By Bill Millar
In the view of Reijo Salo, Vice President Corporate Tax at Helsinki-based Fortum Corporation, transparency will be the element of transformation that stands out most strikingly for the 21st-century tax department.
Already today and even more so going forward, businesses will be required to greatly increase disclosure, he believes.
Sensing the growing importance of this trend, the Finnish utility began publishing an annual tax footprint report in 2012.
The document simplifies but at the same time thoroughly discusses the group’s tax policies, practices and payments.
“Companies need to take a step back, consider the whole of the changes taking place and then build a road map from where they are now to where they need to be.“
Gary Paice, EY Tax Performance Advisory, Global and Americas Leader
It breaks down the various forms of taxes paid by Fortum, including taxation on profits, taxes on real estate, insurance premiums, import duties, waste disposal and the use of natural resources.
The report tends to be a tremendous eye-opener for many who see it, according to Salo.
“Many express surprise at just how many ways we are taxed and the total amount of tax we pay,” Salo says.
Across the world, tax departments are trying to prepare for the fast-arriving future.
They are adapting to transparency demands, investing in technology and attempting to collaborate and communicate more effectively with other parts of the company, such as corporate communications and public affairs.
Accelerating taxation cycles
Technology is driving this change, says Patrick Trapp, EY EMEIA Tax Performance Advisory Leader.
“The common thread to everything is digitalization,” says Trapp. “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.
Consider collections of value-added tax (VAT).
In the past, most businesses could settle their accounts with local authorities quarterly or in some cases monthly — 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.”
Tax authorities in many jurisdictions are in fact way ahead of companies in terms of digitalization, says Chicago-based Gary Paice, EY Tax Performance Advisory, Global and Americas Leader.
Although authorities from most major economies are well along in their development paths, it is often developing countries such as China or Mexico that are implementing the most sophisticated transaction and taxation tracking systems.
One reason is that these latter nations have less legacy tax collection architecture and can therefore leapfrog technologies, says Paice.
But another is the simple desire to increase compliance and collections.
Going forward, matters will continue to accelerate thanks to technology.
All manner of taxpayer engagement with host nations will become increasingly digital, according to Trapp.
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 decidedly electronic, with many jurisdictions requesting and eventually gaining real-time direct access to corporate enterprise resource planning (ERP) systems.
In addition, 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.”
“By presenting a more complete picture to the external world, we help people understand how tax fits into the broader economy.”
Reijo Salo, VP Corporate Tax, Fortum Corporation
As businesses have less time to respond to tax authorities, they will need to embed more closely with operations worldwide to build a more up-to-the-minute picture of the company’s global tax position.
Paice believes this is an absolutely vital development.
Since business doesn’t always go as planned, this often means huge, unexpected swings in the tax picture.
The business plan may have assumed production would take place in “Country A,” but due to a dock strike or natural disaster, an entire quarter’s costs were shifted to “Country B.”
In such cases, the tax liability can shift dramatically.
“Companies need to be in a position to adjust spending, sourcing and other components of the business throughout the year, rather than at the last minute,” Paice says. “Tax planning and management, in effect, becomes continuous.
Globalization is also 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 to a shared services model, so too goes the tax department.
So whether the issue is VAT collection, transfer pricing, controversy or planning, “companies are becoming significantly more centralized and globally focused,” Trapp says.
Add digitalization of local processes and the workload begins to shift from country-focused to where most of the work takes place in a global function, he explains.
Companies will also have to develop a number of globally focused positions within tax, according to Trapp.
For example, a global head of transfer pricing, another for controversy and another for VAT collection.
“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.”
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.
Initiatives such as the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project may make more information accessible to tax authorities, as well as politicians and activists who could build cases that companies should be paying more taxes, according to Paice.
“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,” Paice says.
“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.
“No matter how hard companies work to comply with ever-expanding global tax law, the incidence of double taxation, cross-border controversies and lawsuits can be expected to significantly increase.”
James Boothroyd, Head of Tax Risk and Indirect Tax, Petrofac
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.
Along with publishing the company’s total tax revenue and a breakdown by tax, the company’s tax footprint also presents an overview of the inner workings of the group’s tax department.
The report highlights, for example, the ways it helps to achieve tax 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.”
Greater transparency could also pave the way for more tax controversy in the future.
James Boothroyd, Head of Tax Risk and Indirect Tax for global oilfield services provider Petrofac, believes there will be an increase in disputes going forward as the BEPS project is implemented around the world as well as more tax jurisdictions mining source data in search of additional tax revenues.
Meanwhile, tax authorities are expected to seek every opportunity to raise new taxes on businesses, particularly in conjunction with attempts to maintain low headlines rates, which give the impression of a competitive tax regime.
“No matter how hard companies work to comply with ever-expanding global tax law, the incidence of double taxation, cross-border controversies and lawsuits can be expected to significantly increase,” Boothroyd says.
“Tax departments will need to work more closely with their business units to proactively identify risks, find pragmatic solutions and defend against controversy.”
Overall, tax departments will need to retool and refocus.
Automation is expected to lessen the manual, spreadsheet-laden tasks of tax management, says Boothroyd.
However, at the same time, more personnel will be needed in areas such as building strong documentation to support transfer pricing policies, monitoring global tax positions and reviewing law changes, particularly in the short-medium term.
A more globally minded posture means that top tax executives will need greater visibility and to understand international tax issues more broadly to manage their exposures across the entire enterprise.
In the end, the tax departments of the past and future share the same core responsibilities of efficiency and compliance.
Beyond that, their shift from reserved, distributed and labor-intensive to transparent, centralized and digitalized will be dramatic. Many are making great strides, says Paice.
“Companies need to take a step back, consider the whole of the changes taking place and then build a road map from where they are now to where they need to be,” Paice says. “The future of tax is arriving sooner than most people realize.”
Key action points
- Companies should harness process technologies to streamline workflows and advanced analytics to improve tax planning.
- Tax authorities are making tremendous advances in their use of technology. Businesses need to catch up if they hope to discuss tax issues on equal terms with authorities.
- To reduce costs and improve efficiency, leading businesses are shifting from a local to a global orientation. Companies should automate in-country processes to the fullest extent possible, and shift managerial roles from country-focused toward regional or global.
- Initiatives such as BEPS are providing local tax authorities with greater detail on each company’s global tax picture. Companies should meticulously document global transfer pricing practices in advance of heightened controversy.
- Companies should create a road map to help them reach where they want to be in two years.
This article is included in Tax Insights issue 17 – Transformation and innovation (pdf)