Clearing skies: Demystifying the transition to the cloud for tax

October 4, 2020

A blog post by Deloitte Tax LLP professionals Jen Deutsch, Rochelle Kleczynski, Stephane Lunan, Travis Loomis and Joshua Ingalls.

In recent years, cloud(s) have been gathering on the horizon for many organizations—both global, multinational organizations and smaller, agile organizations. These clouds represent sweeping changes for most organizations that may bring major disruptions and may require corporate tax executives to make career decisions.

This article provides tax executives and their teams with insights into how to navigate the upcoming transition from current environments and tools to cloud-based applications and services. With key insights, tax executives will be able not only to navigate, but also to thrive in the new environment, leading to clear skies in the future.

What is the cloud?
What exactly is the cloud, and what are cloud-based solutions?According to the National Institute of Standards and Technology (NIST), “Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”¹

What this means is that an entire ecosystem has evolved steadily in the past few years to provide more focused and agile solutions for business process applications, from sales to procurement to full financial enterprise resource planning (ERP) with tax design enhancements. Several key reasons explain why these solutions are becoming more acceptable to organizations of all sizes.
Historically, as organizations grow and expand, so too do their information technology (IT) infrastructure needs. These needs typically include more hardware, more software, and more in-house maintenance. Organizations are increasingly looking to shed this operating overhead. In response, the cloud presents the opportunity to:

• Increase business agility by gaining greater flexibility in architecture and sourcing. Organizations can scale up and down as needed, enhance efficiency, accelerate time to value, and reduce time to start up and complete projects. This typically manifests with the ability to bring new operational functions, tools, or applications into the organization and to provide greater computing resources to speed products through development life cycles, facilitating user self-service and allowing functions like tax to “go digital”;
• Reduce IT capital spending by using pay-as-you-go models instead of purchasing or leasing expensive hardware, which allows IT to move its costs from capital to operational spend;
• Increase innovation that assists in shifting focus from asset ownership to service-oriented models, allowing IT to tap into private-sector innovation, encouraging a more entrepreneurial culture and closer links to emerging technologies such as artificial intelligence and machine learning and wrangling millions of data points to gain the insights that drive business; and
• Reallocate resources to more value-added activities by automating routine processes through the cloud. One example is shifting time from manual review of errors or manual reclasses to more automated analytics so that resources need investigate only exceptions found in data.

Why now?
Although the opportunities the cloud offers have driven some of the transition, simply put, recent disruptions from the current pandemic and economic uncertainty have forced the acceleration of the general move to the cloud.

For organizations with legacy on-premises applications, including ERP systems, they need to make decisions in the near term, as ERP suppliers begin to phase out their on-premises solutions in favor of wholly hosted, cloud-only solutions. Additionally, as internal corporate budgets are challenged to do more with less, the IT functions aim to relieve organizations’ reliance on on-premises technology (hardware and software).

In other words, systems, technologies, and software that companies historically purchased or licensed and maintained through in-house resources are now transforming into third-party hosted solutions. Companies do not use their own in-house platforms to access these systems, and data is stored in the cloud. To stay ahead of the curve, chief financial officers, chief information officers, and business process owners are already looking ahead to the next iteration of their applications and platforms to develop strategies that will move functions or tools to cloud-based solutions.

These discussions are happening today. Road maps are being developed, budgets (including potential savings) are being projected into the next several years, resourcing is being planned, funding is being allocated, and service providers are being contracted. All this activity raises the question: Where does tax fit in the future?

Tax’s place in the transformation
The impact of the transformation on tax is potentially seismic and may serve as a pivotal event for most tax executives. Tax must be part of the transformation. If tax cannot stake out a seat at the table, design decisions—as well as decisions about automation, risk reduction, and potential savings that could be missed—could be made without tax. There are three core reasons that tax needs to be represented in the very early stages of a company’s planning for a transition to the cloud. In short, why does tax need to be at the table?

Planning leads to savings
The first (and perhaps most obvious) is functional: Tax professionals should always be at the table, working collaboratively with their counterparts in IT and finance, when massive global technology contracts are being considered. With adequate time and proper planning, the tax function can be a strategic partner to IT and provide valuable advice on structuring agreements, contracting cloud service and software licenses, and other credits and incentives that could increase the return on investment.²

Several tax value-add considerations when a company moves to the cloud apply to both ERP and non-ERP cloud migration projects. Key areas that can generate savings are:

• Identifying tax-efficient structuring alternatives to align with the business transformation. A move to the cloud is often part of a wider business transformation that affects the operating model, and cloud migration is a good point to consider whether a more tax-efficient structure can be achieved. Changes resulting from the transformation initiative may even create new intellectual property (IP). The up-front involvement of tax may drive tax efficiencies related to IP development that the broader organization can use;
• Early identification and involvement with relevant vendor contracts to identify indirect tax considerations to reduce potential sales and use and recognize possible future indirect tax exposure. In addition, understanding the IT modernization (from current state to future state), as well as the vendors, characterization of spend, and location of IT users is key to more insightful and potentially more accurate tax decisions;
• Evaluating the potential to claim federal and state research and development (R&D) credits on internal and external spending to allow placement of proper tracking of activities early in the project. Language used in vendor contracts may also affect the ability to claim an R&D credit; and
• Capturing the expected IT spend over the life of the transformation, potential increased head count, and expected employee training for implementing new solutions to determine whether discretionary state and local credits and incentives may be available.

Proper planning can lead to significant savings at the very outset that can be reinvested in the IT modernization project.
In addition, as concerns a cloud-based ERP system upgrade, system functionality and data capabilities can help the tax function find and secure additional savings for the organization. With proper support and planning, tax can develop use cases that may not only fund tax’s portion of a project, but also, in some cases, the entire enterprise ERP transformation program itself.

Less complexity
The second reason is more operational. In virtually every organization, tax is the greatest consumer of enterprise data; almost every business process includes some element related to tax. But the tax function rarely owns that data—often, tax is viewed as a user of data that is owned by the business or by a specific finance process, such as procure-to-pay or order-to-cash.

If the migration calls for introducing a new cloud-based, next-generation ERP application (for example, hosted, SAAS, or on-premises but with cloud infrastructure), doing so necessitates that business and finance leaders examine and document all their existing processes across the enterprise. This is an opportunity for tax to embed its requirements into the business process, tax-sensitize data,³ and fully automate taxes within the ERP or in bolt-ons connected to the ERP in order to future-proof the tax department’s calculation, reporting, forecasting, and planning functions. By embedding tax-sensitized data and automation within the ERP and integrated applications, the outcome is removing tax complexity, which is historically driven from highly manual activities that expend massive resource hours reviewing, manipulating, or creating data, to becoming an automated data-driven digital organization.

Better risk management—and prediction
The third and most important reason for tax to seize upon a shift to the cloud is risk management. Today’s tax environment has changed completely over the past decade. Now certain authorities are moving toward a real-time, digital tax environment.⁴ In Brazil, for example, corporations must disclose their full invoice details before they can obtain a valid invoice number from tax authorities. The United Kingdom’s Making Tax Digital initiative envisions totally digitized tax submission in the next few years.

Changes in tax authority expectations will require business and tax leaders to fundamentally rethink their tax operating models, value propositions, and underlying processes. Indeed, in a digital tax environment where tax authorities are receiving data in real time, companies must have control and centralized visibility over the entirety of their tax-relevant data. Companies that lack visibility, integrated systems, or tax-sensitized data may be vulnerable to the changing expectations of tax authorities.

The risk of getting this wrong (or being too slow to respond) is significant. It could result in fines, penalties, and interest. Perhaps more important, businesses can essentially lose their licenses to operate or suffer reputational damage due to negative media coverage. In some countries, executives could even face legal penalties, such as in cases where the organization implements a tax control framework that tax authorities deem to be ineffective or inappropriate in the context of the footprint and the scale of the operations.

Organizations that fail to include tax at the outset of their cloud journey risk missing out on the opportunity to revisit their existing processes and modernize, automate, and reduce overall tax risks. Furthermore, they risk having to reconfigure or create workarounds in their new cloud systems down the road. That type of rework typically costs more than doing the due diligence up front.

Tax’s transformation road map
For tax to seize opportunities fully in the transition to the cloud, it should chart its course in a way that intersects with the organization’s strategic vision. Getting tax to a seat at the transformation table will require some essential prework to:

• Envision the end state;
• Map the road to transformation; and
• Partner for success.

Envision the end state
Understanding where you want to go typically starts with figuring out where you are. Tax’s digital transformation journey is no different. For tax to recognize what its future needs will be, it must understand its current state and look closely at its tools, processes, and people.

To develop a view of the future state, tax should begin with self-assessment of the current state. These assessments typically begin in the tax function to review existing processes, tools, applications, and available data and its usage within the tax function. This self-review can help tax to understand upstream processes as well. As one of the largest consumers of transactional and reporting data, tax depends heavily on almost every business transaction and process (such as finance and procure-to-pay functions) within the organization.

After this assessment, tax should be able to identify three metrics:

1. How it measures itself and how it is measured by the organization?
2. Where it falls along the spectrum of key performance indicators?
3. What the key pain points or gaps are in existing processes or data?

This assessment will help tax to build out the road map it will use to navigate the transition to the cloud.

Map the road to transformation
Defining a new road map is critical for articulating to key stakeholders what tax’s requirements are and what benefits the entire organization can derive by supporting tax’s requirements.

The road map should be tax-centric, but the major milestones and activities should align with the organization’s broader digital transformation initiative. Identify the capabilities and data that tax needs from the organization and which operational and systematic changes tax can implement under its own management.

Collaborating with the broader organization can lead to greater success for the larger tax initiatives, but the tax function should not expect the organization to take on responsibility for funding or managing all of tax’s proposed changes. The road map will also serve as a guide to identify which initiatives tax itself will need to fund and which initiatives tax can leverage for joint benefit.

The final takeaway from the exercise will be tax’s clear understanding of exactly how strong its cross-functional relationships are in the organization. The relationships tax does or does not have will determine its success in transforming.

Partner for success
Due to the nature of tax and its interdependencies with finance and IT, it is critical for tax executives to cultivate strong relationships in these areas. Allies within the finance and IT functions will be able to:

• Advocate for tax to have a seat at the table;
• Enable an organization to collaboratively identify overall potential cost and budgetary saving benefits, allowing for better organizational use of available investment dollars;
• Understand tax’s overall requirements and the value to the organization of meeting those requirements; and
• Articulate the need for tax scope to be included within finance or IT initiative, so tax does not have to forge its own path for funding.

Although tax can benefit from the transition to the cloud as it pursues its own initiatives, partnering with finance and IT on broader financial programs will allow tax to be included within the scope of transformation programs.

Additionally, partnering with finance allows tax to influence the process and data improvements in finance that affect tax. To address the pain points in the tax function, the finance area must play a leading role in reshaping its own functions. Collaborative work with finance can yield benefits to tax that, in turn, can benefit the whole organization through:

• Less compliance risk;
• More reporting accuracy;
• Less cash leakage;
• More opportunities for potential tax savings;
• Decreased cost through efficiency;
• Less reliance on IT and finance to prepare and send data to tax; and
• Less time for tax to close the books.

Having allies in the room can benefit tax in the broader program, but can also allow tax to obtain support and funding for its own initiatives that can run in parallel with the overall transformation. As daunting as this task may seem, tax executives can take actions today to limit the turbulence of transition.

Next steps
The adage “A journey of a thousand miles begins with a single step,” which appears in the Tao Te Ching, has been attributed to the ancient Chinese philosopher and writer Laozi. The words are still valid. To summarize the next steps in the digital transformation, begin the collaboration process as quickly as possible, commit appropriate time and resources (internal and external) to the transition, build the right relationships to get a seat at the table for negotiations and overall program design, and stay engaged over the life of the project.

The essential step is to act now. Do not wait for finance and IT to come to tax seeking assistance. Guide tax to the right connection points and highlight tax’s value as a strategic partner in upcoming programs. Ownership and diligence are vital to a forecast of clear skies in the future transformation.

This article first appeared on Tax Executive.  © 2020 Tax Executives Institute, reprinted with permission. 

Endnotes:

¹ Peter Mell and Tim Grance, The NIST Definition of Cloud Computing, US Department of Commerce Special Publication 800-145, National Institute of Standards and Technology, September 28, 2011, https://nvlpubs.nist.gov/nistpubs/Legacy/SP/nistspecialpublication800-145.pdf.
² David Linthicum, “Are You Thinking About Taxes and Cloud Computing?” Deloitte (blog), July 31, 2018, www2.deloitte.com/us/en/pages/consulting/articles/taxes-and-cloud-computing.html.
³ Deloitte, “Tax Analytics: Why Is Mastery of Tax Data More Important Than Ownership?” 2016, www2.deloitte.com/global/en/pages/tax/articles/tax-analytics-why-is-mastery-of-tax-data-more-important-than-ownership.html.
⁴ Deloitte, “Our Digital Future: A Perspective for Tax Professionals, January 2019,” September 2018, www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-deloitte-our-digital-future.pdf.