax department is framed by one of our identified megatrends for 2016 and beyond, “the future of smart.” As defined by EY, “smart takes a transaction, ensures it is connected, analyzes its data and makes it more autonomous and effective.”

The sea change for taxation is that smart tax is real-time and even forward-looking — where tax has traditionally been historical.

Multiple smart technologies are colliding and hitting their critical inflection point at the same time:

  • Business process robotics will help automate data collection.
  • The internet of things will minimize paperwork.
  • Artificial intelligence (AI), which is becoming more prevalent in such day-to-day settings as web searches, weather forecasting and voice recognition applications, will enable data mining and deep learning
  • Blockchain, most simply described as a secure, distributed digital ledger, is not only poised to break into the world of business and finance, but is also tipped to merge its transactional capabilities with AI’s cognitive capabilities for autonomous transactions that can self-initiate, self-manage and self-retire.
  • Big data analytics is already enabling better decision-making through data storage, aggregation, cleansing, integration, consolidation and analysis — including predictive analytics.

The disruptor: digital governments

In the future, traditional accounting, finance and tax functions will be revolutionized by robotic process automation and new systems that offer real-time collaborations, scenario planning, cost modeling and risk simulation tools.

Repetitive, high-volume tasks will be performed by a virtual workforce of software robots that can work faster, more inexpensively and more accurately than a human being.

AI will be loaded with such information as tax code, case law and administrative guidelines, and AI will make certain decisions on this basis.

“Tax professionals will be redeployed to higher-value activities that require subjective judgment and strategic decisions,” says EY’s Suhr. They will be supported by real-time data aggregation, data visualization and predictive forecasting — allowing people to focus on unlocking value within accounting, finance and tax, rather than being burdened by their compliance or reporting function.

Clearly, the tax world is going through a daunting transition. But EY’s Flynn summarizes the situation simply: “Technology is enabling tax authorities to become more efficient and robust at assessing and collecting tax, and technology can also help companies get ready for that.”

 

A version of this article was originally published as Disruption puts corporate tax on an uncertain path on Tax Insights.

Summary

By embracing innovation, tax teams can help their businesses seize opportunities in an increasingly digital and borderless world.

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By

US Americas

Multidisciplinary professional services organization