Embracing technology is not all about being defensive; new insights into data can work to businesses’ advantage.
Technology is changing the nature of testing. We are moving away from a world of sample tests and averages, towards 100% checking and verification of a population.
This is fundamentally changing tax departments. More to the point, it is also changing how tax authorities go about their business. These two factors combine to show why every sizable company must have a tax technology strategy.
Most large companies already perform some form of data analytics. Current hard-rules based analytics can group certain items together for further analysis. However, they are unable to consider whether the items are deductible or taxable.
Cognitive learning (that uses machines to simulate human process) will take this to the next step. Robotics will incorporate the results of all past analysis and treat similar items in the same way in future periods – constantly learning as it goes. This type of machine learning is very much in the pipeline and should be with companies in the next year.
Time is vital here. Not just companies are interested in this technology – this kind of machine learning is an obvious prize for tax authorities. If the tax authority gets the technology first, it can ask for companies’ source records and raise additional assessments when it finds errors in past filings. These errors are there to be found! Which head of tax can put their hand to their heart and hoenstly say all their returns are 100% accurate?
Embracing technology is not all about being defensive; new insights into the data can work to businesses’ favour. A company that takes a conservative view of its expense claims could re-analyse previous years’ submissions and find unclaimed expenses. Because this type of technology thrives on volume, a company could analyse the entire general ledger to find items that had been misallocated to improve their taxable profits position.
What steps should companies be taking? First and most important is to locate all their data. Much data should be on the resource management (ERP) system, but a lot is likely to be held on spreadsheets throughout the organisation. Some companies have already made progress on collating this data, creating a central data bank; others, such as financial services with their disparate legacy systems, face more of a challenge and it will clearly take them longer. But, once the data is in one place, it should be possible to mine it to serve the different tax customers within the organisation.
In the meantime, companies should be working on their tax technology strategy. Over the next year, we would expect every tax department, which doesn't already, to have some form of analytics in play. This could start with a hard-rules based approach, giving the company something to build on as higher-level analytics become available.
Within two years, organisations should have trialled machine learning, or at least basic grouping of similar items, as a routine part of their compliance process. Over the longer horizon, three years and more, the trick will be how to aggregate the data.
This final step matters because the real value in all these processes comes from reviewing direct tax data: improving tax reporting and eliminating errors before they get to the tax authorities.
Data aggregation is also vital because technology advances are making outsourcing of direct tax compliance a reality. Cloud-based data sharing, such as through an ERP system, eliminates the pain of direct tax compliance as it enables a company to give an outsourcer direct access to the data required. Added to which, the price will drop as this kind of external compliance service becomes more mainstream.
This world does not exist – yet. But it will be here very soon. And when it does arrive, heads of tax will need to be ready to capitalise on it and outsource their compliance to someone who can do it cheaper, faster and more accurately.
Our advice is simple: get ready for the change. Find out where your data is and collate it. Set a tax technology strategy and stick with it. Only then can you add value to your organisation through greater insight and cost savings, through better analysis of its tax affairs – before the tax authorities beat you to it.