3Ts for a global CFO: tax, transformation, today

Tom, the head of tax for a global telecom company, was more than surprised to learn that his company name appeared on the “tax hall of fame” in Chile. Previously one would have expected a letter by post or by email. Nowadays, tax offices appear to use different tactics – from leveraging social networks to nudge the outliers, to engaging artificial intelligence (AI) to perfect the tax audit sampling. This example of French tax officials using AI to spot undeclared pools might sound minor until it doesn’t. Just have a look at the AI for humanity – the strategy of using AI in the French public sector, with numerous demonstrated achievements in the tax domain.

Doing nothing is not an option anymore for tax executives like Tom. That is why tax function transformation is high on global tax leaders’ agendas.

In this article, we will look into the so-called ‘3Ts’.

• Tax – with an emphasis on the challenges in tax compliance.
• Transformation – some of the imperatives and best practices in global tax compliance transformation.
• Today – why it is critical to start immediately and whether outsourcing might be an effective solution going forward.

Tax: global tax compliance challenges

To put things into perspective, it is important to examine the global trends impacting the complexities of doing business globally. TMF Group’s Global Business Complexity Index 2022, not only ranks the countries in terms of complexity but also allows us to extract some global patterns in local experts’ responses. For 2022, those global trends for tax compliance are:

Digitalisation:

As technologies impact the way businesses market, sell and deliver their products, this trend also impacts the way taxes are generated. For example, the  Organization for Economic Co-operation and Development (OECD) – the supra-national body that drives certain global tax initiatives – has a view on the importance of the digital platforms in tax policy.

Tax enforcement

 During the COVID-19 pandemic, many governments provided support to businesses via fiscal measures – eg reducing temporary tax rates. Now some measures are being reversed and overall tax discipline has become stricter.

This trend, however, is somewhat balanced with better communication and guidance by tax authorities.

Global alignment

Governments around the world implement changes in local tax legislation to be more aligned. The example of a global minimum tax deal – with more than 130 jurisdictions agreeing to set a minimum level of corporate tax at 15% – is a telling example here.

With these driving forces, the latest TMF Group’s report, Tax compliance transformation: Risks and Strategies for Global Management classifies the challenges into traditional and emerging ones.

Traditional challenges have been there for a while. Those range from legislative changes to legacy IT and business systems that create strong headwinds in terms of adaptability, efficient consolidation and reconciliation. Regional and local complexities, including local tax reporting, collecting required necessary information, language and culture barriers definitely play their part as well.

However, the newer challenges bring even more uncertainty and complexity. To minimise leakages, many governments introduce new types of requirements. Many are more granular,  on a transactional level. Some are more frequent – see for example near real-time e-invoicing requirements in Hungary. Cross-border operations particularly appear on the tax authorities’ radars – with more stringent reporting requirements (such as the US FATCA - Foreign Accounts Tax Compliance Act). The rise of internal and external requirements for data protection and security requires as well certain changes on organisational and departmental levels.

Transformation: some imperatives and best practices

AS-IS and TO-BE. These two terms are well known to any project manager. For any project, big or small, they refer to the current reality and the future state of affairs. Tax transformation is a collection of projects as well – so any interdisciplinary learnings and best practices are welcome.

In defining AS-IS state of your tax compliance function many find a maturity level approach useful. Is your tax maturity nascent – with siloed operations, fragmented processes and low automation? Or maybe established – with some levels of centralisation, somewhat standardised processes, transactional automation and dashboarding? Or should one congratulate you for advanced maturity – with tax operations fully digitised, intelligent automation in place, with predictive analysis and a robust techno-functional talent in place?

Once the AS-IS is established, one should not rush towards specific tangible TO-BE deliverables. Success stories of global clients executing tax transformation on time and on budget tell us one important thing. It is about “strategy first”. In other words, laying down the strategic principles on paper and then aligning all individual initiatives to that larger canvas proves to bring good results. And, of course, the tax transformation strategy, especially the digital component, needs to be in sync with the change patterns in wider organisational and financial contexts. The AI for humanity strategy document mentioned above is a telling example here. Not only is it a perfect proof of a “strategy first” principle, but it is also a great source of best practice. From an inter-disciplinary team approach to the sequence of priorities to emphasis on data – you have a great template to follow.

Some other valuable best practices that we have observed in successful global tax transformation projects are start with data, know your process and forget perfectionism.

Talking about data might sound like a broken record, however the importance of meta data in the tax world cannot be overestimated. Many times global tax controllers have been dragged into specific local deductibility conversations, leaving a bitter taste of speaking different languages. Defining consistent meta data categories allows for a common “language” that various players can speak – from tax to management to machines.

KYP – or Know Your Process – is an allusion to another popular abbreviation, KYC (Know Your Client). KYC is a process to verify the identity and other credentials of a financial services user. In other words, financial institutions cannot provide services to a person or a company until they know enough about them. Similarly, no steps to improve or automate the process should be taken in the tax compliance space before you know sufficient details about the process. We have seen some suboptimal results of transformation activities related to processes that were “black boxes” for some global tax departments. Specifically, other taxes – such as environment tax, withholding tax and package tax – are notorious for slipping off the radar.

Another abbreviation used is MVP. Not the sporty one – but a transformation related one – Minimum Viable Product. In other words, do not try to boil the ocean and come up with a perfect result in all the cases. Forget perfectionism – that might throw back your implementation in terms of both time and budget. Tax compliance is especially notorious for exceptions and complexities. All your years of experience might tell you the tax is calculated as a product of a tax base and a tax rate, until you come across the calculation in Hungary and, even on a negative tax base, need to pay a tax. If you can standardise 90% or 95%,  it might already bring you closer to the TO-BE state.

Today: why it is critical to start immediately and whether outsourcing might be an effective solution

According to Gartner, technology related priorities are nine percentage points up on CFOs’ agendas in 2022, being only second to growth priorities. The same study shows that 92%  of CFOs indicate they plan to increase investment in technology, up from 70% last year. As a finance leader, one should assess which side of the fence they are on – and whether they support the growth of their companies as efficiently as other players. For global tax leaders the benchmark is probably more internal in nature – the pace of transformation in other parts of the finance function. Not being synchronised with the rest of the organisation might jeopardize wider company objectives. Not embarking on a transformation journey today means the gap with the others will only widen tomorrow.

Future ready

The stakes are high in global tax compliance nowadays. But incorporating the right elements into the transformation strategy and tapping into the evolving third-party ecosystem can play a crucial role in building a future ready tax function.

How TMF Group can help

Our accounting and tax experts located in more than 80 jurisdictions can keep you compliant, wherever you do business.

Need more information? Contact us today.