Tax Functions Should Transform to Tackle Pillar Two and ESG

The new rules to implement the OECD’s Pillar Two global minimum tax and the role of tax data in reporting for environmental, social, and governance have catalyzed the next wave of tax operating model transformations. Tax functions will need a deeper data strategy, robust technology, and skilled professionals to address these and other emerging reporting requirements.

The phenomenon began five years ago when budget-strapped businesses started looking for solutions to keep up with exponential legislative and regulatory change, future-proofing technology investments, and the race for talent.

The 2023 EY Tax and Finance Operations report—based on a survey of 1,600 tax and finance professionals from 32 jurisdictions and 18 industries—shows this year’s progression, as 96% of all respondents say they’re transforming their tax operating model, and 95% say they’ll likely co-source select tax and finance activities in the coming two years.

Just one year ago, 79% of businesses with less than $20 billion in revenue planned to use co-sourcing to manage big data and analytics. That number has jumped to 94% today.

Transforming tax operating models and co-sourcing can liberate tax professionals from routine compliance work and help them focus on more strategic activities that can deliver value to the broader business as regulations and business opportunities evolve.

New Regulations Create New Challenges

The global minimum tax rules are a primary concern. This new international tax framework, which requires the affected enterprises to comply on a country-by-country basis, is an example of new and ongoing pressures that under-resourced tax functions struggle to handle.

Most tax professionals anticipate at least a moderate impact, yet just 30% of those surveyed have completed an impact assessment, and the clock is ticking on the 2024 rate forecasting and first-quarter reporting for 2024.

At the same time, tax functions play a central role in providing data that companies need to meet their ESG objectives and obligations. Because sustainability generally is addressed with tax codes, 47% of survey respondents say green or sustainability taxes will have an impact on their operations, and 41% specifically cite the EU’s carbon border adjustment mechanism.

The transitional phase to meet the draft reporting obligations and regulations of this new carbon tax on imports of energy-intensive materials and products begins on Oct. 1 and will change gradually, demanding even more tax data for compliance reporting.

Tax laws and regulations are changing rapidly outside Pillar Two and ESG. Seventy percent of survey respondents expect to experience a significant impact from three or more emerging reporting requirements, such as the US corporate alternative minimum tax, real-time tax filings, and country-by-country reporting obligations.

The push for tax transparency also has an impact, as many tax professionals are planning to make public their tax governance framework, the property taxes paid, or payroll taxes paid on behalf of their employees.

New Technologies Bring New Opportunities

Generative artificial intelligence tools will affect tax operations, administration, and enforcement.

Moreover, the challenges that resulted in the tax operating model transformations in the first place still loom large. Companies struggle with managing data and investing in future-proof technologies. Almost half lack a plan, though 63% say their team will need to augment their tax technical skills with new data, process, and technology abilities in the next three years.

The first companies to transform had to consider whether to build capabilities in-house or outsource them. Over the past five years, most have taken a hybrid approach. As more businesses commit to transformation and co-sourcing, tax directors must consider what they need to get out of these investments.

Specifically, businesses need a thoughtful approach to build or buy the technology and skills. They can:

Re-evaluate their current operating models. For example, digital businesses and transactions challenge the very foundation of traditional international tax policy in a borderless marketplace. Generative AI also will change governance and taxation, as well as tax function operations and needed skills. And supply chains will be a focus of both tax and operations. An effective tax strategy can only be designed by modeling the impact of new global rules on a taxpayer’s footprint and by re-evaluating any new business structure.

Decide which tasks to keep in-house. Nobody understands a business the way an insider does, so developing a tax strategy, advising business units, and reporting to management are all key roles for in-house tax teams. But as new regulatory compliance demands move to implementation, many tax leaders foresee a flood of data and documentation requirements that can’t reduce their technology spend without losing out on high-value responsibilities. There’s a big opportunity now to gain a competitive advantage with strong talent.

Decide which activities to co-source. For many organizations, the new demands would require a digital transformation and staff with cutting-edge skills—both of which are available from an outside partner. By integrating a partner’s talent with technology that adapts to changes in tax and finance compliance obligations, the internal team can avoid the time-intensive process of building an in-house solution.

Consider a hybrid approach. This allows a provider to meet basic compliance obligations while the internal team provides the most business value. Buying an outside solution might not meet all the tax and finance needs but can provide a basis for the internal team to modify and supplement.

The transformation of tax operating models over the last five years has been one of the most important business stories of the century. Businesses should embrace this trend; those that don’t risk falling behind.

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

Marna Ricker is the global vice chair of tax at EY. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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