Overstretched tax and finance functions turn to co-sourcing

Tal­ent short­ages, leg­isla­tive change, tech­no­log­i­cal trans­for­ma­tion and dis­rup­tion caused by the pan­dem­ic are some of the chal­lenges plac­ing unprece­dent­ed pres­sure on cor­po­rate tax depart­ments.

The world has sud­den­ly become dif­fi­cult for in-house tax spe­cial­ists as an grow­ing set of require­ments crowd their agen­da.

These devel­op­ments are increas­ing the work­load for the same tax and finance func­tions that are fac­ing bud­get cuts and unpar­al­leled skills short­ages.

In response to these pres­sures, many busi­ness­es are co-sourc­ing select tax affairs to tech-enabled tax spe­cial­ists. The mount­ing com­plex­i­ty of mod­ern tax sys­tems is lead­ing cor­po­rate tax depart­ments to pass at least some of the respon­si­bil­i­ty for rou­tine work to out­side providers. Whether it’s val­ue-added tax (VAT) fil­ings or cor­po­rate income tax, co-sourc­ing rou­tine tax tasks is a way to improve effi­cien­cy and give senior staff the breath­ing space to help devel­op answers to some of the big strate­gic ques­tions fac­ing busi­ness­es.

“We have nev­er seen a time like this in the tax pro­fes­sion,” says Kate Bar­ton, EY glob­al vice chair – tax. “All of these issues are con­verg­ing: tal­ent chal­lenges, the need to address envi­ron­men­tal, social and gov­er­nance (ESG) issues, a desire to dri­ve long term val­ue, unre­lent­ing leg­isla­tive and reg­u­la­to­ry change, and cost pres­sures.”

Stu­art Lang, EY EMEIA tax and finance oper­ate leader, says data and tech­nol­o­gy are key enablers to help tax depart­ments cope. “You can either auto­mate basic tax tasks inter­nal­ly or under­go a tax trans­for­ma­tion by work­ing with an out­side provider that has made sig­nif­i­cant invest­ments in cloud tech­nol­o­gy,” he says.

Dave Helmer, EY glob­al tax and finance oper­ate leader, agrees: “Doing noth­ing is not a valid option. You might get your ESG wrong, you might over-pay on your tax bill, face a big con­tro­ver­sy issue, or you might not under­stand all of the leg­isla­tive and reg­u­la­to­ry change that is com­ing. The stakes are high if you don’t trans­form.”

Deal­ing strate­gi­cal­ly with these impor­tant issues is dif­fi­cult because core respon­si­bil­i­ties of tax and finance depart­ments have also been made expo­nen­tial­ly com­pli­cat­ed by an increase in dig­i­tal tax fil­ing require­ments from gov­ern­ments. An increas­ing num­ber of juris­dic­tions are demand­ing tax infor­ma­tion dai­ly, week­ly or month­ly, with trans­ac­tions pro­vid­ed direct­ly to the gov­ern­ment in dig­i­tal fil­ings. This has forced busi­ness­es to focus on their own data and tech­nol­o­gy for day-to-day tax man­age­ment, even as they try to respond to increas­ing demands.

As a result, today’s tax pro­fes­sion­al is hav­ing to become mul­ti­skilled, with the abil­i­ty to process large amounts of new tax tech­ni­cal infor­ma­tion while also mas­ter­ing the tech­nol­o­gy and data need­ed to enable effi­cient and accu­rate fil­ings with gov­ern­ments. For the tax indus­try, that means devel­op­ing a whole new type of renais­sance tax pro­fes­sion­al, as much a data ana­lyst and tech spe­cial­ist as a tax and account­ing expert.

Ham­per­ing this process of pro­fes­sion­al trans­for­ma­tion are the tal­ent short­ages that have hit the econ­o­my dur­ing the pan­dem­ic. Many employ­ees have decid­ed to change jobs, leave the job mar­ket all togeth­er or retrain in new fields. At the same time, many old­er pro­fes­sion­als are reach­ing retire­ment age, just as the shift to dig­i­tal tech­nol­o­gy has cre­at­ed a short­age of tax spe­cial­ists with the right skills and qual­i­fi­ca­tions to car­ry out the sig­nif­i­cant­ly more com­plex range of tasks at hand.

Tax was already get­ting hard­er for busi­ness­es before the pan­dem­ic came along. Led by the G20 and the Organ­i­sa­tion for Eco­nom­ic Co-oper­a­tion and Devel­op­ment, 141 juris­dic­tions have worked togeth­er to devel­op and agree a set of rec­om­men­da­tions for sig­nif­i­cant alter­ations to the glob­al frame­work for tax­ing inter­na­tion­al busi­ness income. This ini­tia­tive has two main ele­ments. The first pil­lar involves revi­sions to the his­tor­i­cal approach­es for how tax­ing rights over cross-bor­der busi­ness income are divid­ed among coun­tries. The sec­ond pil­lar involves the estab­lish­ment of a new sys­tem of glob­al min­i­mum tax rules for busi­ness income. These trans­for­ma­tion­al changes will add to the com­plex­i­ty of glob­al tax man­age­ment.

The pace, vol­ume and com­plex­i­ty of leg­isla­tive change is increas­ing the pres­sure on tax and finance func­tions just as rev­enue author­i­ties seek to recov­er approx­i­mate­ly US$33tn in world­wide Covid-19 sup­port mea­sures. More­over, the pan­dem­ic has had seri­ous ram­i­fi­ca­tions for tax depart­ments, with remote work­ers often dis­con­nect­ed from their data cen­tres and in some cas­es cre­at­ing tax oblig­a­tions for their own employ­ers by their mere pres­ence in new juris­dic­tions.

A sur­vey car­ried out by EY and con­duct­ed by Euromoney Thought Lead­er­ship Con­sult­ing found that 84% of com­pa­nies are trans­form­ing their tax and finance func­tions to get more val­ue while 81% are more like­ly than not to co-source their activ­i­ties in the next 24 months. The sur­vey, released in Jan­u­ary, ques­tioned some 1,650 exec­u­tives in more than a dozen indus­tries, across 40 juris­dic­tions. It found that 87% of all com­pa­nies sur­veyed plan to reduce the cost of the tax and finance func­tion in the next two years. This demon­strates the dual pres­sures on tax depart­ments, as they strug­gle to achieve more with tighter resources.

Many busi­ness­es have decid­ed that the only way to cope with these pres­sures is to co-source some of their tax and finance activ­i­ties to third-par­ty providers. These are typ­i­cal­ly pro­fes­sion­al ser­vices organ­i­sa­tions that have devel­oped cloud-based solu­tions to man­ag­ing rou­tine tax oper­a­tions.

Even data and tech­nol­o­gy com­pa­nies includ­ing Microsoft and SAP SE have co-sourced tax activ­i­ties with EY. Kirsten Birn­baum, head of glob­al tax for SAP, says: “Work­ing with a glob­al net­work of spe­cial­ists, joint­ly util­is­ing 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.”

Asked about skills short­ages, 95% of the sur­vey 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. Many are con­clud­ing it’s eas­i­er to work with out­side providers who spe­cialise in devel­op­ing peo­ple with the right skills.

Mean­while, three in four busi­ness­es say they are strug­gling to keep up with the pace of leg­isla­tive and reg­u­la­to­ry change and 83% expect to pay an aver­age of US$11.1m to com­ply with emerg­ing dig­i­tal tax fil­ing require­ments over the next five years. An out­side provider more like­ly has the right resources ded­i­cat­ed to help.

The area of ESG is espe­cial­ly chal­leng­ing for com­pa­nies, as his­tor­i­cal­ly few busi­ness­es have vol­un­teered infor­ma­tion on their tax affairs. But in the cur­rent envi­ron­ment where the gen­er­al pub­lic and politi­cians are demand­ing greater trans­paren­cy on cor­po­rate tax, busi­ness­es are get­ting ready to open up their books and reveal more.

Over half the com­pa­nies in the sur­vey said they were going to make vol­un­tary dis­clo­sures about their tax gov­er­nance frame­works (51%), and 45% on cor­po­rate income tax. Oth­er areas they’ll be pub­lish­ing include excise tax­es, direct tax­es paid by employ­ees and employ­er-paid pay­roll tax. All the com­pa­nies inter­viewed said they would dis­close at least one of these while 70% said they would dis­close at least three. This new envi­ron­ment of social aware­ness adds to the need for the co-sourc­ing of rou­tine activ­i­ties to free up time for strate­gic think­ing.

In order to cre­ate val­ue while address­ing these changes and recruit­ing tax-tech tal­ent means tech­nol­o­gy is need­ed to dri­ve a range of solu­tions. It must have the abil­i­ty to col­lect data from mul­ti­ple sources; gath­er, clean and deliv­er it into sys­tems that fit all uses; pre­pare reports that meet the demands of mul­ti­ple juris­dic­tions and mul­ti­ple gov­ern­ment agen­cies; update process­es and num­bers for accu­rate com­pli­ance; and analyse options for smarter plan­ning and to help mit­i­gate risk. Each of those tasks requires the most advanced tech­nol­o­gy plat­forms and cloud-based stor­age pos­si­ble. How­ev­er, imple­ment­ing and main­tain­ing such sys­tems can be cost­ly and half of the largest com­pa­nies in the sur­vey agree that a lack of a sus­tain­able plan for data and tech­nol­o­gy is the biggest bar­ri­er to achiev­ing their tax and finance func­tion’s vision.
“Dig­i­tal trans­for­ma­tion that enables inno­v­a­tive ser­vices in finance, account­ing and tax is help­ing organ­i­sa­tions gain more rel­e­vant and action­able insights for their busi­ness, often at a low­er cost,” says Daniel Goff, Microsoft cor­po­rate vice-pres­i­dent, world­wide tax and cus­toms. “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.”

Where busi­ness­es may have been able to get by in the past, the con­ver­gence of so many acute chal­lenges piled on top of one anoth­er means many cor­po­rate tax depart­ments will only be able to sur­vive through co-sourc­ing. They need to find a spe­cial­ist that is up to speed with all the leg­isla­tive changes glob­al­ly, that can help plan and deliv­er con­tro­ver­sy advice and deliv­er rou­tine ser­vices at scale.

In work­ing towards a suc­cess­ful co-sourc­ing process, the tax and finance depart­ments should first analyse and re-eval­u­ate the exist­ing oper­at­ing mod­el to iden­ti­fy areas that could be improved. Next, the com­pa­ny should deter­mine which activ­i­ties to keep in-house. This helps with the next stage which is to decide exact­ly which activ­i­ties should be co-sourced. Final­ly, the com­pa­ny should con­sid­er a hybrid approach in which some activ­i­ties are retained and oth­ers are out­sourced.

The best-planned hybrid approach can improve both effec­tive­ness and effi­cien­cy while empow­er­ing staff to become val­ue-added part­ners to the busi­ness with the focus firm­ly on activ­i­ties that improve the bot­tom line. The result of this should be the cre­ation of a team with a sin­gle mind­set. How­ev­er good the in-house team is, work­ing with a co-sourc­ing provider allows the tax and finance func­tion to go even deep­er and fur­ther with its analy­sis.

Many ben­e­fits are open to busi­ness­es that adopt the co-sourc­ing mod­el. Employ­ing a spe­cial­ist to take care of rou­tine tax activ­i­ties can improve process­es and accu­ra­cy, help­ing com­pa­nies to bet­ter man­age a range of emerg­ing chal­lenges from ESG report­ing to con­tro­ver­sy issues. Shift­ing to this mod­el will allow the tax and finance func­tion to ful­fil its role as a val­ue-added busi­ness part­ner engag­ing in high-lev­el strate­gic tax issues.

Co-sourc­ing tax and finance allows CFOs to show their cor­po­rate boards that they are get­ting to grips with three sig­nif­i­cant chal­lenges fac­ing every busi­ness today – cre­at­ing val­ue, man­ag­ing risk and reduc­ing cost. No won­der so many busi­ness­es large and small are look­ing for a piece of the action.

To find out more, vis­it www.ey.com/TFOsurvey

Pro­mot­ed by EY