The list of disruptive forces CFOs face seems to grow daily. The latest addition to this list is the increasing reliance by tax authorities on digital methods to collect and analyze taxpayer data. These tax authorities then use this data to facilitate real-time or near real-time collection and audits – and so much more. They’re reviewing, questioning and comparing this information to fulfill current and future needs.
Are tax authorities better at analytics than you?
This shift to digital tax administration may soon be a global standard as governments struggle with shrinking resources and increasing revenue demands. As tax authorities embrace digital tools and increased data analytics, businesses cannot afford to stand idly by and must seize the upside of disruption.
Tax authorities across the globe are ramping up their technology and analytics capabilities quickly, and simply put, companies don’t have the same visibility or understanding of their data as the government does. CFOs need to know what information tax authorities are requesting and how they are using, analyzing and leveraging this data. It’s crucial for CFOs to develop a strategy to make the most of the wealth of insights gleaned from data analytics, particularly as drivers of growth and value.
Meeting the requirements of digital tax administration is just the starting point, not the endpoint. Forward-looking CFOs have the opportunity to establish an organizational framework that allows them to be proactive in this new digital environment. Now is the time for planning, insight and action.
Digital tax administration: How did we get here? Why does it matter?
Globalization and increasing complexity have changed how businesses work, and tax authorities across the globe have responded, with many now leading the way in data analytics. Budget deficits and inefficiencies in existing methodologies left many governments operating in the red and accelerated the creation of digital tax administration.
Facing budget and staffing challenges, tax administrations invested in technology that would provide a clear, accurate view of business transactions, financials and compliance, in real or near-real time. This change has allowed them to:
- Meet budget demands through efficient tax revenue collections
- Streamline their processes to review, compare and analyze tax payer data
- Improve targeted audit selection
Becoming digital has given these governments new ways to source funds, offering efficiency and accuracy that some countries have never seen.
Tax authorities are ramping up their technology and analytics capabilities quickly. Simply put, companies need to know what these tax authorities know and what they are doing with this information. This leaves CFOs with an immediate responsibility – to develop comparable analytics capabilities and become as digitally savvy as the new digital tax authorities.
EY worked with a multinational agribusiness to build access and analytic capabilities that would collect, manage and transmit the tax-related data that the government required as well as provide visibility into what was being done with the data.
Through this process the CFO identified new opportunities for using the data by expanding the company’s analytic capabilities, resulting in improved visibility into the supply chain. The company has been able to enhance its strategic planning around tax and beyond, both improving efficiency and enabling a more proactive approach to tax management.
An example highlights how rapidly these changes are happening and how CFOs can be more proactive and benefit. A recent EY survey, Do you define your CFO role? Or does it define you? The disruption of the CFO’s DNA, which details how digital is disrupting CFOs’ roles, identified four keys areas where CFOs need to focus their attention:
- The storm of available data
- A volatile risk environment
- Increased regulatory scrutiny
- A broader set of internal and external stakeholder demands
These real-world CFO issues only give more credence to the need for a comprehensive strategy that prepares CFOs to take the lead in leveraging data analytics for risk management, compliance and growth. Tax authorities the world over have embraced this evolution and are implementing it in varying stages. CFOs must grasp this reality and respond appropriately, proportionately and aggressively.
While companies have initially focused on digital strategies for product and customer innovations, the increased external stakeholder demands now include the rise of digital tax administrations. This growing reality takes digital strategies from growth plan to government mandate. These new digital demands present CFOs with untapped opportunities to lead the business and restructure their organization with an eye toward new processes to capture and use data.
CFOs will be able to harness data analytics to gain a more holistic view of their organization’s resources, taxes and other financials in real or near-real time. This data-driven perspective will allow CFOs to plan, address, prevent and react from a more knowledgeable position and result in
- Elimination of tax overpayments and penalties
- Avoidance of blindside data requests
- Increased accuracy in sales, supply chain and human resources data reporting
Ignoring disruption and simply using a traditional tax compliance response model leaves organizations reacting to mitigate risks. It opens them up to fines, increased exposure and higher operating costs for compliance. And adding to this current complexity are the future exponential data demands that companies will face as more and more countries transition to digital tax administration.
A majority of CFOs already recognize the gap between where they are in terms of data analytics and where they need to be. A large proportion of these finance leaders say that they need to build their understanding around digital technologies, but aren’t sure how. For those leaders dealing with digital tax administrations, here’s how to begin now:
- Assess: Acquire a clear understanding of where you currently stand. What types of data are you sending and to which governments?
- Manage: How is your data submitted? By whom? Often this data spans across the enterprise into such areas as sales, supply chain, HR and others.
- Analyze: Have you identified and addressed any potential risk areas that would be flagged by tax authorities? Look at your data through a similar lens as that used by tax authorities.
- Implement: Put systems in place that can streamline and, where appropriate, automate steps 1-3.
- Expand: Use insights gained from data analytics to better optimize systems and make more strategic business decisions.