Even COVID-19 hasn’t derailed the march of globalization as multinational corporations continue to chase opportunities across borders — which requires their indirect tax teams to keep up with compliance obligations across multiple jurisdictions.
The DHL Global Connectedness Index found that pandemic-induced closed borders and travel bans slowed globalization in 2020 — but then global trade rebounded, the international flow of capital recovered, and international data flows surged as online commercial activity expanded and “digital globalization” flourished.
While COVID-19 has disrupted business and life around the world,” the DHL study noted, “it has not severed the fundamental links that connect nations.”
For corporate indirect tax specialists this reflects international business as usual – and solidifies the gap between their resources and the work required to meet regulatory requirements everywhere their companies operate around the world.
In the 2021 State of the Corporate Tax Department study from the Thomson Reuters Institute, 80% of survey respondents said their teams are responsible for tax compliance in multiple countries. The median number of countries is five, and the average is 17. Jurisdictions cited as challenging include the U.S. (particularly California), the UK, Canada, India, Germany, Mexico, and Brazil.
Indirect tax specialists were heavily represented in the survey, in which nearly half of the respondents reported being under-resourced. In the U.S., 56% of respondents said their departments were under-resourced, compared with 46% in Canada, 37% in mainland Europe, and 25% in the UK.
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Strained resources have an acute impact on indirect tax teams as they contend with multijurisdictional demands and other pressures, including regulatory obligations to file digitally and remit tax payments in real time.
“Looking ahead one to two years,” the study said, “more than one-half of tax departments say they anticipate significant change to government requirements for indirect tax — more specifically, they expect increased digitized tax filing and real-time remittance requirements.” This expectation is highest in Europe: 64% of survey respondents who represent companies headquartered in mainland Europe and 62% from the UK expect significant change, some of which is already underway.
Four out of five tax departments said these changes are challenging to address with their current technology and processes, and about two-thirds said they struggle with a talent gap. In addition, “most tax departments surveyed operate across multiple jurisdictions, so they are dealing with many different sets of changes,” the report said. “Clearly, there is significant work to do to comply with new government requirements for most tax departments.”
Closing the indirect tax team resource gap
The study found that closing this indirect tax team resource gap can improve tax compliance, work quality, efficiency, and talent retention – and noted that tax teams strive to reach this goal by securing new resources, specialized skillsets, and technology. Specific strategies used most often, according to respondents, are hiring external consultants, implementing automation, streamlining processes, staying abreast of legislation, and adding staff.
The survey asked respondents to rank the impact, and their utilization, of 11 types of tax software. Indirect tax determination software ranked third for positive impact – behind only direct tax compliance and tax provision technologies. These technologies ranked first for degree of utilization by tax professionals surveyed once they are implemented.
Tax professionals said technologies that make the biggest positive impact and deliver the greatest value are those that save time, reduce errors, create efficiencies, and improve data quality and reporting.
Tax automation is a key part of the tax compliance strategy. However, less than 60% of survey respondents have implemented direct tax and tax provision software. The adoption of indirect tax technology is even lower:
- Only 32% use indirect tax compliance technology
- One-quarter use indirect tax determination software
- Only 10% have implanted digital tax reporting
The study provides a framework for assessing the technological state of corporate tax departments and asked respondents to categorize their operations as chaotic, reactive, proactive, optimized, or predictive. Those that described themselves as significantly challenged – as chaotic or reactive – were twice as likely to say they were under-resourced than the optimized and predictive teams. The more sophisticated teams spent three times more per dollar of revenue on the tax department budget as compared with chaotic and reactive departments.
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“Effective technology and streamlining processes take significant investment, as do advanced technology skills,” the study said.
Making the case for tax technology and automation
Sophisticated tax departments leverage technology and automation to improve efficiency and outcomes, but tight budgets have made it difficult to secure resources for new technology implementations. When making the business case for such indirect tax software investments, tax leaders said they most often cite cost savings followed by the impact of automation on quality of work, accuracy, and standardization. Other benefits cited, in rank order, are risk reduction, speed of tax processing, general efficiency, and freeing up the team to focus on more important tasks.
“Given the strained resources in nearly one-half of tax departments, it is not surprising that freeing up the team to conduct higher value work was a top three argument for more than one- third of departments,” the study noted.
Keep reading for more resources about how to take your tax department to the next level: