TAKEAWAYS
The global landscape is undergoing a seismic shift, with the COVID-19 pandemic and accelerated digitalisation being among the key triggers. In response to this shift, many businesses are re-examining and re-evaluating aspects of their operating models, and one area is the transformation of the tax and finance functions.
In this article, we discuss why and how the tax and finance functions must transform today – to go beyond being a support function and become a strategic partner that adds value to the business.
What impact does the current global landscape have on the tax and finance functions?
It is increasingly clear that in this current landscape, tax can no longer stay as a mere support function in their organisations. It needs to transform into a key business and strategic partner of the operating units in the organisation, and more actively and directly add value to their organisations and stakeholders.
But this transformation journey is hindered in several ways, in particular, in the areas of talent acquisition, keeping up with legislative and regulatory changes, as well as the costs and investments to adopt technology and collect data.
Governments around the world are increasingly adopting digital tax-filing. We expect the breadth and depth of digital tax-filing to increase manifold over time. The challenge for organisations and their tax and finance functions is to have the right technology tools and data to meet what we believe to be a heightened level of compliance.
It is also quite clear that the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiatives would precipitate overhauls in many countries’ tax regimes. For example, in Singapore, as announced in Budget 2022, the government is exploring a top-up tax called the Minimum Effective Tax Rate (METR) that will affect multinational enterprises (MNEs) operating in Singapore with annual global revenues of at least €750 million. As one country overhauls its tax regime, other countries are not staying still. In the next 12 to 18 months, we should see a complex web of tax-filing and reporting challenges, especially for enterprises with a regional or global footprint.
The headline findings of the “2022 EY Tax and Finance Operations Survey” (TFO survey) mirror the reality on the ground. It shows that businesses are actively transforming or looking to transform. For Asia Pacific, 73% of respondents are revamping their tax and finance operating models. They focus on priorities such as automation, use of shared service centres and co-sourcing. A large portion of the remaining respondents indicated that they are planning to change their operating models in response to the array of challenges they face.
Is the increased focus on ESG having a significant impact on the tax and finance functions?
Tax and finance functions now play a bigger role in helping their organisations address their environmental, social and governance (ESG) objectives. Seventy-nine percent of the TFO survey respondents for Asia Pacific say they are currently or considering co-sourcing ESG reporting activities. Even when adopting the co-sourcing approach, one challenge remains with the organisation – automation of its information and data infrastructure to harvest reliable data to meet the reporting needs. More likely than not, this challenge falls on the tax and finance functions.
Incidentally, the survey shows that respondents are now more focused on making voluntary disclosures about their organisations’ tax activities. This trend is driven by the demands for transparency in tax reporting. The disclosures range from the tax governance framework to variety of tax payments made to governments.
The increased focus on ESG places more emphasis on having the right talent and also the right data to meet the demands of delivering such insights in an accurate, complete and timely manner.
Is the function also challenged by “The Great Resignation” and “The Great Reshuffle”?
The tax and finance functions are not spared from these global phenomena. People with the right combination of specialised tax technical skills, and data, process and technology skills are in short supply.
In fact, all of the Asia-Pacific survey respondents believe their tax and finance teams will need to upgrade their tax technical skills, as well as data, process and technology skills within the next two years to keep up with the demands of the functions.
It is one thing to invest in upgrading the team’s skill sets, it is quite another to retain them. “Talent grab” is common in the market. People with the right skill sets are in such high demand that rapid turnover creates a further challenge – retention of institutional memory. At the moment, no one can tell if this is just a passing phase or if it is a longer-term structural shift.
How can organisations manage these multifaceted pressures on the tax and finance functions?
More organisations are now tapping into technology tools to automate and manage the increasingly demanding tasks and activities in the tax and finance functions. Organisations have the option of either investing in their own infrastructure, engaging an outsourced service provider or adopting a combination of both.
One of the benefits of outsourcing or co-sourcing is that it gives organisations instant access to qualified and experienced tax professionals who can meet their demands, yet leaving the retention, replacement and training of this manpower resource to the service provider. It also offers organisations access to high-end technology that leverages data to provide insights that may otherwise be too costly to acquire on their own.
To that end, some tax advisory practices have been helping clients that are keen on an outsourcing or co-sourcing approach to reimagine their tax and finance operating models. We are also doing so, with our Tax and Finance Operate (TFO) solution. The EY TFO approach is not a “one-size-fits-all” or “lock-stock-barrel” solution. It is scalable, and can be customised to fit organisations’ focus and strategic priorities, to support their roadmap to build “an intelligent tax function”. In a nutshell, an intelligent tax function is one that accesses a single source of data and leverages advanced technology to effectively address risks across the organisation’s tax life cycle.
With the TFO solution, organisations are not burdened by the cost of constantly adapting their own capabilities. The outsourcing or co-sourcing approaches arguably require less management focus and investment. They should also allow the inhouse tax team to focus on more strategic activities.
There are pros and cons to these options as an option that appeals to one organisation may not offer the same appeal to another. Evaluating these options in the context of an organisation’s current and likely future needs must be the first step in this tax and finance function transformation.
And finally, what would be the advice for businesses looking to undertake such transformation?
With the tremendous volume of changes facing tax and finance functions, the time to act is now.
The transformation urgency is greater for enterprises operating in multiple jurisdictions. Most of these organisations have started their enterprise transformation. They are in various stages of upgrading their information technology systems and setting up shared service centres. At the same time, businesses are facing cost pressures, and some of them are embarking on headcount reduction initiatives.
Some organisations may decide to address these challenges internally. Others may consider an outsourcing arrangement.
Whichever course they take, organisations should continuously re-evaluate their operating models to identify gaps in people and technology, and aim to respond promptly to changes and shifts. They would want to decide which activities are “high value” and “best-in-class” that should remain inhouse. Activities that are “best-in-cost”, that is, more routine, highly repeatable and rules-based, may be performed more efficiently via co-sourcing with a third-party service provider.
Ultimately, it is about finding the right mix that can help improve both effectiveness and efficiency of the tax and finance functions while empowering the inhouse tax function to become a value-added partner to the business.
Chia Seng Chye is EY Asean Tax and Finance Operate Leader.
© 2024 Institute of Singapore Chartered Accountants
