We hear it from CFOs all the time: more and more companies are looking for ways to operate more efficiently, both across the organization and around the globe.
At the same time, shareholders are expecting even more from their C-suite when it comes to creating value for the corporation.
With those drivers in place, the topic that is showing up on an increasing number of boardroom agendas is finance transformation.
But when it is time to set the finance transformation agenda, one topic is missing far too often: tax.
A successful finance transformation is about growing the business in a controlled manner; improving profitability and operating efficiency; creating a leaner cost structure; and developing more accurate analytics and forecasts for decision-making and risk management.
Every decision has a potential tax implication.
Yet, based on our recent global compliance and reporting survey of more than 200 finance and tax executives from companies in the Forbes 2000, the reality is that more than 50% of those companies undergoing finance transformation are excluding a variety of tax activities from that process.
As a result, they’re carrying elevated levels of tax risk, missing valid tax savings and losing valuable forecasting data that could drive a positive impact long after the transformation is complete.
Why involve tax — the value
In the other almost 50% of the companies, CFOs are beginning to realize that tax can play a significant role as a value creator in finance transformation if tax is properly involved.
Those who are bringing tax in at the right time and with the right level of input are seeing three significant contributions that tax can make toward the overall success of the transformation effort:
(1) Improved tax efficiency
Having the information to drive improved cash tax planning can mean unlocking millions of dollars.
But the key in a finance transformation is involving tax professionals early in the technology and process design who can help unlock what might otherwise be lost.
Finance transformation will alter the tax function, as well as the information tax needs to provide insights to the company.
Involving tax early and integrating it more deeply into finance allows the organization to create a leading-class tax function from the beginning.
That means getting it right the first time; fixing it after the fact can be three times more expensive.
(2) Proactive risk management
It takes oversight, not hindsight, to see that the company pays the right amount of tax, does not incur financial penalties as a result of compliance and reporting errors, and avoids any subsequent risks to brand.
Based on our polling, 64% of tax audit adjustments are a result simply of mistakes or the application of incorrect rates.
The largest percentage of business taxes is in indirect taxes, where our polling shows that only 17% of companies manage these taxes globally.
Companies with focus do much better.
By considering the tax implications before transformation decisions about restructuring and shared services are made, CFOs can see that vital knowledge is not lost and that upstream changes in the operating model don’t crash the downstream tax processes.
(3) Measurable value
One of the factors that surprises most CFOs is that tax can generate as much as 10% of the overall payback of the finance transformation without cutting tax headcount, a significant and compelling number especially in light of the relatively small size of the typical tax department.
The impact tax can have is arguably one of the most overlooked elements of finance transformation.
Although it may be one of the smallest operating departments in the organization, it can have a much larger impact on shareholder value than many other departments.
When to involve tax — the triggers
It’s safe to say that it’s never too early to involve tax, beginning with the planning phase, to see that the needs of the tax department and the implications of the tax decisions are appropriately factored into the scope of the project.
If the planning phase has passed and the project is underway, certain milestones should trigger a call to tax:
- When the business is evaluating options and prioritizing the road map
- When the business is doing benchmarking studies and evaluating performance
- When the CIO is evaluating ERP and technology solutions
- When the CFO is developing the short- and long-term agendas
What’s in the way — the misperceptions
After many hours spent in discussions with CFOs, we’ve seen some common misperceptions in the C-suite about the role of tax, certainly in the context of finance transformation and often in the context of the overall business.
But those misperceptions can lead to missed potential or lost opportunities for tax to contribute significantly in achieving the company’s objectives and, perhaps more important, in mitigating its risks:
Tax is not a business partner and doesn’t always need a seat at the table.
When tax is involved early in strategic and decision-making discussions, there is much more opportunity to manage risk, avoid material weakness and eliminate penalties and unnecessary costs.
Tax is a back-end/back-office function.
There is a potential tax impact in every end-to-end process and nearly every decision in the finance function. Building tax into the underlying processes and practices gives management more visibility and better information.
Tax does not need a share of the IT budget.
Data is the lifeblood of the tax department. The better the data that tax has, the more efficient the tax function and the business are overall.
An ideal opportunity
If a company is spending the time and expense of a finance transformation, it presents a prime opportunity to look at tax in a way that’s altogether different.
CFOs who understand the value of a well-integrated and high-functioning tax department also understand that tax function performance declines when tax is called upon to act as an ad hoc unstructured partner in business management rather than be included as part of the strategic discussion and aligned with the business objectives.
What success looks like
Strong cross-functional connectivity between tax and operations, finance and IT means more and better information for spotting and implementing such opportunities as R&D credits or foreign tax credits.
And better information can mean tens of millions of dollars in appropriate tax savings, whether through better tax planning, a more efficient structure or reduced cash taxes.
And under the direction of an insightful and informed CFO, this is a value that tax can deliver long after the finance transformation is completed.
Read more: EY Tax Executive Center
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