The future of the tax function as a strategic business partner
Despite an increased focus, one area that we noticed being consistently overlooked is that of tax transformation. At best, tax transformation is considered a secondary or minor part of a wider finance transformation or at worst, more of an afterthought.
In recent years, transformation and automation have become a trending topic in Malaysia. This has been further amplified with the advent of the pandemic and remote working as more discussions of these issues take place. Despite an increased focus, one area that we noticed being consistently overlooked is that of tax transformation. At best, tax transformation is considered a secondary or minor part of a wider finance transformation or at worst, more of an afterthought.
The tax function has traditionally been viewed as a consumer of data from business and finance systems. As such, engagement in transformation projects have often happened in the beginning or at the end. However, this fails to consider the possibility of tax requirements evolving through the course of a transformation. Without engagement throughout the entire process, the end product fails to address the specific needs for tax reporting. The exceptions to these are where tax is the driver of transformation, such as was the case during our previous implementation of GST.
From our discussions with CFOs and Tax Directors, we have observed a common trend in how tax is managed. In particular, there is a heavy reliance on manual processes, data-crunching, and reconciliation to prepare tax relevant information. The investment in technology towards automating such processes is also virtually non-existent, with Microsoft Excel being a preferred option.
The lack of investment and focus in this area, could in a way, be linked to how tax has been viewed over the years, i.e. more of a cost and something that is not really an issue, until it becomes an issue. Unfortunately, this traditional view of tax is no longer applicable in today’s environment. We have evolved and is now far more sophisticated with a complex array of products and services to meet customer demand and increase profitability. In addition to shifting revenue models, there has been a greater push to increase efficiencies through driving costs down.
Tax has a crucial impact on the balance sheet, income statement, and cash flow statement and one that has the potential to not only support but add value to the broader aims of the business. An effective tax transformation through better planning, enhanced visibility and risk management, and improved return on capital, benefits not just the tax function, but finance and business as a whole. In short, the current environment needs the tax function to play the role of a strategic business partner.
To become a strategic business partner, two tax transformation agents are needed, a tax technologist and a tax solution architecture plan. These two agents will help tax drive the tax transformation business plan and the budget to become a strategic business partner.
So, what does a vision or a plan for tax transformation look like? As the saying goes, Rome wasn’t built in a day, and any transformation will take time to properly plan and execute. An effective transformation should start with the development of a roadmap and proposal i.e. a tax solution architecture plan. Ideally such a plan should be developed with someone who is both familiar with tax processes and how technology can be used to improve such processes i.e. a “tax technologist”, to get the most impact. Once the plan is developed, it should then go through scoping and development of a business case, followed by a design and implementation phase. While it might seem obvious, the importance of proper planning cannot be overstated.
Tax transformation is not just new software, it is a reengineering of an entire process. It is a change for people as well as the processes and data needed to support them, much of which may need to be examined in detail and rethought or reordered. To be most successful, full buy-in by finance and other involved non-tax functions is ideal. Finally, there needs to be a sufficient budget allocated, as without that budget, the vision is unlikely to be achieved.
Taking into consideration the budgetary challenges, our suggestion is to think big and start small. One area to focus on would be understanding your data sources and mapping out the tax data requirements. There has to be an understanding of what data ais needed, which are available today, and where they originated. This will enable the function to communicate to dependent source departments the data required, and at what level. As opposed to simply identifying the source as a general ledger account or report from a sub ledger or other system, for example, a tax department would move to being able to articulate what the data requirements are to the dependent departments so the proper reports are designed and used. This will help tax departments move from a reconciliation function to a more powerful, flexible position as an end user of the data.
Another opportunity for tax transformation may be the use of work-flow tools to eliminate or reduce the use of spreadsheets. The goal would be the number of spreadsheets that can be removed, and to identify which specific spreadsheets are no longer needed. In the most effective tax transformations, there should be a simplification of the number of workbooks or tabs used.
An additional area to take advantage of is the investments your business may already be making in terms of big data, cloud, and data science and ensure that these are leveraged and tax sensitised.
Tax is the last piece in the process of closing the general ledger to produce the financial statements, and efficiency should be a leading driver in its transformation. If the provision can be completed in a week, why should it take nine months to complete the related tax returns? With the proper use of technology, that is a question that may never rise again. As the technology becomes cheaper and less complex to adopt and operate, tax must take this opportunity and realise its role as a strategic business partner.
The views and opinions expressed in this article are those of Senthuran Elalingam, Deloitte Malaysia’s Tax Management Consulting Leader and Cheong Mun Loong, Tax Management Consulting Director. They are both focused on supporting clients across the tax transformation journey.