As the tax environment evolves, businesses must drive change from within

As the tax environment evolves, businesses must drive change from within

These are challenging times for corporate tax leaders. From a rapidly changing regulatory landscape to the digitalisation of tax authorities' systems resulting in the rising need to update processes, large companies face a lot of pressure in their tax operations.

Corporate tax leaders are also facing challenges such as increased risk of audits, lack of visibility and control over their tax functions, and lagging behind in the digital race. It will be difficult to strengthen compliance and add value to the business unless tax departments change how they work.

Like corporate taxpayers in many parts of the world, companies in Singapore have had to keep up with numerous regulatory shifts in recent years. Key among them is the formalisation of tax governance rules through the rollout of the Tax Governance Framework and the Tax Risk Management and Control Framework for Corporate Income Tax. Aimed at strengthening compliance, the schemes encourage large firms to embrace good tax governance principles and practices. This rollout followed the Singapore Budget 2022 announcement that the goods and services tax (GST) would rise from 7 per cent to 8 per cent in January 2023, with a further increase to 9 per cent slated for 2024.

Tax leaders have been working hard to ensure that they have the right processes and systems in place to support robust tax governance and adapt to changes like the GST rate increase. However, there is much more to be done.

The impact of BEPS 2.0

As announced during the Singapore Budget 2023, Singapore is implementing a global minimum effective tax rate of 15 per cent for large multinational companies. The move is part of the Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting initiative, or BEPS 2.0, which aims to create a more transparent global tax environment.

The second pillar of BEPS 2.0 introduces a 15 per cent tax rate to multinational entities (MNEs) with global revenues of at least 750 million euros (S$1.08 billion) a year. Although Singapore will only be adopting the new rate from 2025, MNEs have already undertaken impact assessments.

The current challenge is how they will access all the required datasets to ensure compliance. This has proven to be a complex exercise for many of these MNEs, as much of the required data sits across multiple systems and departments within the organisation.

As a result, we can expect an increase in the utilisation of data aggregation technology.

Internally, many tax departments are grappling with resource constraints as the pressure to transform digitally increases. They are often torn between adding new tax technical professionals and hiring more technology workers who can speed up digitalisation.

One of the biggest drivers behind this need to transform quickly is the fact that many of today's tax authorities have already embraced digital technologies. They have real-time access to corporate taxpayers' data, and their audit and enforcement processes are now mostly digitalised. This has put pressure on companies to make sure their data is in good shape, so that there are no misstatements or other major issues when revenue authorities access them in real time.

Beyond digitalisation, tax departments must also deal with organisational changes that impact their operations. Some are aligning with their finance departments' centralisation efforts while consolidating their tax functions under one core team so that processes and deliverables can be standardized.

There is also a growing trend for tax departments to participate when their organisations move to cloud-based solutions—most notably, enterprise resource planning (ERP) systems.

Given the complexity of the tax rules and data sets required to comply with regional regulations, tax teams can no longer rely on reconfiguring data outside of their core systems to meet tax compliance obligations. Usage of multiple systems or software outside of the core ERP systems can lead to data manipulation, making the compliance process inefficient and prone to errors. A properly tax-sensitised ERP system is therefore crucial to meet tax compliance obligations.

All these pressures are driving tax departments to rethink how they operate so that they can strengthen compliance and provide greater strategic value to the business. They understand that they face an increased risk of tax audit and controversy and will fall behind in terms of digitalisation and efficiency if they do not transform their operations.

From our experience, many companies are considering a variety of options for their tax operating models. One option is to outsource their entire operation. This would eliminate the need to invest in technology themselves, while benefiting from a provider's scale advantage and potentially reducing their cost.

Another option is to keep their tax functions in-house and invest in enhancing processes, expanding the use of services centres, and embracing automation and technology across the operation.

No one right answer

Whatever route an organisation takes, it is important to understand that there is no one-size-fits-all solution. A company may decide to outsource, but that is just one aspect in the transformation of the entire tax operation.

More organisations are engaging in comprehensive reviews to gain a full understanding of their tax departments' challenges.

These could range from the need to introduce a new process design model and drive value from data by automating processes, to addressing talent shortages and weak governance practices.

The value of such reviews lies in identifying an operating model that addresses their immediate and future needs—one that optimally blends internal and outsourced talent.

Regardless of what organisations choose to do, implementing technology across all processes is essential to stay competitive in today's dynamic and demanding tax environment. From data capture to processing and reporting, technology brings organisations closer to where they need to be, and it is high time organisations start to embrace it.