Tax transformation: Examining the critical role of data and technology

Research examining data and technology challenges affecting tax compliance and how leading organizations are responding.

Transforming tax compliance – the role of data and technology

In this series, we examine the challenges tax departments face in an evolving tax compliance environment that rewards agility, new skill sets and the ability to do more with less. In each article, we examine a different topic and provide insights on how tax departments can transform and thrive in the tax compliance landscape of today and tomorrow. In our first article, we focused on tax compliance regulatory, legislative and market trends and how leading organizations are addressing them. Our second article examined talent issues tax departments are facing and explored leading practices. This final article in our series focuses on data and technology.

Introduction

Up until now, tax departments have been somewhat reactive with respect to technology advances, but as new reporting and regulatory tax paradigms take shape, the roles of data and technology in the tax compliance function need to evolve to keep pace. Employers are realizing that their tax compliance teams need to quickly get up to speed and incorporate more data and technology skills.

With companies being asked to provide data more quickly, to multiple jurisdictions and in different formats, the potential for risk to organizations has risen. Recognizing the growing need for technology skills in the tax world, accrediting bodies such as the National Association of State Boards of Accountancy (NASBA) and the American Institute of Certified Public Accountants (AICPA) have supported incorporating such skills into the US Certified Public Accountant certification.¹

Companies need to balance the need for data management and updated technology resources with other budget priorities. Challenges abound – among them a lack of skills in these areas in current tax departments, high costs and competing strategic priorities, as well as the need to manage nonintegrated systems. Companies need to map out a future in which they decide whether they can meet the new data and technology standards with their existing resources, employee base and systems or whether they should consider partnering with third parties that can provide support and expertise more efficiently, freeing up in-house teams to focus on other critical areas.

The challenges

The role of technology and data in tax compliance is becoming more critical due to the following:

• Tax has become a value driver. The C-suite is expecting tax to play a greater role in organization-wide decisions. As a result, analyzing, interpreting and communicating the implications of data outside the tax department is becoming more important
• Real-time data needs are growing. To comply with filing requirements, the tax function increasingly needs the ability to access and manage data closer to real time, which creates a need for connected tax technology and data ecosystems and for broader skills development within the tax compliance and reporting function
• Talent retention is a challenge. Talent shortages are driving a need to embed greater standardization and agility in the technologies and systems used for tax reporting
• Technology is an asset for recruiting. Failure to keep up with technological advances and to respond to data management trends may increase compliance risk and have negative implications for attracting the next generation of talent in the tax department.

What we are seeing

Tax is viewed as a strategic business partner

CEOs are looking to transform how their organizations operate to meet challenges related to evolving reporting responsibilities and global policy disruption. This entails focusing on reducing costs, investing in digital capabilities and improving risk management. Tighter integration of tax with finance through connected end-to-end processes, data strategies and connected technology ecosystems may help achieve these goals.

Rapid growth in volume of data required for reporting

We have seen a significant increase in the number of reporting requirements and the detail requested in these reports over the past 10 years. Contributing factors include implementation of the Tax Cuts and Jobs Act (TCJA), reporting requirements for country-by-country reporting and emerging global minimum tax initiatives. On the horizon are increased environmental, social and governance (ESG) reporting, base erosion and profit shifting (BEPS) reporting and much more.

BEPS 2.0 compliance will require hundreds of data points to meet reporting obligations. Tax has historically focused on isolated changes to existing processes with little regard to upstream or downstream effects. These solutions have left data trapped in spreadsheets and other applications that are not easily accessible across tax and finance. Many of the required BEPS 2.0 data points are part of other reporting obligations. However, this data is not easily accessible. Adapting to this new age of reporting requires a holistic approach to tax and finance data. Failure to adapt may result in increased business compliance costs and heightened risk of inaccurate reporting.

Tax is one of the heaviest users of data within an organization but usually doesn’t own or control any of the source systems. This means tax must combine and transform data to meet tax reporting and analytical needs. Most mid-sized to large companies have a complex data environment. According to the recent EY Tax Technology and Transformation Survey, 78% of companies have between four and seven enterprise resource planning (ERP) systems, which is only one source for tax reporting. While progress is being made, 50% of tax department leaders state that a lack of a sustainable plan for data and technology is the biggest barrier to delivering their tax and finance functions’ purpose and vision.

Greater complexity, greater risk

The increased reporting requirements can lead to both financial and reputational risks. Tax continues to be a significant driver of material weaknesses in financial reporting.³ In addition to financial penalties, reputational risk has also significantly increased with the addition of expanded ESG reporting and the push for global transparency. Some of the largest challenges experienced by tax departments have been driven by a lack of timely access to the correct data. To help mitigate risk, a data governance framework that establishes minimum system requirements and enforces policies around real-time recording of transactions is critical.

Humans at the center

In our prior article, we focused on talent and discussed the challenges and opportunities to build a future-ready tax function. The talent challenges, the focus by the C-suite on cost reduction and the rapid rise in data needed to address current and future reporting requirements add new meaning to the old mantra “do more with less.” Rapid advancements in technology also create a challenge to upskill the existing workforce. In fact, 95% of respondents to the recent EY Tax and Finance Operations Survey indicated that tax technical competencies need to be augmented with process, data and technology skills.

While the landscape of technologies is growing more complex, technology is also rapidly becoming more accessible. Technology capability that was only in the domain of computer programmers and computer scientists a few years ago is now available to business users, including tax and finance, through low-code/no-code software tools.

Today a tax function spends 40%-60% of the time gathering, transforming and processing data.⁴

This leaves very little time to focus on other strategic, value-adding activities. The appropriate use of technology to automate data activities and the thoughtful presentation of data to provide meaningful insights are the key for tax and finance professionals to address the current and future challenges of increased reporting requirements and to truly become a strategic business partner.

“Companies have the opportunity and obligation to be strategic about how they approach their technology and data landscapes,” says Christina Bowers, EY Americas Business Tax Compliance Leader. “Upfront planning, strong change management and a deep understanding of their data, technology and processes will be critical in effectively driving tax transformation for each organization.”

Actions to consider – what leading companies are doing

Tax data is based on financial information, and siloed approaches to data collection and management need to give way to a collaborative approach that provides access to both the tax and finance departments. A forward-looking data and technology vision and roadmap that aligns the tax department with the finance department and encourages regular communication opportunities provides greater value and can spur a more meaningful transformation.

In recent years, tax has done a better job of getting a seat at the table in major finance and IT transformations. During recent ERP upgrades, nearly 90% of the time the data is being sensitized for direct and indirect tax reporting, according to results from the recent EY Tax Technology and Transformation Survey. But more work needs to be done. Putting tax on an equal footing will help develop a proactive and nimble tax compliance function that can respond quickly to shifting tax policies and reporting requirements, uncertain economic conditions and potential talent shortages.²

Conclusion

The evolution of the use of data and technology in the tax function brings challenges but also opportunities for tax compliance professionals. While not every member of the tax team will need to become a data scientist or technology expert, companies do need to have a plan to address the way the tax world is changing, particularly the role of these forces in tax compliance and reporting and the growing strategic role of tax within organizations. Those that begin their transformation journey now will be better positioned to anticipate and navigate further change in the years ahead.