Don’t Let Tax Become a Chokepoint for Technology Transformation

In technology transformation, tax is all too often playing catch-up with other finance and accounting functions—including accounts payable, accounts receivable, and general accounting—with lagging levels of maturity in automation, process standardization, data integration, and technology leverage.

Consider the real-life example of a multinational manufacturing company with operations in 25 countries. It has a well-established, efficient, and expert finance function, mostly working out of its European headquarters. It recently rolled out a major enterprise resource planning, or ERP, system across all operations, taking advantage of the latest developments in automation and machine learning.

However, the ERP system in one of the company’s Asia-Pacific operations runs on a different server—the result of a legacy decision driven by statutory tax rules in that country. What’s more, the tools used by the tax function lack the sophistication of the latest visual dashboards produced by the ERP in real time for other finance functions.

This tax-driven exception has made a significant dent in the all-cloud strategy pursued by the chief financial officer.

Another telling example is in global business services for finance, where advanced technology has served numerous finance functions well for some time. Courses and formal certifications for global business services professionals were launched decades ago, with thousands of finance professionals having beefed up their tech skills.

Tax is a different story, however: the first Diploma in Tax Technology was launched at the end of 2022. This reflects a high demand for and scarce supply of a new type of talent in tax, with an apparent time lag compared with other finance functions.

There are two main hurdles preventing the CFO from aggressively transforming the tax function: historical lack of interest in tax, and local complexities.

Historical Lack of Interest

While tax occasionally comes to the top of the agenda—such as during mergers and acquisitions due diligence, or when new tax rules or proposals such as a global minimum tax rate hit the headlines—this tends to be the exception rather than the rule. Generally, much less attention is paid to tax than other parts of the CFO office.

As in the ERP example above, tax experts are rarely consulted at the project design stage, and no tax representatives are seconded to the project team. That leads to considerable inefficiencies in tax processes, such as duplication of transactional data for tax purposes.

What’s more, tax is often viewed as a “black box” with few, if any, tax processes being properly documented, and little of the value that tax work brings to the business properly articulated. It’s not uncommon for an “if it ain’t broke, don’t fix it” attitude to prevail.

Finance leaders are often prepared to accept inefficiencies and duplications in their tax function, as long as taxes are calculated and paid on time. This type of attitude only widens the gap in transformation maturity between tax and the rest of the CFO office.

Local Complexities

The second hurdle in the tax transformation journey is local complexities. Some of these have been around for a while. They include the fast pace of change in the external environment and the need for tax to assess the associated fiscal implications. There are also regional or local requirements around language, qualification, or specific document formats. In addition, there are emerging complexities related to developments in technology or global tax and regulatory environments.

One telling example here is the requirement from national governments to provide more granular information more frequently. For instance, Standard Audit File for Tax, SAF-T, requires the provision of transactional detail on all invoices, payments, and adjustments. Initiated by the Organization for Economic Cooperation and Development in 2005, SAF-T is supposed to be an international standard.

However, in reality each national government comes up with its own specific format. From an automation perspective, it means the SAF-T work the tax team did in France will only marginally help with the same exercise in Romania.

Such emerging local requirements are often seen as blockers to automation efforts, especially in “long-tail” countries, with lower level of operations.

A Way Forward

As with other business processes, an approach to tax transformation involves breaking down the value chain into processes, assessing current maturity levels, starting with a strategy, and focusing on data.

In summary, successful tax transformation programs involve:

• Setting the right expectations. Transformation initiatives tend to fail when unrealistic expectations of quick wins are set at the start of the journey. Businesses must establish regular checkpoints with stakeholders to ensure a clear understanding of expectations and value to be derived at each stage.
• Driving change management. Major transformation requires constant injections of new ideas and multiple iterations to arrive at an optimal approach. Building an agile and flexible culture that responds rapidly to changing needs is key.
• Managing evolving tax skill sets. Tax compliance, especially when cross-border, involves significant human intervention and a high degree of domain- and process-related knowledge and skills. As tax compliance matures with digital intervention, organizations need to upskill or reskill tax professionals so that they can work effectively with the technology.

For companies to avoid tax being a transformation chokepoint, it is important for the CFO to get tax administration and compliance in sync with other finance functions. Above all, it is vital to ask the right questions, and get the voice of the tax team heard early on in any transformation project.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pavlo Boyko is solutions architect, accounting and tax, TMF Group.

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