5 minute read 15 May 2018
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How transparency is transforming tax in a digital era

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US Americas

Multidisciplinary professional services organization

5 minute read 15 May 2018

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As the digital revolution continues, tax teams must increase their cooperation with the business and their openness to the wider world.

In the view of Reijo Salo, Vice President Corporate Tax at Helsinki-based energy company Fortum Corporation, transparency will be the element of transformation that stands out most strikingly for the 21st-century tax department.

Anticipating the trend toward increased disclosure requirements, the Finnish utility in 2012 began publishing an annual tax footprint report, which provides a simplified but thorough discussion of the group’s tax policies, practices and payments.

It breaks down the various forms of taxes paid by Fortum, including taxation on profits, real estate, insurance premiums, import duties, waste disposal and the use of natural resources.

“Many express surprise at just how many ways we are taxed and the total amount of tax we pay,” says Salo.

Accelerating change

Across the world, tax departments are trying to adapt to increased transparency demands by investing in technology and by collaborating and communicating more effectively with other parts of the company, such as corporate communications and public affairs.

Technology is driving this change, according to Patrick Trapp, EY EMEIA Tax Performance Advisory Leader. “The common thread to everything is digitalization,” he says. “This decade will see a wide range of changes to the tax department, but wherever one looks, technology is nearly always a key driver.”

As business becomes ever more digital and as tax data flows more readily, the pace of taxation cycles is already accelerating.

For example, in the past, most businesses could settle their value-added tax (VAT) accounts with local authorities quarterly or in some cases monthly, because there was time to assess. But today, many host tax authorities are using technology to embed themselves within core transaction processes.

“Governments increasingly already know what is being sold to whom and when,” says Trapp. “So they’re already in collection mode, often before businesses themselves are fully aware of the tax liability.”

Trapp believes that all manner of taxpayer engagement with host nations are set to become more digital:

  • More countries will expand their use of data gathering and analysis to build cases for higher revenues.
  • In terms of compliance, data matching will become widespread.
  • Tax audits themselves will become increasingly electronic, with many jurisdictions requesting real-time direct access to corporate enterprise resource planning (ERP) systems.
  • Tax departments themselves will harness technology, shifting from reliance on spreadsheet data focusing on a single country or region to more of a big-data orientation featuring advanced analytics.

“They will use technology to improve performance and to better optimize tax across the whole of the enterprise,” Trapp says.

Technology and tax “will be intertwined, and most of the work taking place relating to planning, reporting, compliance or audit of a tax nature will be automated, going forward at a lightning pace.”

This decade will see a wide range of changes to the tax department, but wherever one looks, technology is nearly always a key driver.
Patrick Trapp
EY EMEIA Tax Performance Advisory Leader
A tax employee at a transparent board

Closer cooperation

As businesses have less time to respond to tax authorities, they will need to work more closely with operations worldwide to build a more up-to-the-minute picture of the company’s global tax position. And globalization is forcing the tax function to shift to a broader and more collaborative posture within the group overall.

In the past, companies tended to feature significant tax resources on-site in nearly every country of operation. But as local tax models and practices have become more automated and standardized, and as more global businesses move support functions into a shared services model, so too goes the tax department.

Add digitalization of local processes and the workload begins to shift from country-focused to a situation where most of the work takes place in a global function.

“It’s a future of technology, standardization and a shift from a local to a functional view,” Trapp says.

As it centralizes, the tax function will need to forge closer ties to groups such as corporate communications and public affairs, as businesses seek to be proactive about their tax-related messaging and their relationship with tax authorities.

“By presenting a more complete picture to the external world, we help people understand how tax fits into the broader economy,” Fortum’s Salo says. “The role of education and persuasion becomes more critical.”

By presenting a more complete picture to the external world, we help people understand how tax fits into the broader economy.
Reijo Salo
Fortum Corporation

Transparency push

Technology is also accelerating data sharing and analysis, leading to greater transparency.

For decades, senior executives were reluctant to publicly discuss a company’s tax position. But initiatives such as the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) project are likely to make more information accessible to tax authorities, as well as politicians and activists who could build cases that companies should be paying more taxes.

“The practice has tended to be to share nothing beyond what is required by statute and to speak of tax if and only if there was no other choice, and then only in defense of the company’s reputation and cash flow,” says Gary Paice, EY Tax Performance Advisory, Global and Americas Leader.

“In the future, companies will share more information proactively as a means of educating the public as to the full extent of taxes paid and to get in front of any potential controversy.”

A company often hears the same questions over and over again, such as queries about variances in the taxes being paid, according to Fortum’s Salo. But amid so many complexities, short, simple answers to inquisitive groups usually lead to still more questions.

For these and related reasons, Fortum decided to become more proactive and transparent in explaining its tax payments and practices, by publishing its annual tax footprint report.

Along with the company’s total tax revenue and a breakdown by tax, the report also presents an overview of the inner workings of the group’s tax department. For example, it highlights the ways the department helps its organization to achieve compliance while at the same time aiding business units in planning their operations more effectively.

“By being open, we are informing people about just how much we are contributing to the communities we serve,” Salo says. “It improves relationships and understanding.”

A version of this article was originally published under the title Tax teams enter era of broader transparency on Tax Insights

Summary

As companies share more tax information, the tax function will need to forge closer ties to groups such as corporate communications.

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US Americas

Multidisciplinary professional services organization