For companies, the pandemic was a watershed moment, changing how they operate “by leaps and bounds compared to five years ago,” said an Ernst & Young (EY) report published in July on “Reimagining Tax Functions” in emerging markets. “What seemed to be a forced adaptation to alternate ways of working is now a reality and opens opportunities that organizations wish to realize.”
Companies in developing markets are eager to implement such change. Almost 57% of respondents to the attached EY survey said they “are welcoming this change.”
An integral part of the adaptation process is ensuring a company’s tax functions cope with the latest local and international standards and benchmarks. The EY report said advanced “tax functions … act as an enabler to support [corporate] growth.” Those surveyed added that tax departments are “called upon to play a stronger role in helping [top executives and managers] determine the next steps and beyond.”
However, corporations face challenges when advancing their tax functions. They include “[tax] risk management, talent management, digitization by the tax administration, constant legislative and regulatory changes, and transparency initiatives.”
The first point the EY report highlighted was the government’s intent to “bring transparency and simplification in the tax laws.” That almost always results in a “multitude of legislative and technological amendments [and] initiatives.”
Accordingly, companies need to advance their tax functions to comply with local and foreign tax authorities’ regulations. That requires an organization to have “full visibility [and] control over tax data and operations, [and] ensure consistency in filings across legislations.”
Additionally, companies should have their own “proactive validation and analytics” to compare results with the tax authority’s findings and reports. Tax-paying firms also need a robust and authenticated “real-time data gathering process” to ensure that information sent to tax authorities in real time is correct.
Thirdly, companies need to upgrade their digital infrastructure “to handle large volumes of data [and] regular and timely tax reconciliation.” The functions most affected are almost always “routine compliances and reporting requirements, [rather than] strategic [and] value-adding activities.”
The EY report recommends companies stay ahead of government requirements via innovation and investing in their tax functions to ensure compliance with changing regulations. “Financial and reputational risks arising from inaccurate [or] delayed compliance could significantly outweigh any perceived saving in tax function costs.”
Tax function 2.0
As governments seek higher tax revenue and a broader taxpayer base, top executives and decision-makers need to “consider … the role of tax functions” within their organizations.
“Historically, tax has been … a passive function, limited to grabbing the back seat in most board meetings,” the EY report said. That is changing as “in today’s evolving tax space, tax is … driving business decisions.”
Companies seeking foresight are “clearly shifting from routine compliance activities to higher value-adding activities, collaborating with other business functions and supporting organization growth through innovation.”
When developing a company’s tax function to produce value-adding insights, the entire organization should adjust. Tax functions need “access to quality data, use of technology to undertake the right level of analytics and, most importantly, best-in-class talent to understand, evaluate trends and build ideas, solutions, insights for business.”
Tax managers and top executives must grow departments handling their tax functions. The goal is to “free up [tax-department employees’] time and divert them from manual, repetitive tasks to move value-added analysis, without a major dent in the budget.”
Tax departments could achieve the necessary expansion without hiring significantly more people. The document’s recommended solution is using “best practices, strategies adopted during the pandemic phase, [including] leveraging technology, automating or outsourcing some or all the tax activities. Process and technology skills … augment technical skills in the tax and finance function.”
Like all other departments, advancing the tax function in a company is only possible with skilled employees. “Tax [management] is a very specialized area and requires deep technical expertise,” the EY report said. “With a multitude of changes being introduced across various facets of tax legislations including … transfer pricing, direct tax, international tax, etc., there is an increasing need for tax functions to carry specialized knowledge and in-depth expertise in each of these domains.”
That increasing sophistication means companies need to create highly specialized and focused teams within the tax function. “One person [or team] single-handedly specializing across all facets of tax does not seem realistic, especially in the current environment of fast-changing domestic and international tax laws.”
To find the correct calibers, the report said the ideal solution would be to “first assess the existing talent in the organization, understand the core skill sets of your team, provide them the enablers to sharpen their capabilities through challenging experiences and growth environment so they stay connected to the organization.”
If top executives find it too difficult, inefficient, or expensive to upskill their tax function employees, the company should consider hiring outside professionals with specialist skill sets that could be an extension of in-house teams.
With growing complexities in the tax landscape, good data management supported by a secure and comprehensive infrastructure becomes necessary. “It is crucial for organizations to understand the importance of data management during all stages of the data lifecycle — data gathering, data analytics, data transformation, data reporting, and data storage.”
The government is a significant driver of such investments by companies. Regulations requiring digital tax reporting, processing, and payment require taxpayers to have a competent digital infrastructure that interacts with the digitized tax authority. In Egypt, the Egyptian Tax Authority (ETA) requires large and medium-sized companies to register, file their taxes papers and make payments digitally.
Additionally, the e-billing system means ETA receives communication from taxpayers in real time, giving companies 14 days to make any adjustments. There also are e-receipts used during ETA audits and e-invoicing.
That means a significant increase in data flows from all company’s functions and departments to the tax function. That data needs to be homogenous, structured, curated, and processed into meaningful information for the tax department to file and send to relevant tax authorities. “It is important to stay one step ahead [of national requirements] when collecting, analyzing, using, reporting and storing data.”
The EY document recommends companies develop an “enterprise-wide data strategy” that ensures a “single source of data extraction [and] usage.” The report said the result is “reduced people dependency, [inceased] institutionalization of knowledge [and] improved data analytics.” Those outputs should loop back to all the company’s departments, benefiting decision-making processes.
In the current economic and financial crunch, companies that intend to grow regionally and globally need to find “the right balance between building a best-in-class and best-in-cost tax function … to achieve readiness to respond to the future.”
To achieve that strategy, top executives, decision-makers, and tax function employees need to constantly invest in the organization’s tax divisions and departments. “Finding this balance could involve the transformation of specific processes, investment in the right technology on a sustained basis, continuous upgrading to tackle change management, continuous training and upskilling of people, preparedness to respond to uncertainties, etc.”
One critical issue is ensuring the company’s tax function constantly evolves with technological advances and new laws and regulations to clamp down on tax evasion via digitization,” the EY report said. “Various approaches are being adopted to achieve a best-in-class tax function, including in-house transformation, bespoke automation solutions or outsourcing.”
Choosing one of those approaches has its positives and risks. In-house transformation brings in greater control of the tax function. However, the report said it requires significant effort in terms of time and capital. “Successful [transformation] would require significant investments … as well as specialist talent.”
On the other hand, “outsourcing can … achieve stronger processes, strategic business partnering, risk-managed framework, access to industry best practices. [It would also] improve data architecture, [achieve] greater visibility and control while leveraging on the investments of outsourcing partners from a people, process and technology perspective,” the EY report said. “[That] could help reduce risks of fallout and achieve better economics.”