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Evolving technology a test for tax departments

For companies and tax authorities alike, the digital era creates a world of complexities. How should tax function leaders respond?

By Jay Nibbe, Global Vice Chair Tax, EY

Technology is reinventing the world of business. The invention of the integrated circuit in 1958 made desktop computing cheap and pervasive and forever changed the way that we handle information. The digital technologies that followed – PCs, mobile phones and the cloud – have had a similarly dramatic impact on the way people do business.

Today, a company can go global in a fraction of the time it previously took to build out an international organization.

The disruptive potential of digital technologies has also profoundly affected tax policy. In an era where you can start a company from your laptop in a coffee shop in Nairobi, a concept like physical presence is turned upside down.

This, in turn, calls into question many international tax principles, transfer pricing rules and decades’ worth of tax treaties relating to business practices that have quickly become outdated. For both tax authorities and tax departments, technology disruption and the digital era usher in a thicket of complexities.

Increasingly, companies are responding to the digital era with new technologies that drive organizational and business changes. Tax departments need to understand and manage their roles in these transformative exercises. Finance transformation can disrupt the tax function in two ways: the loss of highly knowledgeable tax resources at the local level and the erosion of skills and competencies stemming from globalization or regionalization of processes.

Technology transformation in the business operations often improves the connection to customers but can inadvertently alter the organization tax cost and the bottom line, impacting return on investment.

While a great deal of work has been done, to date no consensus has been reached on a framework of how to tax digital activities. Consequently, companies must deal with a patchwork of national tax policies, with new direct and indirect taxes emerging at the city, state and national level.

Such taxes not only have financial implications, but increasingly require companies to alter or restructure their business operations to remain competitive. The patchwork of legislation requires the business tax function to devote more resources to monitoring and assessing the impact of these new tax rules.

The changing environment and global nature of business are also bolstering global calls from the public, activists and governments for heightened levels of tax transparency. From 2016, the OECD has recommended companies with more than €750 million in revenue will be required to submit to tax authorities country-by-country reports on a number of different tax and financial data points.

This information, drawn from their enterprise resource planning (ERP) systems, which will likely require remediation to accurately provide the information.

Tax authorities are embracing technology as well. Many countries are taking advantage of digitization to introduce new e-invoicing requirements into their national legislation to assist with GST, VAT or other revenue-based taxes.

Others are going a step further, asking companies to provide electronic audit files directly from their ERP systems. In every corner of the world, technology disruptions are layering new complexities and pressures on business and their tax function.

Technology change is not all disruption. Some tax departments are finding that they can unlock valuable information for the business through the use of data analytics.

Tax departments are using analytics around transaction tax, financial reporting and transfer pricing to detect risk, reduce controversy and eliminate unwarranted costs in a variety of areas. How to effectively leverage the “big data” of an organization to add enterprise value is of increasing importance.

All of this change means that tax function leaders must also evolve to adopt and leverage these new technologies.

It’s critical to increase communication with key stakeholders, further align with the business and its supply chain and customer interface, and leverage technology to respond to tax law changes. New technologies must be understood and acquired; new talent, skills and competencies must be added; and sustained investment in technology must be secured.

These are challenging, yet exciting times for the tax leaders of today and tomorrow. While technology will continue to disrupt the tax world, it also offers a promise of great solutions.

This article is included in Tax Insights issue 14

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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.

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