How can tax executives guarantee their functions are designed to meet today's demands and the challenges of the future?
There’s a quiet revolution in finance functions. Companies are gradually giving up on their quest for the holy grail of a single global system - to drive all their finance processes. They are coming to realise the benefits can never stack up against the costs and complexity involved.
Instead, the focus is turning to the underlying data. The idea of a central data repository is taking the place of a central accounting system. But this data lake is no solid central platform. It’s a flexible wheel-and-spoke system, with legacy systems pushing into the data hub to access the information they need to perform their functions and produce their outputs.
Why is this essential? Because we believe that in the future data control will no longer be in the company’s hands – it will be in those of the tax authorities, who will be getting it in real time.
The more information tax authorities receive through the different reporting requirements, the more detailed picture they are creating – long before they get the annual tax return.
Tax will increasingly be collected and settled in real time, with periodic reporting becoming less important. We’re already seeing this with split payment mechanisms in countries such as Italy; we already see this to a degree in the UK with employment taxes.
This is terribly dangerous for companies. In the past, tax directors’ view was that close enough was good enough. That view no longer holds. Returns have to be 100% accurate.
And this is already happening. For example, Brazil has a very complex tax system which now includes electronic invoices and digital reporting. Any error in reporting earns a significant penalty.
Data is emerging as the big battleground, with regulators and tax professionals effectively engaged in an arms race: both sides are trying to modernise, optimise and use data in new ways.
Too many people assume that tax authorities are not particularly sophisticated and are not investing much money in this. That couldn’t be further from the truth. China, India, Malaysia and Mexico have made huge investments in new taxation systems with digital auditing. Countries everywhere are waking up to the fact that these investments are improving tax yields, bringing assurance over the amounts of tax settled and paid, and increasing efficiencies.
Add to this the changes in types of tax. Regulators acknowledge that tax policy is changing to focus on whatever is the easiest to collect using technology to benefit that type of taxation. There is a fundamental shift towards taxes based on consumption and which are easier to collect and administer. In 1969 only eight countries had a sales tax or VAT: today that number is 160.
What does this mean for companies? Simply reacting to new rules and regulations is no longer good enough. Large groups can find they are running many thousands of parallel processes to deal with their reporting obligations. This sprinting-to-catch-up approach is inefficient and ineffective – and will only get more so as the global tax situation becomes more complex.
The answer is a holistic strategy around data. Pulling all data together into a centralised hub and running analytics around it will mean companies can come up with a consistent and reconcilable view of their tax position. Once a process is set in place for one requirement it can be leveraged for others, so the incremental cost of running it will fall.
The biggest barrier to this is mindset. Too many tax professionals still believe that their job is about grappling with complex technical issues. The reality will be very different. In years to come the most important issue will be to get things 100% right, and to analyse the data and prove it is right.
But it’s increasingly clear that a piecemeal approach to tax no longer works. Spending $1 million just to come up with a strategy on SAF-T (Standardised Audit File for Tax) requirements in Poland, as we know one company has, is no longer sustainable.
Some companies are already coming to that conclusion. They are starting to take a global view on data management. The immediate benefits are immense: creating all their tax reporting from one data set will save time, money and resources. The future benefits are clear too: staying one step ahead of the tax authorities. Add to that the value that can be gained from using analytics on the data, and the business case for putting data front and centre is compelling.