With taxation issues dominating headlines over the past few months, it’s a good time for corporate tax functions to start prioritising business partnering rather than compliance
This article was first published in the June 2016 UK edition of Accounting and Business magazine.
Tax functions have an essential role to play in organisations, but they are rarely accused of dynamism. Tax is seen as a vital but passive function whose role is purely compliance-based – there are requirements to meet and boxes to tick. But a strategic partner that helps to inform and drive business decisions? Not so much.
Perhaps it is time for the tax function to move out of the shadows. In its recent series of predictions for the tax function of the future, PwC argues strongly that tax functions will need to adapt if they are to keep pace with organisations in a rapidly changing world and give them the support they need. The primary role of the tax function, argues PwC, should be to support a business in meeting its strategic goals rather than compliance – and that is a significant change of emphasis.
In recent years, the external spotlight has shifted onto the tax affairs of companies. In particular, a company’s reputation now depends heavily on the external perception of how it manages its tax affairs. The list of stakeholders to which companies must clearly and accurately communicate their tax position has grown to encompass not only tax authorities and governments, but also investors, the media and the general public.
This, along with the pressure from megatrends (such as demographics and technological breakthroughs) that are fundamentally changing the way that businesses operate, is having an impact on tax functions. We are already seeing, for example, greater reliance on financial reporting software and data analytics.
How tax delivers
Perhaps the biggest driver for change within tax, though, is the increasing emphasis on risk within organisations. The ever increasing regulatory requirements around tax (such as country-by-country reporting – see page 56), combined with a growing realisation that getting tax planning wrong can cause serious reputational and financial damage, has promoted tax to the list of the major risks that organisations must manage. As well as reporting tax results accurately, tax functions need to reassure stakeholders that the controls and processes used to manage tax risks are good enough. In other words, how tax delivers is becoming as important as what it delivers – if not more so.
The problem for many tax functions is that their compliance-based history means that they are not well prepared or resourced to cope with this new world – thanks to inefficient processes and overreliance on spreadsheets. So they must transform themselves, and quickly. PwC’s checklist of requirements includes increased capabilities in forecasting, analysis and scenario planning, and the redesign of historic processes and practices, making full use of technology, to manage risk better.
The good news is that tax functions have the ability and the tools at their disposal to meet these new demands and to transform into a true strategic business partner. The question is, how will functions bridge the gap between today and tomorrow? This is not a simple question of hiring an extra set of hands or buying the newest tool – this is an integrated, cross-functional transformation that will involve governance, data, technology processes and people.
PwC says that tax can and should be transformed alongside the finance function. There is a strong case for simultaneous change, as both functions face similar challenges: the need to support internal and external stakeholders; meeting demand for faster, better and more transparent reporting; the need to streamline and use technology to improve processes; and the need to provide insight to support business decisions.
Finance and tax are closely integrated, but it has been easy in the past for tax to be sidelined. ‘A lot of times when finance functions are transforming they don’t think in terms of external tax reporting,’ says Mark Schofield, global tax reporting and strategy leader at PwC. ‘They are usually thinking about finance only as an internal tool in managing the business. But it’s important not to lose sight of external stakeholders.’
It will take work, preparation and a decent budget – tax functions will need to make a clear and compelling business case for change to secure the investment that is needed. Schofield argues that the size of tax functions means they are often overlooked during a transformation programme, but in this case the risks associated with tax are proportionately larger. Nevertheless, tax functions will have to learn to explain how they add value to the organisation.
Transformative power of data
The linchpin for real transformation is data. Historically, tax has done its best with what information it could collect itself, with the result that functions spend a lot of time manually collecting and collating data. As one of the most data-hungry functions in the organisation, tax will need to clearly articulate the information it needs and why.
‘It all starts with data,’ adds Schofield. ‘If you think about the role of tax, it is to advise on business transactions, to understand the implications and consequences of transactions, and to report externally to stakeholders. That all needs high-quality data.’
Transformation will also require a different set of skills from before, both in terms of technical tax skills and in order to plan and manage the transformation. It will not be enough for tax professionals to be technically proficient and experienced in tax law; they will also be expected to be highly skilled in data analysis, statistics, technology, process improvement and change management. ‘The skills that are needed are very different from the skills that exist today,’ says Schofield.
While the scale of change may seem daunting, the most likely outcome for most tax and finance functions will not be a single, massive transformation programme but a series of smaller steps and projects that send the functions in the right direction. The important point is that tax and its needs are not lost along the way.
Schofield argues that in many cases managing the transition will require a specialised project team: ‘There are people in tax who are capable of managing the transformation, but the bigger challenge is how to manage a transformation alongside their day job. Tax functions are under a lot of pressure.’
The arguments for the need for tax functions to evolve are clear, as are the benefits of a stronger collaboration between decision-makers in tax and finance to the wider organisation. If the tax function is involved at a strategic level, opportunities can be identified earlier and risks managed more effectively. The value of tax and tax professionals to the business will then finally be properly understood.
Liz Fisher, journalist
"The primary role of the tax function should be to support a business in meeting its strategic goals rather than compliance"