CFO Insights 2020 August
Road to a digital future: Considerations for implementing digitalization plans to assist organizations on their way to crisis recovery
CFO Insights is a monthly publication to deliver an easily digestible and regular stream of perspectives on the challenges confronting CFOs. In this article, we share "Road to a digital future" for tax function.
With the tax function now playing an essential role in strategic planning, many businesses are encouraging tax functions to accelerate and progress their digital transformation journeys. As a result of the current crisis, transforming the way businesses operate will be a necessary step in supporting the organization on the road to recovery, and tax and finance leaders will be required to embrace business-critical changes to advance their own digitization needs.
- Focus on immediate priorities and opportunities
- Getting from here to there
- Going paperless in Japan
- The NTA is going digital and encouraging taxpayers to do the same
- Employee expenses and vendor invoices
Focus on immediate priorities and opportunities
Deciding what steps should be taken and developing a plan of action to advance your business’s digitalization needs can seem like a complex undertaking involving a myriad of factors. Thus, before implementing change, it is best to first focus on the immediate priorities and opportunities of the business. Based on our experience in supporting leading tax functions, the following three factors have stood out as being key priorities that all CFOs and tax leaders should be focusing on to assist the organization in its crisis recovery.
- Setting the foundation for a digital future – Creating an environment that will allow the business to benefit from accelerating digitalization.
- Streamlining and automating manual processes – Streamlining processes and making use of technology can increase efficiency and reduce required labor.
- Driving strategy and value – Developing a plan that contributes to the overall strategy of the business.
Over the past few months, Deloitte has been working (for the most part, virtually) with many companies around the globe to help their tax functions respond to the immediate crisis, recover their operations, and plan for a future in which they can thrive. In discussing immediate priorities and opportunities, most CFOs seem to understand what their immediate priorities are, but they are unsure of where to begin due to the scope of the transformation required. Thus, the focus should shift to where to begin and to what CFOs should be doing over the near-term to develop the digital and strategic capabilities required to support the organization.
Getting from here to there
The decision of where to begin is one challenge almost every CFO faces with an initiative of this scale and importance. However, taking the following steps may be able to point them in the right direction and help them find the starting line.
- Think big – Building on the immediate priorities and opportunities considered above, a good place for many companies to start is to identify the landscape and size up the business’s opportunities. This process can include talking to people in the tax department to identify recurring instances of where significant time is currently being spent on inefficient manual processes. It may also be beneficial to include finance colleagues in the brainstorming, as they often face similar challenges. Video conferences and virtual whiteboarding tools can help accelerate these efforts.
- Start small – Next, companies should prioritize opportunities based on potential value, risk, and ease of implementation. Given the likelihood of continued disruption in working conditions due to COVID-19, a good place to start may be opportunities that are critical to supporting telework or that have a wide impact beyond just financial benefits (e.g., opportunities that might increase efficiency, mitigate risk, or create new benefits from prior technological investments). Once one or two top priorities have been identified, companies should develop a proof of concept that clarifies the approach and demonstrates the value.
- Act fast – After prioritizing opportunities and developing a proof of concept, the next step is to help others understand the plan’s benefit. It is critical at this stage to let end users react to the plan to help gauge what challenges the company may need to manage during the transition process and better tailor the end product to users’ needs. This process is important to help avoid pushing an idea to the finish line only to learn it is not being adopted because not enough input was gathered from the people expected to use it. Once the initial buy-in is established, opportunities should be sequenced based on impact and deployed in short sprints that build on each other and create momentum for change.
Going paperless in Japan
When looking at opportunities and developing a plan to create digital change, many companies’ current strategies typically focus on increasing its productivity. However, maintaining productivity is equally important, as demonstrated with the COVID-19 pandemic which severely disrupted the productivity of many companies as they struggled to adapt to the sudden changes in working conditions and the necessity for telework. A robust technical infrastructure and end-to-end digital processes (i.e., “paperless”) are key elements to safeguarding productivity during disastrous events. With meeting compliance obligations being a major near-term challenge for most tax and finance leaders, taking steps to maintain productivity should be a critical element in any action plan.
One key component to maintaining productivity is ensuring integration into existing projects. That is, companies should identify and leverage business-critical changes that can help advance the digitization of tax and the virtualization of the workforce. Many businesses are looking to achieve this goal by upgrading to the next generation of ERP systems such as SAP S/4 HANA or Oracle Cloud, which also creates another compelling opportunity for businesses to re-evaluate their record retention approach and supporting processes.
The NTA is going digital and encouraging taxpayers to do the same
When looking to re-evaluate the approach to record retention, it is important to keep in mind that there are certain requirements set forth by the National Tax Agency (“NTA”) in Japan that companies must satisfy to go digital. In order to utilize e-document preservation, taxpayers must submit an application to the NTA, which certifies that the electronic record system and supporting processes meet the necessary requirements, which include:
- Ability to track corrections and deletions
- Cross-referencing between related records
- Ensuring readability of records
- Ability to search records
- Timestamping of records
- Presence of internal controls
Employee expenses and vendor invoices
In addition to the challenges with maintaining productivity and going paperless, new management challenges have also been created due to new or expanded teleworking expenditures, particularly with respect to employee expenses and vendor invoices. With most employees working from home, submitting physical receipts and retrieving hard copy vendor invoices may be difficult and time consuming. While travel expenses have been reduced, new employee expenses have emerged in their place (e.g., purchases of monitors and basic office supplies, cell phone and internet costs, or online training reimbursements).
Companies that do not digitize the process of handling employee expense receipts and vendor invoices may find it difficult to comply with Japan’s record retention rules and can run the risk of losing their blue form taxpayer status. Even companies that digitize (or already have digitized) the process could face similar risk if they fail to meet the specific legal conditions or do not properly apply to retain physical documents electronically.
In particular, it is important that companies comply with the digitization timeframe requirements set forth by the NTA, as taxpayers that fail to follow the necessary procedures and pre-approvals must keep paper receipts.
Who performs digitization?
Within approximately three business days after receiving expense receipt
Within approximately seven business days after normal business processing cycle, which is assumed to take place at least every two months
The NTA allows companies to choose software providers accredited by the Japan Image and Information Management Association to help meet the stipulated technical requirements (e.g., timestamping), but many foreign headquartered companies, in particular, may face difficulty in integrating such software with their home grown or other generic expense/invoice management software.
Seal (hanko) issues
Seals pose another challenge for companies looking to digitalize their processes in Japan. By their design, the use of seals requires paper documents. As a result, some companies have set certain dates for stamping documents, and employees who need the company seal must come to the office on such dates, despite still having to work from home.
Companies that use a seal merely for internal authorization can easily replace it with any IT-based system that can mark (and evidence) the internal authorization. On the other hand, if other parties (e.g., vendors, customers, or suppliers) are the ones requesting the use of a seal for contracts, replacement may not be achievable so easily. One of the reasons other parties may require the use of a registered seal for contracts is the legal presumption on the authenticity under court precedents and civil procedure law. However, the Japanese government enacted the Electronic Signature Act (“ESA”) in April 2001, and several vendors have been authorized to provide certification services for electronic signatures. Signatures that are electronically fixed to digital documents, such as PDFs, in accordance with the ESA will be given the legal presumption of authenticity, in the same manner as a registered seal. Nevertheless, this system did not garner much attention until the outbreak of COVID-19.
Note that some electronic signatures available on the market are not authorized under the ESA. Some companies that have already implemented digital signatures may find that their current system is not covered by the ESA. In any event, it is advisable to sort out the documents which would likely be ESA compliant and perform a cost-benefit analysis on the use of electronic signatures under the ESA.
COVID-19 has dramatically changed the environment and working conditions for many companies across the globe. In order for tax functions to assist their businesses in the recovery process, it is becoming increasingly important to identify opportunities to implement digitalization process to maintain productivity and meet new challenges.
Going paperless and digitalizing process such as record retention and the handling of employee expenses, vendor invoices, or third party contracts can help business meet these objectives, while at the same time providing other benefits such as enhanced efficiency and lower compliance risk.
In addition, digitalization may result in reduced administrative burden and costs. For example, e-document preservation may significantly reduce administrative burden compared to paper indexing and storage in Japan, which generally requires large volumes of paper records to be stored in an environment which is protected from fire and other hazards for up to 10 years. However, when transitioning to a digital environment, businesses should take measures to ensure they comply with invoicing and record retention requirements set forth by the NTA.
Further, the digitalization application process also requires IT expertise to understand the various IT requirements and organization's business processes. Accordingly, we recommend that companies looking to go digital seek external support for the application procedure as soon as possible.
The above is based on Deloitte Thought Leadership articles. A complete version thereof is available here:
- COVID-19: The Road to Recovery | An Unexpected Opportunity for the Tax Function
- Recovery and the Data-Enabled Tax Department - The Key to Effective Digital Transformation
If you would like more information, please speak to Hirokazu Ina (email@example.com), Sreeni Menon (firstname.lastname@example.org) and Lars Dahlen (email@example.com).