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Not another tax department transformation

One of the principal subjects of discussion and analysis in tax in recent months is digitalisation. I am not only talking about the OECD, EU and unilateral proposals to address the taxation of the digital, or digitalised, economy, but also the potential of digital innovations to change business, tax administration and tax department processes.

Could new reporting obligations be the ‘burning platform’ wakeup call that pushes companies to invest heavily in tax department transformation?

It is probably no surprise that these significant developments have prompted the view that this is a great opportunity for tax department transformation. The possibility of using this technological and business process innovation to free tax departments from the labour intensive and low value-added processes connected with compliance and allow them to focus on higher value business support and planning sounds attractive – but doesn't it also sound familiar? There have been other tax department transformation opportunities over the past several years promising similar benefits linked variously to shared services, insourcing, outsourcing, enterprise ERP deployment, tax software implementation, finance transformations, data warehousing and other changes. Did those opportunities deliver the potential benefits, or did the initial hopes and enthusiasm dissipate in the face of system and process issues, internal roadblocks and general unwillingness to change?

Discussion with former colleagues in different companies, businesses and countries about their current goals and challenges indicates that transformations over recent years have not always been completely successful. One of the principal challenges and the trigger for repeated goals arises from consistent problems with data and processes, which has a direct effect on identifying and managing tax risks and limits or prevents progress on goals to improve partnership with business units and subsidiaries. Looking back to the 1990s, the challenges and goals do not seem to have changed much at all: That suggests that in the intervening years, the underlying causes of concern to tax departments have not been addressed.

We should ask whether the opportunity for digital transformation of tax will help tax directors improve or fix the persistent data and process inconsistencies that absorb resources and create additional risks. The ability to analyse and manipulate data in larger quantities and at greater speed with greater granularity has many benefits, but does not by itself fix any underlying data errors or process inconsistencies. The ability to potentially identify errors and fix them retrospectively is valuable, but routinely correcting errors without addressing the underlying source of the error is not a process that tax administrations would approve of, and risks undermining confidence in the integrity of the accounting systems. There is the additional risk that new data analytics available to tax administrations, and the increasing implementation of rules that require real-time reporting and allowing tax administrations fuller access to basic accounting data will give the tax administration greater knowledge of business transactions than the tax department itself. The tax authorities having the ability to identify errors that the company is not aware of is not something any CFO is likely to be comfortable with, and while these risks currently apply principally to indirect taxes, it would not be prudent to assume that direct tax compliance and data integrity will not be subject to similar scrutiny in future. There is much commonality between basic data for indirect tax and direct tax, so it must make sense to work on a permanent solution to the underlying data deficiencies for all taxes.

Tax department transformations in response to technology or process changes have been optional in the past, and don't have a good record of success in fixing the underlying challenges, particularly in relation to data. It has to be questioned whether the focus should be on a tax department transformation in isolation at this critical time. Would it not be better for attention not to be on an inward-looking tax department transformation, but on working together with finance and other colleagues, using data analytics and digitalisation, to transform data entry and processing to eliminate or minimise data errors? If that is ultimately successful, a side effect would be to facilitate permanent tax department transformation, allowing greater focus on enterprise value-added activities and achieving some of the other tax department goals that never seem to be met. Working on that transformation requires knowledge of individual transactions and data needs, understanding of the business operations, as well as tax expertise. This is a mix of skills and experience that is not found in many direct tax departments. However, the indirect tax group may well have those skills and could use the transformation to build the deep engagement with the business that has been an ambition for years.

Past transformation initiatives may have ultimately failed to deliver due to a lack of sufficient support from senior management. The enterprise risk arising from digitalisation and changes in filing requirements may be the 'burning platform' that helps convince the CFO that this is not just a tax department compliance issue, but one that merits an enterprise-wide initiative and full support. The alternative is likely to be tax departments spending more time and resources dealing with the consequences of poor data and never achieving their ambition of becoming a trusted business adviser. This has direct consequences on staff engagement, retention and development. Maybe what is needed now is not tax department transformation, but lead participation in an enterprise project that uses digitalisation to improve the quality and reliability of data – only then would the tax department be free to pursue its longer-term goals.

Giles Parsons worked as an in-house professional at American multinational Caterpillar for more than 20 years, setting its tax policy and coordinating its tax services. Before that, he spent nearly 10 years at PwC. He is the also the chair of the European direct tax committee at the Tax Executive Institute (TEI). In this column, he draws upon his experience to give his perspective on today’s pressing tax issues, and answer questions from readers.

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