By Gerri Chanel
What would it mean to be an “outstanding” tax function? Is the idea a pipe dream or a realistic possibility? In fact, global shifts in governmental tax policy and the increasing need for the tax function to show value have made the shift from good towards outstanding not just a possibility for today’s tax departments, but a mandate.
And technology is the linchpin to making it happen.
New technology, new capabilities
A discussion about enhancing the tax function using technology begs the question, “so what’s new?” After all, for example, automated tools that reduce reliance on duplicative, error-prone manual spreadsheets are not new.
Yet surveys of the Fortune 1000 indicate that more than 50% of respondents continue to use spreadsheets to calculate and consolidate their tax provisions, suggesting that certain aspects of automation may still be relatively “quick wins” for many companies on the road towards excellence.
Likewise, the concept of a tax department integrating more effectively with their company’s financial reporting systems is not new either. What is new is that more powerful tax tools and ERP systems have become available.
“A few years ago,” says Andrew Burman, a tax technology partner with EY in London, “tax had to accept whatever data came out of the ERP system and rescue what they could, often developing their own offline pieces of kit or putting data in Excel and playing around with it.”
Now, much more powerful and flexible inherent systems in both finance and tax allow automation and the elimination of much duplicate work and provide better information to tax. A process that used to require manually wading through 50,000 or 100,000 lines of data can now be an automated system with business rules, checks and balances that requires only a double-check of a small handful of invoices.
How companies use visualization software to compare VAT rates across jurisdictions is one such example. “If the VAT rate in a particular jurisdiction is 19.6%, and the average for that location is showing as 21%, a potential problem has been identified,“ says Daren Campbell, a partner in EY’s Tax Technology and Data Analytics Services.
“The user can click on that jurisdiction and the data will be broken out, showing all the items where you paid more or less than the 19.6% and you can keep drilling down. Before, companies really weren’t able to do that, but with the new tools, companies can now look at every transaction.”
This can lead to large refunds, he says, because the analytics often reveal that a company has paid tax where it shouldn’t, as opposed to missing tax where it should have paid.
New external pressures
Not only is technology stronger than ever, so is pressure to meet external demands for tax-related information and transparency. From OECD country-by country reporting and its Common Reporting Standard to the U.S. Foreign Account Tax Compliance Act (FATCA) to other legislation, governments across the globe are demanding unprecedented amounts of information.
Moreover, disparate groups want different information and in different formats. Increased use of more powerful technology offers the only practical solution to meeting these demands and to enhancing the likelihood that the information provided to these disparate users will also be consistent.
When companies aren’t prepared, significant disruptions can occur. For example, some countries in Latin America are now demanding an almost contemporaneous feed of company invoices and/or journal entries and trial balances, often in their own designated format.
“It’s a real paradigm shift,” says Carolyn Bailey, EY’s Digital Government Tax Transformation Leader for Latin America. Very big companies doing business in Latin America are being refused refunds because they cannot provide data to the taxing authorities the way they’re being asked to provide it, she says.
“Companies in business for a century are having problems complying with the rules, as are new companies that are growing like crazy, but their systems, processes and data are just not ready to comply with these kinds of rules. And it is only likely to get worse.”
The road to “outstanding”
An outstanding tax department is one that is “absolutely integrated with the business and is leveraging technology to deliver value to the business,” says Albert Lee, EY’s Asia Pacific Tax Performance Advisory Leader.
“A tax function whose data needs are well-integrated into the company’s financial systems can harness a huge pool of ‘big data’ in a strategic way,” he says, rather than gathering and manipulating scraps of data on a request-by-request basis.
Many roads lead toward “outstanding.” The path can begin with individual projects to improve or replace a spreadsheet-based process all the way to a holistic, strategic redesign of a tax department’s function. The challenge for many companies, says Burman, is simply knowing where to begin.
The first step might be an exploration of the tax department’s current frustrations or “pain points,” which can result in a number of short-term, “quick wins.” The next step is determining where the tax department should be to meet not only current demands but also those on the horizon and then developing a road map to make it happen. A technology strategy is a parallel process.
It is critical, Burman, says, that the tax function integrates with the business as much as possible so that it will be involved in any systems design in order that the resulting systems will gather data needed for tax and in a way tax can use.
Another common challenge, says Burman, is getting financial buy-in for the plans, which often means increasing the CFO’s awareness of how tax does what it does and the inherent level of risk in the tax area.
Sally Stiles, Chief Tax Officer for Caterpillar, Inc., the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, says, “If I had to tell a group of CFOs why they need to invest in their tax operations, I would say that they need to fully understand the amount of risk on their financial statements from tax, which is one of the biggest numbers on the financial statements.”
Many of these risks are different from the past, she says. “There is an enormous amount of competition among countries to grab as much tax revenue as they can and this is not something that is going to go away. Companies will have to defend against unreasonable government positions and face the increase in data requests and resulting assertions, which are going to become more and more onerous from countries around the globe.”
Read more: Amid a large finance transformation, Caterpillar is also strategically realigning its entire tax function to drive greater integration and transparency.
Key action points
- Use data and analytics to drive value from the tax function.
- Seek opportunities to use technology to reduce duplication of effort and manual entry errors.
- Identify “quick win” opportunities for short-term progress that will also help to achieve longer-term progress.
- Leverage systems already used by other areas of the business.
- Develop an effective tax technology and data strategy and understand the “art of the possible” for your business, what needs to change and how.
- Use technology to integrate tax with the rest of the business.
Sally Stiles, Chief Tax Officer of Caterpillar, Inc., participated in an EY webcast on “Tax and Finance Transformation” on October 13, 2015. To access the webcast, visit the ‘On-demand’ section at ey.com/webcasts, or use the following quick link: http://bit.ly/1Khp50d
This article is included in Tax Insights issue 14
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