Entering a New Era: The Future of Corporate Tax Management

DEMANDS AND DISRUPTION

Digital disruption

Digital transformation is reshaping tax departments’ primary points of interaction, both inside and outside of their businesses. This includes government regulators, external service providers, and their own organizations’ enterprise systems and business units. These entities are leveraging the cloud, connected platforms, and tools such as robotic process automation (RPA) and artificial intelligence (AI) to deliver greater value.

Automation of standard processes, however, is at a nascent stage. Most (90%) of businesses have introduced some level of automation. Yet 67% have automated less than half of their processes.

At a time when digital is becoming more dominant, many tax departments are not sufficiently investing in the technology needed to simply keep up.

Regulatory demands for greater transparency

Tax authorities worldwide continue to pass legislation requiring greater disclosure from corporations. The regulators are also increasingly sharing organizations’ financial data amongst themselves. Against this backdrop, government agencies are looking for transparency from organizations. They want more direct visibility into organizations’ business activities by accessing their financial data and reporting processes. This new era of heightened focus on global taxes began when Brazil introduced real-time, electronic invoicing and reporting requirements in 2008. Mexico followed suit in 2011, and Italy brought the concept to the European Union in 2018. A year later, the U.K. launched Making Tax Digital, an initiative that requires organizations to e-file VAT returns.

Subsequently, the European Commission (EC) proposed the VAT in the Digital Age, also known as ViDA. It is designed to modernize the VAT system and prevent fraud. A major component of that is e-invoicing and digital reporting.

What started as a unique requirement within a handful of countries has gained significant traction. More countries worldwide are adopting this mandatory requirement and multinational organizations need to consider a technology solution to manage this additional workload.

Meanwhile, tax policymakers aligned behind the Organization for Economic Cooperation and Development’s (OECD) tax base erosion and profit shifting (BEPS) project. Under BEPS, countries’ tax authorities automatically exchange taxpayer information to improve the collection of tax revenue from multinational business activities.

Further, the Global Minimum Tax (GMT) (GloBE or Organization for Economic Cooperation and Development BEPS 2.0 Pillar 2), places additional requirements on the nearly 10,000 businesses affected worldwide. Per the regulation, 137 countries agreed to enforce a GMT rate of 15%.

GMT rules require organizations to collect, analyze, and report on more data than ever before. The regulation aims to make it harder for big organizations (those with $750M€ in revenues in the Consolidated Financial Statements of the Ultimate Parent Entity) to avoid taxes by shifting profits to lower tax jurisdictions.

The GMT came about because major economies want to ensure that corporate income is taxed in the country an organization generates revenue, but does not have a physical presence. This issue has been exacerbated in recent years by the digitalization of the world’s economy.

The regulations create numerous compliance challenges for organizations. They further intensify expectations on tax teams, requiring them to provide unprecedented global transparency and ramp up reporting requirements.

For many, the most daunting challenge will be the management of data required to report on for GMT. Organizations are required to widen the scope of data collected across their business, including the addition of organizational data, for example, stock compensation, pension expenses, and includes data related to Pillar 2, for example, elections and carry forwards.

The reality is that complying with the new rules will mean data needs to be gathered more frequently, if not continuously, from more areas of the business, in more granular detail, more quickly, so that tax calculations and filings can be done more regularly.

As the focus on transformation heightens to support mitigating risks and increase efficiencies, data management matters more than ever.

Creating further challenges for corporate tax departments is Country-by-Country Reporting (CbCR) laws. For example, multinational organizations are required to report profits and tax payments for every jurisdiction in which they have legal entities and DAC6 is a mandatory disclosure regime affecting those with business activity in the European Union.

DAC7, however, marks a paradigm shift for organizations as it extends reporting requirements to digital platforms. It aims to enhance tax fairness and transparency in this realm and mandates the automatic exchange of seller information. It also helps EU tax authorities to exchange information.

The information organizations must report is extensive, requiring organizations to update their operations and legal efforts. Compliance with DAC-7 is critical for organizations as penalties for non-compliance are steep.

Heightened risk management

Despite the potential for reputational, legal, and financial damage from non-compliance, many global organizations are simply ill-equipped to meet these new, higher demands.

In addition to tightening budgets, many organizations have tax data that is decentralized and stored in siloed systems dispersed around the organization and the globe. This lack of connectivity among various parts of these organizations creates an elevated risk as well as a host of other challenges.

Tax managers may spend valuable time finding and gathering the data they need for tax calculations from these disconnected sources. Then they may have to deal with messy data that arrives in a variety of formats and is stored in standalone Microsoft® Excel spreadsheets. This not only costs organizations time, it also wastes resources. The extensive manipulation and rehabilitation required before the data will conform with tax department applications is wildly inefficient.

This lack of standardization and controls increases the risk of costly errors, undermines tax compliance, and may cause organizations to take inconsistent tax positions that are more likely to be discovered by tax authorities. At the same time, tax authorities are now equipped with— and employing — much more sophisticated technology that can be used to scrutinize and compare corporate returns and reports.

This poses a particular risk for organizations as tax audits and penalties are common, especially among under-resourced organizations. In fact, 47% of businesses say their tax operations are under-resourced, according to the Thomson Reuters 2023 State of the Corporate Tax Department report.

Overall, 61% of businesses underwent tax audits in the year prior to the report. Among them, more than one-third saw six or more audits, with 42% incurring tax penalties. Under-resourced organizations were more likely to incur tax audits and penalties in the year prior to the report, as well as higher-value penalties.

However, automation and quality control are cited as the most effective measures for reducing this risk.

Partnering with finance

In today’s complex and ever-changing business landscape, tax departments and finance teams must work hand-in-hand to navigate the intricacies of tax compliance, financial reporting, and strategic decision-making.

The partnership between these two departments is crucial for ensuring accurate financial statements, optimizing tax strategies, and mitigating risks. By closely collaborating, these departments can ensure accurate financial reporting, minimize tax liabilities, and contribute to the overall financial success of an organization.

The synergy between tax and finance is not only beneficial for the organization but also essential for maintaining transparency, compliance, and financial stability in an increasingly complex tax environment.

Finance departments, for their part, are increasingly called on to provide strategic business guidance based on data analytics and business savvy. The tax team can, and should, contribute to this effort. However, outdated systems, processes, and technology platforms are an obstacle.

Tax and finance teams can, and should, strengthen their working relationship by collaborating on four key challenges:

• Talent: Many organizations are looking to create a more agile workplace. This may provide firms with the opportunity to re-skill staffers to become more tech-knowledgeable. Some organizations are also bringing technology-savvy personnel from outside the tax department into the unit for a set period to show the tax teams how technology may help build workflow efficiencies. Offering tax professionals the opportunity to add more skills is one way to potentially recruit and retail sought-after industry talent.
• Data and technology: Organizations need to ensure that the technology is designed to best use the data gathered by analyzing it, culling out what is not needed, and giving data-driven solutions to the problems identified. Unfortunately, it’s in this part of the equation where many tax and finance departments begin to falter.
• Legislative and regulatory updates: New legislation and changing regulatory priorities are impacting corporate tax departments all over the world. And, there’s likely more change coming as various governments and legislative bodies continue to grapple with declining revenue. Yet, many tax departments don’t have the bandwidth to stay on top of all the legislative updates.
• Budget constraints: Tax and finance departments looking to optimize their functions need to face the reality of constrained budgets. They need to evaluate how to best allocate their resources. One important factor is where technology and automation may provide efficiencies that would allow departments to better manage their workflow and redeploy resources.

Tax leaders able to more closely align their department with the business, outside of tax-related issues, will set the unit up for more success.

THE GROWING IMPORTANCE OF ESG

Tax professionals across the globe are increasingly encountering environmental, social & governance (ESG) issues as the topic continues to gain popularity. Corporate tax professionals are therefore facing a rapidly evolving landscape with ESG considerations becoming increasingly central to business operations and investor expectations.

ESG is especially impacting the direct tax function through increased scrutiny and transparency. It’s no surprise that in the current environment stakeholders — which include investors, customers, and regulators — are demanding greater transparency and accountability when it comes to an organization’s tax practices.

Organizations are facing increasing pressure to disclose more tax information to these stakeholders. ESG reporting frameworks, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), require organizations to disclose their tax strategies, tax risks, and tax contributions. Such disclosures require careful consideration.

The increased desire for transparency also puts pressure on organizations to ensure their tax practices align with their ESG commitments, such as paying their fair share of taxes and avoiding aggressive tax planning. It is crucial for tax leaders to proactively integrate ESG principles into their tax strategies, which means not only complying with emerging ESG-related tax regulations, but also aligning their organizations with broader sustainability goals.

Therefore, many organizations are now evaluating the environmental and social impact of their tax planning decisions. They are aligning their tax strategies with their sustainability goals, such as investing in renewable energy projects or supporting social initiatives through tax incentives. This integration of ESG into tax planning helps organizations demonstrate a commitment to sustainable practices, which can enhance their reputation among stakeholders.

ESG is also influencing tax compliance requirements. Governments worldwide are incorporating ESG considerations into tax regulations. For example, some jurisdictions offer tax incentives for organizations that meet certain environmental or social criteria. Organizations need to stay updated on these evolving compliance requirements to take advantage of tax incentives and avoid penalties or reputational damage.

Organizations concerned with societal expectations on their tax obligations and commitment to ESG may want to consider presenting a full report to reassure stakeholders and others that appropriate governance and risk management measures are in place.

As this issue continues to gain momentum, tax professionals ignore the growing importance of ESG at their own peril. ESG isn’t just a moral imperative — it’s also a key element of long-term business success. Therefore, tax leaders have an opportunity to position themselves as strategic partners in driving the ESG agenda within their organizations.

MAKING THE SHIFT

Multinational organizations sit at different points across the spectrum when it comes to implementing technologies needed to manage these challenges and seize opportunities.

How corporate tax departments approach technology is a very important factor. Despite technology’s importance in the tax world, many tax professionals say their departments’ technological maturity is low or moderate. Indeed, many corporate tax departments spend a significant amount of time on data collection, data manipulation, and compliance. These time-consuming and inefficient tasks are being performed during a time when many organizations are trying to do more with less from a budgetary standpoint.

Even more troubling is the fact that 41% of those surveyed for the 2023 State of the Corporate Tax Department report said their departments take a reactive approach to technology. Worse still, 47% said they feel their departments do not have sufficient resources to make the needed technological improvements.

As a result, tax professionals are often limited in their ability to deliver the analysis, risk management, and business planning that adds value to the Finance Department and the C-suite. In this environment, technology is an even more important factor, not less.

Tax departments that can demonstrate the need for proper technology investment will be able to add greater value to their organizations in both cost savings and penalty avoidance. Perception of a tax department’s approach also matters.

Therefore, organizations behind the curve need to make a significant shift to tools and technologies that can help their organizations with these processes. Tax professionals also need to acquire new skills, especially the ability to work with, and utilize, cutting-edge technology to enhance their efforts and free up their time so they can focus on more strategic initiatives.

THE TECH ROADMAP

For tax departments, this journey should start with a strategy and a clear technology roadmap with several stages:

Automated data management

Tax data software solutions can streamline and standardize data collection and management throughout the corporate tax workstream. This type of solution stores data securely in a centralized platform, protects the data through access controls that establish users’ roles and responsibilities, and ensures data can easily be reviewed in real-time, aggregated for reporting, and used in assorted tax management applications and processes.

Robotic process automation

RPA solutions enable tax professionals to establish automated, repeatable processes for performing data preparation, blending, and analysis in order to support advanced forecasting and predictive and prescriptive analytics.

For example, this type of solution can pull information from disparate sources and merge and transform it for use in dashboards, year-over-year comparisons, and other applications. This approach gives tax professionals more understanding of and control over tax and legal risk, effective tax rate, cashflow modeling, reserve planning, and audit support and response.

Analytic process automation

Corporate tax teams need to go beyond siloed RPA applications and combine complementary tools and systems. They must break down silos and augment and automate tax work across the organization when possible. This approach is called Analytic Process Automation (APA) or “hyperautomation.”

Not every process is simple or routine and this can potentially create challenges for organizations trying to automate beyond the processes that are considered the low hanging fruit of the office.

Some more complicated processes may involve intelligent automated decision-making and optimization. Some organizations use APA solutions to manage massive data sets, reconciliation, and analytics at the backend of their tax processes. This approach can lead to impressive efficiency gains. And, the initial efforts to implement the process are likely to continue to yield results for the foreseeable future.

New regulations, especially those requiring digitization in the tax space, will make artificial intelligence a more ingrained and necessary part of organizational processes. This presents significant opportunities for organizations and tax professionals alike.

The heavily manual, and often error-prone, processes that’ve often been a challenge for corporate tax departments will increasingly give way to automation and artificial intelligence algorithms that ensure the proper entry and verification of key information. This will offer seasoned tax professionals the opportunity to spend more time on higher-value strategic work and open new avenues for tax professionals to grow their careers. It will also open opportunities for those directly interfacing with the system and ensuring it remains up to date and achieving the desired results.

Here are four ways AI applications will become more essential for tax professionals and organizations:

Product mapping and classification

Product classification is vitally important for organizations that import or export finished goods. AI can help solve many of the challenges related to product classification.

Cross-border trade requires a plethora of rules and standards. Guidelines for categorizing products are the primary factor in determining which tariffs apply and the amount of duty to be paid when goods move across borders.

This would be vastly complex to manage even if circumstances were static. Yet, every year there can be dozens of regulatory updates to the tariff schedule, making it exponentially more difficult to manage. Further complicating the challenge is an organization’s own impact on the classification requirements.

Therefore, it’s crucial for organizations to get their classification correct — and to be able to prove it during an audit. Classification discrepancies can result in shipment delays, incorrect duty payments, and compliance violations.

Incorrect classifications can also carry a financial cost. Organizations may be unaware they have overpaid and, if the mistake is realized, the process to recover refunds can be complex and lengthy. An underpayment, on the other hand, can result in fines and delays.

Many businesses rely on global trade management (GTM) software or tariff classification solutions to help classify products correctly. This automation can deliver:

• Accuracy through repeatable, documented processes
• Cost savings because classification occurs faster and avoids mistakes that increase risk of non-compliance
• More time for team members to focus on strategic work

Yet, the complexity of classification, including how often changes are required, makes it difficult to be completely automated. Artificial intelligence, however, is helping.

AI-based solutions read and interpret readily available, complex commercial product information and bridge the gap between the way products are described by the trade and how they are expressed in the systems. Then, when a product description is submitted to a system, it is analyzed to determine if it provides adequate detail.

Transaction analysis

AI can analyze information and also aid humans in their analysis. It can recognize and identify patterns and automate basic tasks that can free tax professionals from many routine, and sometimes manual, transactional processes.

Furthermore, AI can help provide organizations with an analysis of their tax filings and aid in scenario planning and generating narratives that are easily digestible by business professionals.

Anomaly detection

AI algorithms can automate functions, detect tax risk, and help organizations avoid many potential regulatory nightmares. Anomaly detection and social network analysis are both crucial ways for organizations to utilize AI to identify risks and potential regulatory non-compliance. Generally, the algorithms check for differences between reported data — and even unreported data — and the information available. AI can also look for other types of anomalies, such as data entries from users that do not typically post information.

Generative AI and talent

Generative AI can save organizations time and help enhance efficiency and accuracy. This frees up tax professionals’ time to allow them to focus on higher-value, more strategic activities. This, in turn, may make it easier for organizations to address their talent acquisition challenges by offering more rewarding work.

SEIZING THE FUTURE

The difficult, high-stakes job of tax management at complex, multinational organizations is growing ever more challenging. Doing so at a time when budgets are under increasing pressure and there are more tax professionals exiting the business than are entering it, due to mass retirement of Baby Boomers, only amplifies the challenge.

To keep up with the demands, navigate disruptions, minimize operational risks, and deliver greater value to an organization, tax professionals need to craft a comprehensive technology plan. It is critical for tax leaders to employ the right solutions that can complement the talents of their existing tax teams.

By employing solutions that automate time-consuming manual processes and help tax professionals more easily stay in compliance with increasingly complex regulations, organizations can free up their tax professionals to focus on increasingly strategic work.

Pairing the right automation and AI technology solutions with the brainpower of an organization’s tax team, is also a smart way for tax leaders to offer more rewarding work to tax professionals, potentially lowering the chances of burnout and serving as a selling point to new recruits.

Tax professionals formulating a plan at their organizations may want to consider these key steps:

• Assess the current state of the tax department’s technology adoption. Identify the gaps, risks, pain points, and the manual processes that can possibly be automated.
• Identify technologies the organization is already using across IT, finance, treasury, human resources, and other functions. It’s easier to build a tax technology plan on an existing foundation.
• Engage and educate stakeholders. Show them how tax technology will help address risk and improve performance in quantifiable ways. It is important to ensure the plan aligns with, and advances, the organization’s strategic objectives.
• Secure funding. Understand the process and calendar for the IT and finance departments to assess, prioritize, and fund projects. This will help in engaging key stakeholders effectively.
• Evaluate results. Have explicit metrics to assess results and share them with stakeholders.

A well-thought-out plan will truly help tax departments combine the key strengths of technological solutions with highly-valued tax team talent.

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