Rethinking tax compliance for the new world

By Jonathan Howe, Connected Tax Compliance Market Leader, PwC

Are traditional approaches to tax compliance still fit for purpose? The answer from most of the tax leaders we speak to is a definite no.

The strains were evident in the interviews with 300 business decision-makers we carried out for our Reframing Tax research. Their top two tax challenges are keeping pace with regulatory change and managing compliance. The resulting need to overhaul capabilities and approaches was reflected in the fact that tax compliance ranks joint number one in their priorities for investment in tax tech, alongside insight and analytics.

So if compliance is the number one challenge, what are tax leaders’ priorities for change, progress in executing these strategies and the stumbling blocks they face.

Staking a place at the top table of decision-making

In a recent survey of more than 250 tax leaders, what comes through strongly is the extent to which compliance burden is not just growing in areas ranging from Pillar Two to environmental taxes, but also how these changes impinge on the business and call for an organisation-wide response. Nearly 60% of the tax leaders taking part in our survey expect an increase in their tax reporting and compliance responsibilities over the next 2-3 years

Looking specifically at Pillar Two, less than a quarter believe that they’re well-prepared. This should ring alarm bells from an operational perspective. But also a strategic one when you consider the impact of Pillar Two in areas such as supply chain restructuring and the location of R&D and other high value operations. Rather than simply implementing after-the-fact compliance in isolation from the business, the strategic ramifications of today’s regulatory changes mean that tax teams should be closely involved in key strategic decisions from the outset.

This resulting boost to compliance acting as a business partner is a chance to reframe the strategic conversation and enhance the role of tax compliance within your organisation. When we asked tax leaders how they could add most value to the business, tax optimisation and proactive management of risks came out on top. The relevance, timeliness and quality of the compliance data they bring to the table are going to be a critical part of this.

Connecting up compliance

The upsurge in carbon, packaging and other environmental taxes highlights the extent to which tax teams are dependent on data coming from other parts of the organisation. The challenges are exacerbated by the increasing need to report in real-time. Before, your tax team would have had the time to collect, cleanse and adjust data from the business for returns due many months after the event. Now, they need the business engagement, understanding and systems integration to guarantee a supply of reliable, comprehensive and ready-to-report data.

The digitisation, connection and automation of tax data is the key enabler. The win-win is the ability to collect and analyse more data, more quickly on the one side, while freeing up tax teams to focus on business intelligence and decision support on the other.

Just as important is bringing the business on board. Real-time reporting will concentrate minds. For example, some tax authorities are preventing businesses from issuing invoices if they have questions over the tax coding in the real-time sales data. With the resulting ability to collect revenue at risk of being delayed, the business has a clear incentive to fix any tax data issues quickly rather than leaving it to tax teams to deal with them.

Broadening the remit

Cutting through these changes is a marked shift in what compliance teams are there to do and even what we define as compliance.

Up until now, the main focus has been high quality returns. But now a combination of increasing regulatory demands and the need to bring tax compliance into the centre of decision-making has broadened the remit. Key priorities include making sure the right data is collected from the business and made available to the tax function and wider business.

In turn, the focus is no longer just specific regulations so much as the talent, technology, data and processes needed to keep this connected, real-time and value-driven approach to compliance on track. There is no doubting the challenges in what is a cultural as well as operational leap. But if you can transform compliance, you can transform the tax function as a whole.

Struggling to make headway

How are tax teams responding? Nearly 70% of the tax leaders we surveyed are planning greater use of technology and more than 60% are stepping up the upskilling and reskilling of their teams.

But it can be difficult to make headway when resources are so tight. Nearly 60% of tax leaders expect budgets to stay the same or be reduced despite the increased workload. A telling consequence is that barely a quarter report extensive use of smart automation or automated controls.

Similarly, data feeds are still being impeded by disconnects and delays. Nearly a third of tax leaders admit that the quality of data used in tax processes is less than good. Despite the demands of real-time reporting, less than 30% report that all the data they need for tax compliance is stored in a central repository or subject to a full digital audit trail.

The way forward

So how can your business get compliance up to speed now, while future-proofing capabilities for the changes ahead? Four priorities stand out:

1. Connect with the business
2. Be prepared for what’s coming
3. Simplify to accelerate
4. Take advantage of partner resources/outsourcing

1. Connect with the business

Compliance is no longer delivered in the back office. Meeting regulatory demands and delivering business value require close connection with the business teams making key decisions and generating data across the organisation.

To move forward, tax has to take the lead rather than letting change happen to and around them. This means playing a lead role in framing the talent, technology and wider transformation agenda for their function. Crucially, it’s also important to have an upfront say in relevant developments in the wider organisation. If sales systems are being overhauled, for example, then tax should help set the specifications for the tax data that needs to come out of this and ensure that solutions are fully integrated with the tax platform.

2. Be prepared for what’s coming

The starting point is clarity on how regulatory and business demands are changing and then gearing up your capabilities to respond.

PillarTwo is a clear case in point. The need to comply with local interpretations, while ensuring consistency in data and approach across different operating territories is likely to provide the catalyst for the development of a more centralised, connected and controlled compliance process, with automation at its heart.

Just as important is resilience in the face of continual upheaval. Again technology can help. For example, tax determination engines can take the headaches out of indirect tax by incorporating regulatory changes automatically and providing automated reliable data feeds and payments.

3. Simplify to accelerate

There is no bottomless budget. As a tax team, you’re constantly under pressure to deliver more for less.

That’s why it’s so important to make the most of the resources that are available to you. Priorities include eliminating all the unproductive time spent on data extraction and cleansing, so you can focus on decision support. Both automation and the simplification of processes can play a key part in this. As you look to make budgets go further, you may also find that a lot of the functionality you need is available within existing ERP platforms or from relatively cheap and easy-to-implement off-the-shelf packages.

The ultimate aim is to deliver standardised high quality data sets in real-time and spend much less time and effort on routine compliance.

4. Take advantage of partner resources/outsourcing

Bringing systems and talent up to scratch can stretch budgets. To add to the challenges, this new world of compliance calls for people with skills that may not be readily available in your team – software engineers or data analysts, for example.

Partnering could therefore offer a more feasible and cost-effective way forward. Working with today’s increasingly sophisticated tax service providers allows you to gain access to their breadth of skills, expertise and state-of-the-art technology. You can also dial-up and dial-down support, helping you to meet variable demands while controlling fixed costs.

More from us

This article is one of a series designed to help those responsible for tax navigate their transformation journey. If you have any questions or would like to know more about redefining the role of tax compliance in your business, please get in touch.

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