The importance of including tax in finance transformation

The importance of including tax in finance transformation

Mon 05 Oct 2020

CFOs are focused on increasing value, reducing costs and managing risks. This requires greater business partnering and analytical capabilities, continuous improvement of processes to eliminate waste and increase automation, and enhanced controls and monitoring. Finance transformation programmes are designed to achieve these objectives and have commonly focused on standardising and centralising or automating routine and repetitive activities in shared service centres, transitioning more complex activities requiring judgement to centres of excellence and investing in cloud solutions for enterprise data management and financial reporting. 

Why should tax be included?

Tax is an integral part of the finance function and faces the same demands and challenges.  The head of tax is often asked to provide greater insights to the business, support on the tax impact of decisions and help with planning and forecasting. Tax is also asked to do more with less in support of reducing costs, while faced with process and data inefficiencies. This needs to be done in the context of increased regulatory requirements and expansion by the business into new markets to drive growth with the associated increased tax risks of each. It is therefore essential that tax is included as part of any wider finance transformation programme.

What is the impact of not including tax?

Unfortunately, tax is often not included in finance transformation programmes. This can happen because the impact on tax is not understood properly or tax is not perceived as a priority. However, undertaking finance transformation without tax can have a negative impact on the ability of tax to efficiently and effectively fulfil its compliance and reporting obligations, expose the business to increased risk and lead to missed opportunities. The quality of data received by tax sometimes deteriorates due to system and resource changes and there can also be delays in receiving information or additional re-work of that data required, which results in increased compliance and reporting costs. There is also less time to consider the tax impact of business changes, management of tax risk or focus on tax planning to deliver savings for the business.

How does including tax provide the opportunity to increase value?

Inclusion of tax in the finance transformation programme provides many benefits and opportunities. Tax has often looked to follow finance’s lead by transitioning activities to shared services for indirect compliance and some direct compliance and reporting activities to free up time to focus on more value-added activities. To enable this transition, the information tax receives needs to be ready to be used without having to be manually reviewed, reconciled or manipulated. At least 50% of the time for tax processes is typically spent on gathering and preparing the required data. With tax involvement in the finance transformation programme, tax processes, inputs and outputs can be clearly understood and documented. Tax sensitisation of a new or upgraded ERP system can build tax requirements into the chart of accounts, define the level at which data needs to be made available and the reports required. This enhances the quality of data at its source, provides access to key business drivers to allow better planning and analysis, and facilitates increased automation.

What automation options are available to reduce costs?

Automation can take many different forms. Integrating an ERP system with tax determination technology can automate the calculation of indirect taxes at the time of the transaction.  Leveraging dedicated tax compliance and provision technologies can automate data collection, consolidation, calculation and filing processes. Emerging robotic process automation and artificial intelligence solutions are providing even more options to both the CFO and Head of Tax to streamline activities. Finance is seeking to leverage these new technologies to improve the efficiency of either established shared service centres or broader initiatives to create a digital workforce. Where tax has not yet transitioned activities to shared services, an alternative option is now available to the Head of Tax to deploy these technologies within the tax function directly to create its own efficiencies and adopt a more agile and automated approach with a lower level of initial investment. Even where tax does use shared services or has already implemented dedicated tax compliance or provision technologies, robotic process automation can be applied. Robotic process automation is one of many tools that can be used to achieve operational excellence and reduce costs.

How can risks be managed more effectively?

Many jurisdictions have increased their tax governance and transparency requirements, such as Senior Accounting Officer certification and tax strategy publication in the UK, horizontal monitoring in the Netherlands, EU CRD IV and the OECD’s Country by Country reporting. These requirements have driven the need for improved process and risk management, real-time extraction of data and enhanced data analytics. Through tax transformation programmes, tax is seeking to get better access to accurate data through business intelligence solutions and to manage risk more effectively through implementation of tax control frameworks and leveraging workflow management technologies. Tax control frameworks typically include a tax strategy and policy by which tax should be managed, supported by a tax risk assessment framework and tax governance framework detailing the required processes, mandated controls and monitoring activities for identified tax risk areas.

What makes a successful finance and tax transformation?

Successful finance and tax transformation starts with a clear vision and is then followed with a robust design for the change required and a roadmap to get there.  The transformation journey may not always be smooth, but the rewards are great for both finance and tax. Costs can be significantly reduced, direct value and cash flow benefits can be created and enhanced governance and risk management delivered. The journey will typically be informed by the c-suite’s transformation vision and objectives, designed through a Finance and Tax Target Operating Model and delivered through a finance and tax transformation programme with a defined roadmap, milestones and initiatives. The Finance and Tax Target Operating Model will consider the design principles and the current state position, benchmarked against leading practice to design the future state. It will take a holistic view across service, organisation, people, process, controls, technology and data to form a case for change to build support for the transformation and a baseline against which success can be measured.