Chapter 1
How businesses are transforming
Finding the right balance between performing routine activities and making more complex contributions to their business may require new investments.
As indicated above, many businesses are considering or are already transforming their operating models in order to strike the critical balance between routine activities and more complex contributions to the broader business objectives.
With costs as a key area of focus, it is perhaps unsurprising that tax and finance budgets are being shifted from routine to strategic activities. And considering recent, significant changes to global tax policy, such as the agreement to introduce new global minimum tax rules, this would appear to make sense.
This strategic focus on the allocation of resources will help organizations not only keep pace with the current state of play, but also plan for inevitable future regulatory change.
This means that businesses that shift budget away from routine activities, such as tax compliance, will need to ensure that spend is reallocated effectively.
This has been the experience of SAP, which has leveraged EY’s global network and technology investments to improve its own tax compliance capabilities.
“Digitalization and globalization have had a great impact on economies, affecting the lives of people around the world,” says Kirsten Birnbaum, Head of Global Tax, SAP SE. “And the impact is sure to increase in the future. Working with a global network of specialists, jointly utilizing our technologies has enabled us to considerably increase our efficiency in delivering tax compliance. We have more room to focus on strategic activities – and that’s a great benefit for the company.”
The importance of having advanced technology cannot be understated. Seventy percent of respondents say they intend to invest $2 million or more over the next three years (this rises to 85% for organizations with $30 billion or more in revenue).
Tax and finance functions will also need to have a laser focus on the following three key challenges: talent, legislation and regulation, and technology and data. Achieving all of this may well help them unlock the power to do more.
Chapter 2
The talent squeeze gets tighter
Workers demanding more flexibility after the pandemic creates more challenges for businesses – and their tax and finance functions.
All business functions, including tax and finance departments, are facing difficulties attracting and retaining the right talent. Even before the pandemic, workers were increasingly demanding more flexibility in a variety of forms: flexible working arrangements, secondment opportunities, a greater emphasis on wellbeing, and heightened expectations around professional development and advancement. Companies have been also under increasing pressure to align their values and ESG policies with employees’ values as workers assess not only where and how they work but also why they work.
The pandemic accelerated these workplace shifts and left employers scrambling to contend with the logistical challenges of more flexible arrangements. These challenges included implementing new health-and-safety protocols for on-site workers, ensuring they had the right technology in place to facilitate remote working and the management of business-as-usual operations.
Many of these flexible arrangements, particularly remote working, have become entrenched. According to the EY Work Reimagined Employee Survey 2021, 9 out of 10 respondents want flexibility in where and when they work, with 54% saying they are likely to quit if they are not offered that flexibility. At the same time, 35% of employers want a full return to the office post-pandemic. Of course, with ‘The Great Resignation’ making headlines and many industries facing labor shortages, workers have more leverage than ever before. But workers are not just resigning to leverage newfound power, the survey found. They are exploring (reshuffling) roles that better align with more fulfilling experiences.
Of course, different workers want different things, and there are many craving more human interaction in the workplace as a growing number of people have been hired and left employers during the pandemic without meeting their colleagues in person. But in instances where workers fled cities to rural areas with lower costs of living and cases where employees moved to different countries to be closer to family during the pandemic and do not want to return, more businesses than ever before face tax compliance and reporting requirements in jurisdictions where they have created a ‘permanent establishment.’ In fact, 55% of respondents in the TFO survey anticipate facing more permanent establishment risks in the coming two years as employees continue to work remotely as a result of the pandemic. These risks will only heighten as work-from-anywhere culture becomes more commonplace.
Coincidently, people with the right combination of specialized tax technical and data, process and technology skills are in short supply; 95% of respondents believe their tax and finance personnel need to augment their tax technical skills with data, process and technology skills in the next two years.
And, just as workers with specialized skill sets are hard to find in some industries facing labor shortages, these types of modern tax professionals can be hard to find and hire.
In many cases, it is easier to work with a vendor that invests heavily in developing its own tax professionals that are also knowledgeable in leveraging data to meet obligations and bring insights to the broader enterprise.
“Flexibility is the new currency for employees. In fact, 54% say they would leave if they did not have it,” says Marna Ricker, EY Americas Vice Chair – Tax. “Between the short supply of tax and finance talent, remote workforce tax tracking and reporting, and the need to cost effectively transform, businesses are increasingly turning to their service providers for both technical and technology acumen to accelerate and elevate their tax and finance department impact."
Chapter 3
The pace of legislative and regulatory change is accelerating
The rapid pace of legislative and regulatory change shifted into higher gear during the pandemic – and it may soon reach overdrive.
Legislation and regulation underwent seismic change during the pandemic. Governments have passed more than $33.6 trillion in support and stimulus programs, or the equivalent of 39% of global Gross Domestic Product (GDP) according to the International Monetary Fund (IMF). In many cases, that relief took the form of tax measures, many of them temporary.
As the world emerges from the pandemic, tax and finance functions have to contend with an unwinding of temporary policies, a return to a longer-term view, and tax reform that was already gaining speed pre-COVID.
“Governments are focused on their fiscal stability and will likely seek to recover what was spent on the pandemic,” says Eng Ping Yeo, EY Asia-Pacific Tax Leader. “This means the already rapid pace of legislative and regulatory change might accelerate. Businesses also have to contend with more tax law enforcement activity, which will place additional pressures on resources.”
The most significant policy developments have been prompted by the Organisation for Economic Co-operation and Development’s (OECD) project on addressing the tax challenges of the globalization and digitalization of the economy, including the agreement in October 2021 on new global minimum tax rules at a rate of at least 15%.
This global tax reform is also set in the context of policy change taking place on national levels around the world. In the US, for instance, there have been proposals to significantly increase the corporate tax rate from 21% – although the currently pending legislation does not include such an increase, discussions are still in a state of flux. In the UK, the corporate tax rate is set to rise from 19% to 25% in April 2023 for all affected businesses. And these are just two examples of major, ongoing change.
The difficulties faced by organizations in this shifting global tax landscape are significant. According to the EY International Tax and Transfer Pricing Survey 2021, 76% of respondents say they are being challenged by the sheer volume, pace and complexity of global tax reforms. But this is only part of the picture.
“While keeping up to date with the regulatory and legislative landscape is critical, tax teams are also having to deal with changes to reporting obligations,” says Bridget Walsh, EY EMEIA Tax Managing Partner. “Tax authorities have become increasingly sophisticated in recent years and a continued shift to digital filing and a move toward real-time or near-real-time reporting is increasing the compliance, risk and cost requirements.”
According to the TFO survey, 59% of respondents believe that complying with emerging digital tax filing requirements will increase the cost of running the tax and finance functions.
The cost of compliance will be considerable as well – with 83% of all companies expecting to spend at least $5 million, an average of $11.1 million, to comply with emerging digital tax filing requirements over the next five years (rising to 92% for companies with revenue at $30 billion or above and an average spend of $13.2 million).
Emerging digital tax filings
59%Of respondents believe that complying with emerging digital tax filing requirements will increase the cost of running the tax and finance function.
As is always the case, compliance is not optional. But as tax authorities look to recoup support provided during the pandemic and clamp down on tax compliance and reporting, these changes are likely to have a serious knock-on effect in the years ahead. It is perhaps unsurprising then that the 2021 EY Tax Risk and Controversy Survey showed that 53% of tax leaders expect heightened tax enforcement in the next three years.
Chapter 4
The right data and technology can help
Data and technology helped businesses survive the pandemic and many now seek solutions to help them stay connected and compliant.
Access to up-to-date data and technology is key to achieving transparency in today’s fast-changing global tax landscape. This became painfully clear to many organizations during the pandemic as tax and finance teams, many of which were separated from their workplace files, struggled to meet basic compliance obligations such as filing tax returns and dealing with audit activity with tax authorities.
Tax and finance functions can also bring more value to the entire enterprise when they have advanced technology and data at their disposal because they are able to better project the tax implications of broader business decisions ranging from acquisitions and dispositions to the impact of tax law changes.
The C-suite has recognized the significant role that technology plays and how the tax and finance functions can be real value-adding partners to the business. Thirty-seven percent of respondents (including 41% of chief financial officers) to the TFO survey believe a lack of a sustainable plan for data and technology is the biggest barrier to achieving their tax and finance function's vision. This rises to 50% of larger companies with over $30 billion in revenue. This clearly shows that there is plenty of transformational work to be done.
Technology can be a significant expense for a tax team budget. On average, the TFO survey respondents say they will spend $4 million in tax technology over the next three years. Meanwhile, a large number of businesses are looking to reduce costs and are struggling to build the necessary technological capability in-house. Therefore, it is not surprising that 56% have prioritized working with a provider who has significant capabilities in data, technology and shared service-center delivery – rising to 68% for those businesses with annual revenues of more than $30 billion.
“Digital transformation that enables innovative services in finance, accounting and tax is helping organizations gain more relevant and actionable insights for their business, often at a lower cost,” says Daniel Goff, Corporate Vice President, Worldwide Tax and Trade, Microsoft. “But transformation looks different to different companies. Some want to build internal capabilities. Some prefer to co-source with a provider. Often, a hybrid approach is the best approach. Companies that undertake such transformations are better positioned to redirect resources to focus on the most strategic finance and tax issues.”
Chapter 5
4 steps for successful transformation
Continuous evaluation is key to successful transformation, whether co-sourcing, building internal capacity or a hybrid of both.
Transformation gives tax and finance leaders the power to shape strategy, innovate and have a greater impact on the business. It can transform tax from a compliance, business-as-usual function to one that helps the organization’s leaders understand the full picture of broader business decisions.
Tax and finance functions need a transformation strategy that is holistic, flexible and has the scope to evolve and adapt changing talent, regulatory and tech landscapes in order to be as future-proofed as possible.
Transformation can take many forms. Some businesses may decide to address these challenges internally. Others may invest in a co-sourcing arrangement. Many will choose a hybrid model with elements of both. There is no one-size-fits-all approach, however; businesses must choose their own path forward.
The following steps can act as a guide to successful and robust transformation:
1. Re-evaluate your operating model
Even if you have made transformational changes to your operating model, continuous assessments should be undertaken to stay up-to-date. Your priorities around cost controls, value creation and risk management may change as you re-evaluate how the tax and finance function contributes to the overall business strategy. Continuous assessment will help you identify gaps in people and technology as you look to futureproof your operating model.
2. Determine what stays in-house
You may decide on in-house delivery of activities you consider higher value and best-in-class — for example, planning or managing tax controversy. To do this successfully, however, requires a degree of internal transformation to optimize existing people, data processes and technology.
3. Decide what to co-source
It may be more advantageous to co-source some activities, especially those that are more routine, such as completion of tax returns, regulatory filings and data collection. Highly repeatable, data-driven and rules-based tasks may be performed more efficiently via co-sourcing with a third party.
4. Consider a hybrid approach
You may decide that a hybrid approach works best – continuing to own some critical tax and finance processes and activities, while co-sourcing others. The most effective hybrid approach can improve both effectiveness and efficiency while empowering your people to become a value-added partner to the business by focusing on activities that improve the bottom line. Connecting both in-house and co-sourced activities will provide greater value.
While an in-house approach enables you to develop and grow your own team, and improve control and flexibility, co-sourcing to a third party can reduce overall tax costs, control unpredictable IT expenses, and redirect internal resources to more strategic activities. It also enables organizations to leverage the vendor’s considerable and ongoing investments in the necessary talent and technology to keep pace with an ever-changing world.
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Summary
Tax and finance function transformation moved from ambition to reality for most businesses, according to the new 2022 EY Tax and Finance Operations Survey. The COVID-19 pandemic is partly responsible, aggravating challenges around talent and further complicating an already complex tax legislative and regulatory environment. Businesses undergoing transformation are choosing a number of approaches, from co-sourcing some activities to improving their own internal capabilities. In many cases, they are adopting a hybrid approach that best meets their individual needs.
