INSIGHT: How the Covid-19 Pandemic Is Transforming the 5-Year Plan

Across the globe, businesses entered 2020 contending with rapid, sweeping changes. Many were still adapting to U.S. tax reform, even as they modeled the impact of BEPS (Base erosion and profit shifting) 2.0, the OECD’s framework for addressing the tax challenges of the digital economy. Globally, trade was in flux, as long-standing free trade pacts were upended, replaced with a complex array of new tariffs, duties, and bilateral agreements. Meanwhile, governments were digitizing, demanding data files in place of filing papers, while tax controversy continued to rise, fueled in part by rigorous tax authorities sharing more and more of this data between themselves.

And that was before Covid-19 rattled borders, further disrupted supply chains, and accelerated the rate and pace of digital and legislative change.

To put the scale of change into perspective, in 1991, the EY Worldwide Corporate Tax Guide summarized the tax laws of 106 countries in just 381 pages. In 2020, it now occupies 1,936 pages. And those pages don’t even account for the lengths to which governments have gone to in order to support their economies during the pandemic.

In such a volatile environment, this leaves the tax and finance functions of businesses large and small to struggle when operating effectively and efficiently.

“In the last five years we’ve experienced the most dynamic policy and legislative activity since the beginning of international taxation,” says Jeff Michalak, EY Global International Tax and Transaction Services Leader. “That goes back to the 1920s and 1930s, when the League of Nations first helped design the tax rules. The shift has been massive.”

Faced with such fast-moving change, tax and finance functions have had to be flexible. Suddenly, the three-to-five-year plan—a mainstay of strategy expected to guide the allocation of resources for everything from personnel to international expansion and technology—has come under pressure. Decisions that would have taken companies months—if not years—to consider, are now being made within much smaller timescales: weeks, if not days.

“This is a very challenging environment in which to lay out a long-term plan,” says Rob Weber, EY Global Business Tax Services Leader. “You have a lot of competing interests, and the more international and global the footprint of the company, the greater the complexity.”

Organizations are acutely aware of the challenge. The 2020 EY Tax and Finance Operate (TFO) survey—which engaged more than 1,000 respondents prior to the pandemic—found that 98% of respondents were already re-examining their tax and finance functions due to deficiencies in their operating models. Talent, regulation, data, and technology, and cost reduction were all flagged as pressure points.

“This pandemic has really magnified the challenges companies are facing and triggered an accelerated transformation process,” says Dave Helmer, EY Global Tax and Finance Operate Leader.

“People were looking at multi-year transformations,” Helmer says. “Now they’re looking at six months.”

Helmer adds that the sudden shift to remote working has forced businesses to reckon with challenges they have connecting their workers to data and technology, which is often stored on computers at the office. The sheer volume of legislative change to support business continuity and introduce stimulus—as well as associated pressures to reduce costs as businesses are forced to adjust to the economic fallout—have only accelerated the need for organizations to transform their operating models.

Adding to existing pressures, many companies have an even more pressing concern: simply getting the cash required to keep the business afloat. Again, the tax function has a key role to play here, monetizing tax assets, accelerating deductions, and deferring income. However, many companies are facing a trade-off—whether to stabilize in the short-term by getting cash immediately, thereby incurring a higher accounting tax rate for the next three to five years—or deferring that cash in favor of a better accounting tax rate. And all these decisions are being made without any clarity around how the financials will shape up for the rest of 2020. Let alone 2025.

With such mounting concerns long-term considerations could legitimately be dismissed as an abstract luxury. All of which begs the question: Has Covid-19 torched the five-year plan? In short, absolutely not. Companies still need to lay out that long-term view. What the pandemic has done is simply change how the plan should operate.

With change now veering toward the fast and furious, the most effective approach lies in more nimble planning. Gone are the days when tax and finance functions were unobtrusive back-office functions. They must now sit squarely at the C-suite.

As Michalak explains, “You can’t have the key decision-makers sitting around talking about how they’re going to change the business model, and then at the tail end call the tax team and say: ‘Hey, here’s what we’ve decided to do—do you have any comments?’”

Tax and finance functions play an important role in maximizing an organization’s profitability, reducing costs and pin-pointing potential pressure points. They also reduce risk across the organization. As tax controversy and enforcement look set to increase around the globe, it is critical that businesses have access to tax data, can understand and assess the shifting state of play, and that they are proactive in dealing with potential controversy.

While these transformations are necessary, it doesn’t follow that they’ll be straightforward. Tax functions were already having to juggle multiple challenges before the pandemic. Respondents to the EY TFO survey revealed they spent more than a quarter of their time (27%) ensuring they were compliant with rules and regulations, 22% in tax planning, 21% in being a business partner, 16% managing costs, and only 13% providing valuable insight to the wider organization.

Significantly, considering the increasing digitization of the tax landscape, 65% said the biggest barrier to achieving their tax function’s purpose and vision is the lack of a sustainable plan for data and technology.

It’s unsurprising then that when faced with such pressures and internal deficits, companies are exploring the benefits of working with trusted external providers. Seventy-three percent of respondents to the EY TFO survey said they are more likely than not to co-source some critical activities in the next 24-months in order to add value, reduce risk, and decrease cost.

The co-sourcing model is becoming increasingly popular. Here, critical value-adding elements remain in-house, while the high-cost, high-risk, or compliance-based elements of the work are outsourced to specialist partners.

“Could the average business build its own unique tax tech platform that can interface with 180 countries?” asks Weber. “Probably not. Working with an organization that has its own platform and shared services would enable it to operate far more cost-effectively, and to redeploy those dollars back to the most critical parts of the business. Where does it want to be the best? Do that internally. Where does it want to be the most cost-effective? Outsource.”

Whether they choose to work with partners or go it alone, all businesses must now see their tax and finance planning as nimble and evolving. A plan committed to paper and simply left on the shelf to gather dust is no longer fit for purpose.

“The business plan must now be a living document,” says Weber. “Companies still need a framework that outlines the critical path and the next three-to-five years, but it needs to be versatile and agile to adjust as they go. Understand that six months from now, the plan could look very different. And in 12 months, even more so.”

The bottom line is that cutting-edge technology, world class processes, and automation are transforming the way tax gets done globally. This, coupled with constant tax law changes, has required companies to become more agile than ever. That said, short-term plans need to be balanced with mid- to longer-term thinking, so if organizations are to thrive now, next, and beyond, they must reimagine their tax and finance functions now.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kate Barton is EY Global Vice Chair – Tax.

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.