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Transforming the tax function through tech

Transforming the tax function through tech

Transforming the tax function through tech

Starting on a journey to embrace technology, even on an incremental basis, is necessary to keep up, and also maintain or even enhance the value of the tax function to the organization it serves.

Transforming the tax function through tech

So far, we have pointed out some of the challenges within an organization that tax technology may help you to fix; we have shared a framework through which you may consider how most tax technology solutions fit; we’ve discussed the need to consider incremental change; and we’ve acknowledged the need for realism (and patience) on the journey to transformation.

Now we move on to some important aspects of tax technology, and given our emphasis on keeping this simple, we’ve broken the issues down into some fundamental building blocks. In the following sections we explore each of these questions in turn.

  1. Why transform?
  2. What should you do?
  3. Who should help you do it?
  4. How should you do it?

Why transform?

Even if you know you wish to transform your in-house tax function to be ready to embrace technological change, the question is: why do it?

Is it because of the need to remove inefficiencies? Is it because of a desire to optimize tax outcomes? Is it because your organization is susceptible to tax risks that you cannot get control of? The answer is ordinarily all of the above, but different facets of your tax function may vary in terms of the priorities to be addressed.

In the previous section, we noted that most tax technology solutions can be placed into one of four different buckets or categories. Now let’s give the reasons why most organizations choose to deploy them.

 

Types of tax technology solutions Why do it? (most common reasons)
Compliance related solutions
  • to remove inefficiencies in existing manual processes
  • to ensure greater accuracy and/or transparencyof returns.
Insight related solutions
  • to optimize tax outcomes
  • to obtain better insights to help manage tax risks
  • to create efficiencies.
Process management solutions
  • for efficiency and accountability for decision-making
  • to ensure clear lines of responsibility
  • to share information within the organization.
Accessories, components or infrastructure
  • to enable or facilitate compliance, insight and process management solutions
  • investment is not seen as a benefit in itself, but rathera means to an end.

There may be specific reasons why your organization maywish to invest in certain technology solutions that differfrom the reasons set out in the above table, so this is just ageneral guide.

Even though a business may choose to invest in tax technology because of the benefits to that organization, what typically causes an acceleration to any investment decision is the news that the tax authorities are doing likewise.

The additional X factor — Supercharging your technology investment

Even when an organization believes it knows ‘why’ it wishes to invest in technology, there is an additional X factor that may turbo charge any such decision resulting in investment decisions being prioritized above all else. That additional X factor is the tax authorities.

What do we mean by this?

Put simply, the reason organizations often choose to accelerate their investment in tax technology is because of the threat or concern that the tax authorities may have developed their own technology that could shine a light on an organization’s deepest darkest secrets — to highlight its risks, or any breakdown in controls that expose the organization to tax liabilities.

In our experience, even though a business may choose to invest in tax technology because of the benefits to that organization, what typically causes an acceleration to any investment decision is the news that the tax authorities are doing likewise.

In this regard, it is useful to spend just a few moments exploring what the tax authorities are doing around the world in the field of technology solutions.

Enhanced data collection and use of technology by tax authorities

The following summarizes some of the enhanced measures through which many tax authorities are either getting more data from taxpayers, or achieving higher quality data. These are but five examples of the advanced investment in technology and analytics we see happening in tax departments around the world.

Five examples of how tax authorities are using technology:
 

Brazil

  • Brazil ranks as one of the most demanding tax jurisdictions for compliance requirements, and the Brazilian government has been using technology to streamline and simplify the tax filing process in a number of ways. In 2006, it implemented electronic invoicing to digitize product transactions and in 2009, it implemented Digital Book-Keeping System (SPED) for paperless compliance. 
  • Companies are required to submit transaction invoices to the Brazilian authority for verification both at the time of selling and of receiving products. SPED, implemented in 2009, created an online book-keeping system. Digital accounting booking (ECD) has been made mandatory, effective May 2016. Beginning in June 2016, there was a mandatory change from the reporting system (DIPJ) in SPED to a new reporting system (ECF) to enable the government’s access to more granular levels of information. After implementation of SPED in 2009, tax collections rose at a CAGR of 8.7 percent during 2010 to 2015, as compared with a CAGR of 7.6 percent from 2007 to 2009.
  • Brazil upgraded the government web service to calculate the share of taxes for each of the states involved in the transaction of selling of goods to the final customer. In this regard, the government has also created an online document — the GNRE document. A recipient acknowledgement process has been introduced in the government web service through which companies are required to validate their vendors’ XML. 
  • Brazil signed the Organisation for Economic Co-operation and Development’s (OECD) BEPS initiative in October 2016, and introduced Country-by-Country (CbC) reporting in Block W of the ECF coming out of this. The Brazilian government is promoting the use of Internet of Things (IoT) to build digital services. It has also promoted Machine to Machine (M2M) communication and related products by providing tax benefits to companies. However, this may not have any direct impact on the tax landscape of the country. 
  • Inclusion of a ‘Block K’ requirement in SPED’s tax book-keeping (EFD) has been made mandatory for companies with revenues of more than BRL300 million beginning in January 2017. Companies are required to submit inventory and production reports on a monthly basis. e-Social, which was made mandatory for companies with revenues of over US$78 million in September 2016, has been made mandatory for all companies, taking effect January 2017.

 

China

  • The State Administration of Taxation (SAT) launched the “Thousand Enterprises Initiative” (TEI) in July 2015. This program covers approximately 1,000 representative large group enterprises from different industries. Under this initiative the SAT collects data from the TEI-covered group enterprises and their member entities (through local tax authorities) for tax risk analysis. Based on the analysis, the SAT has built risk analysis models with risk indicators for different industries. 
  • Circular Shuizongfa [2014] No. 105 SAT Opinion On Strengthening Tax Risk Management sets out key tax risk management tasks for tax authorities. These include tax enforcement goal setting, information collection, risk identification, risk ranking and risk resolution, as well as risk management process monitoring, assessment and feedback.
  • The SAT on 18 April 2017 issued SAT Announcement [2017] No. 10 (Announcement No. 10), which provides taxpayers with the option of being assisted (through an automated solution) in identifying and correcting tax calculation errors, in advance of formally submitting their CIT annual filing returns. As Announcement No. 10 makes clear, this automated solution draws attention to potential issues in tax calculations, non-correlation between tax data and financial data, and other analytical results that might prompt a taxpayer to reconsider their original inputs. The information on which the analysis is based is drawn from a variety of sources, including taxpayer tax registration, historic tax filings, financial and accounting data, record filings, and third party and industry data.
  • SAT Announcement [2016] No. 67 on The Filing of Financial Statements Upon Submission of Tax Returns for “1,000 Group Enterprises” And Their Member Entities was published on 26 October 2016 and took effect from 1 December 2016. This requires TEI enterprises to file financial statement information with the tax authorities, both at the time of filing periodic tax returns during the year (i.e. quarterly), and with the filing of the annual tax return (i.e. filed each May following tax assessment year-end). Financial statements (to be supplied in electronic form) include balance sheets, income statements, statements of equity changes, and their disclosure notes, for every legal entity in a corporate group in China.
  • SAT Announcement [2017] No. 7 on The Management Measures on The “1,000 Group Enterprises” Catalogues took effect from 1 May 2017. This requires TEI enterprises to report certain entity information to the tax authorities on an annual basis (i.e. each May), which will be maintained on a data platform. This includes details of the taxpayer’s in-charge tax bureaus, operating locations, industries of activity, parent company, tax payments in prior years, revenue in prior years and listed status.
  • The Golden Tax System Phase III provides for the centralized collection of national tax data from all taxpayers registered with the thousands of individual tax bureaus at all levels of government across the country. This covers both local tax bureaus (LTBs — responsible for local government taxes) as well as state tax bureaus (STBs — responsible for central government taxes). The Golden Tax System Phase III aggregates data from all taxpayer-authority interactions, including tax and incentive filings, tax payments, tax audits/enquiries, records of outbound payments from China, tax invoice issuance/certification and information from reviews of taxpayer internal tax controls. This is taken together with webcrawler/public website searches on taxpayers, industry profiling information used to assess tax risks, information obtained from overseas tax authorities, and from other domestic agencies, such as the foreign exchange control regulator (SAFE — State Administration of Foreign Exchange) and the commerce ministry (MOFCOM — Ministry of Commerce). Tax officials in different tax bureaus across China can tap into this system, to see prior interactions that taxpayers may have had with tax and other governmental authorities.
  • Under the forthcoming new Tax Collection and Administration (TCA) Law, Chinese financial intermediaries will be required to bulk report client account transactions (exceeding a certain minimum value) to the tax authorities together with the relevant clients’ tax identification numbers (TINs) to facilitate data matching (e.g. cross-checking of IIT filings), and risk ‘red flagging’.
  • SAT Announcement [2017] No. 14 on Administrative Measures on Due Diligence Checks on Tax-related Information of Non-residents’ Financial Accounts was published on 9 May 2017, and took effect on 1 July 2017. This provides the detailed rules under which China is rolling out the OECD’s Common Reporting Standard (CRS) for the automatic exchange of tax information. Financial institutions with operations in China were required to register on the SAT CRS web platform by 31 December 2017, and then report to the SAT tax information on the accounts of non-residents held with their institutions (including tax ID, balance and receipt of different income types) by 31 May every year (starting May 2018).
  • Since 2016 the Golden Tax System has provided a powerful platform for pooling tax data from all levels of tax bureaus across China, covering both central government and local taxes. Its user interfaces facilitate both taxpayer and tax authority engagement and input, and drive standardization of certain key data inputs. The upgraded system also requires taxpayers to input “goods or service codes” so that the authorities obtain standardized data on what goods or services have been covered by the invoices. This facilitates the tax authorities to closely monitor invoice creation to detect fictitious invoices, ensuring the integrity of invoice information and the authenticity of filing data.

 

The European Union

  • The European Commission has established a special electronic and technological infrastructure and system called Electronic Tax Management System (ETMS) for e-filing of taxes. The majority of direct and indirect taxes are filed electronically throughout the European Union (EU). The e-filing process has been further simplified through auto-filled returns and a standard e-invoicing format for VAT/GST returns. The EU is focused on increasing the e-governance offering in taxation by modernizing the tax processes and reporting framework through use of Information and Communications Technology (ICT). 
  • The EU as part of its e-governance initiative launched 20 public services in 2002 that included six offerings related to tax. These e-tax initiatives evolved over the period as the government established a special electronic and technological infrastructure and system (ETMS) for e-filing of taxes. Currently, nine major taxes including direct and indirect can be filed electronically.
  • The EU provides the option of pre-filled tax returns to ease the process of filing taxes. In 2014, the EU passed a standard e-invoicing format for VAT/GST filing. The EU has implemented System of Exchange of Excise Data (SEED) and VAT Information Exchange System (VIES) for providing a consolidated view of tax payable across the EU. The EU has developed an EU Standard Audit File for Tax (SAF-T) to facilitate voluntary tax compliance and tax audits. 
  • Over 60 percent of the direct taxes were filed electronically in the EU in 2013 with Italy, Austria and Belgium among leading countries. In July 2014, Electronic Identification and Trust Services (eIDAS) regulation was issued to simplify the authentication process. It will enable EU citizens to use their national eID in other EU nations when accessing public and private services online. The mandatory mutual recognition among EU nations would apply beginning in mid-2018. 
  • In January 2015, the EU set up a Mini-One Stop Shop (MOSS), a web portal, to simplify and automate VAT payment by companies offering digital services to EU nations. In December 2016, the EU proposed extending the applicability of MOSS to online sales of tangible goods by 2021, removal of VAT exemption for import of small consignments and the introduction of a new One Stop Shop system for import of goods. Taxes accounted for around 40 percent of the EU’s GDP in 2015.
  • The EU is adopting and going through digitalization mainly aimed to ensure free flow of information driven by regulations such as AEOI, BEPS and other regulatory requirements. The EU SAF-T was developed to ease tax audit and Eurofisc, a network for exchange of information, to control carousel fraud. In 2017, the EU developed a central repository for storing information on advance cross-border
    tax rulings and advance pricing arrangements issued by any one member state. 
  • By 2020, the EU is looking to upgrade IT collaboration tools such as Automatic Exchange of Information (AEoI) modules to ensure transparency of information among the EU member nations. The EU is looking to adopt blockchain technology to improve tax compliance.

 

The United Kingdom

  • The UK has one of the most advanced tax administrations and the majority of direct and indirect taxes are filed online in the UK. The British government is investing around GBP1.3 billion to move to a completely digitized platform through its ‘Making tax digital’ initiative.
  • Electronic submission of all company tax returns was made mandatory for periods post 31 March 2010 — implemented in April 2011. As of April 2012, VAT-registered businesses in the UK were required to file their VAT returns and Intrastat declarations electronically. 
  • Following the EU guidelines, the UK adopted the MOSS system. All businesses supplying digital services are required to register for MOSS. Following Brexit, the UK government might comply with EU-wide initiatives such as adoption of MOSS as a non-union member.
  • Her Majesty’s Revenue and Customs (HMRC), the tax authority in the UK, is planning to integrate all its internal systems to consolidate and provide tax information digitally. As per the ‘Making tax digital’ initiative, all taxpayers will have secure digital tax accounts and will be required to record and pay all their taxes online by 2020. The new system, besides enabling taxpayers to better manage their tax returns and file error free returns, is believed to save HMRC around GBP6.5 billion of tax that otherwise goes unpaid every year. 
  • Already, HMRC has mobile apps that help taxpayers access their personal tax account information. HMRC introduced voice recognition technology for its mobile app in 2017. The government also plans to introduce a number of technical changes to streamline and simplify aspects of the tax rules for employee share plans. 

 

The United States

  • The US has been a catalyst of change in the tax technology landscape, and has now reached a stage of maturity. The developments in the field of tax technology are micro in nature and particularly deal with updating operating systems or replacing legacy systems.
  • The Modernized e-Filing (MeF) system is used for e-filing and ensures faster processing of returns. The Internal Revenue Service (IRS), the governing tax authority, has launched a mobile application providing various e-services and also interacts with taxpayers on social media platforms such as Twitter, Facebook and YouTube.
  • Launched in 2011 by the IRS, the IRS2Go app is a mobile application that lets taxpayers check their refund status, make electronic payments and receive tax preparation assistance. In 2012, the legacy 1040 e-file program was completely phased out and replaced by the MeF system. MeF supports XML, which is both easily readable by humans and machines, and also ensures faster processing of returns.
  • In 2015, 91 percent of all returns were filed electronically. As a part of its Future State Initiative, the IRS is developing online accounts to help taxpayers manage their accounts, filings, correspondence, payments and data, and also identify and resolve issues digitally. The MeF system now supports the XML format for electronic return data. 
  • The IRS is trying to simplify data management and warehousing through its Customer Account Data Engine (CADE2) program, which will merge the Individual Master File (IMF) and Customer Account Data Engine (CADE) databases into a single database that will house all individual taxpayer accounts.
  • The Return Review Program (RRP) is an initiative of the IRS to replace the legacy system, Electronic Fraud Detection System (EFDS). The project is currently in an early phase. 
  • The IRS is trying to mitigate refund frauds by bringing in a new system, the Real-Time Tax System, which will assist in up-front quality checks on tax returns being filed with the IRS. A consolidated authentication process is a focus of the IRS to implement a better, standardized authentication mechanism for all forms requiring an electronic signature. Through Assisted services, the IRS plans to initiate more consistent taxpayer interactions, including secure email, e-fax, enhanced online and automated telephone services.
Transforming the tax function through technology

What may hold back investment in tax technology?

The most common reasons in our experience for organizations to hold back their investment in tax technology fall into one of these four categories:

  1. apathy
  2. fear of the unknown
  3. poor data quality
  4. future finance transformation. 

Let’s take each of these roadblocks in turn.

Apathy is the idea that, because the organization has always done things in a certain way, why would there be a need to change it? It’s the old saying — ‘if it ain’t broke, don’t fix it.’

The problem with this paradigm is that the world is changing, business models are evolving and tax authorities are enhancing their technology as we have already discussed. In short, technology is everywhere, and it is advancing at a very rapid pace. So to do nothing in a world of technological advancement is in fact to fall backwards rather than to lie stagnant. Those who do nothing risk being replaced, or perhaps more likely, for the status and value of their tax function in their organization to reach a state of terminal decline. Therefore, starting on a journey to embrace technology, even on an incremental basis, is necessary to keep up and also maintain, or even enhance, the value of the tax function to the organization it serves.

The other phenomenon that we see all too commonly among tax leaders is ‘fear of the unknown’. It is the idea that by deploying tax technology tools such as data and analytics solutions, it will highlight errors, which may result in a loss of face or status for those who have presided over those errors.

The problem with this type of fear is that, while it may defer exposure or correction in the short term, in the longer term it’s a strategy that will prove disastrous. Those same errors will continue to accumulate, and moreover, with an ever greater likelihood that they will be uncovered by the tax authorities rather than by the organization itself. This is where the CFO and other C-level executives need to take a greater role in overseeing the governance and strategy of the tax function, to ensure that they demand a high-performance culture and a modern tax function. But it also requires an understanding and acceptance that technology tools enable the tax team to identify the proverbial ‘needle in the haystack’, which was simply not possible before.

So the culture and environment in which tax technology is deployed needs to recognize the value in shining a light on an organization’s previously unseen problems. This will help get them under control, prevent their recurrence, and align reward and recognition with the detection and prevention of risks rather than being associated with the identification of past liabilities. Moving to this type of culture produces long-lasting benefits.

Another common excuse often heard is that ‘tax technology solutions will not be beneficial to our organization because the quality of our data is poor.’ And so it shall remain if this mantra is accepted! Here is where the deployment of tax technology solutions may produce benefits in two stages — the first stage being the identification of data improvements that need to be made, and the second stage being the greater insights obtained from those data improvements.

And finally, an oft-cited reason for deferring investment in tax technology is that ‘we are rolling out a new ERP system in X years’ time.’ While future changes in ERP systems may reasonably defer major tax technology investment decisions, typically this is put forward as an excuse for apathy. For example, if the organization is really rolling out a new ERP system in the future, then where is the strategy for how tax technology will be deployed upon its arrival? And what is the tax function doing to ensure that the new ERP system delivers them the data they will need? The simple point here is that there is much that can and should be done in readiness for such a new ERP system — this should drive greater change, not lessen it.

So, in short, the evidence clearly shows that organizations need to consider turbocharging their investment in technology if they perceive they may be exposed, either through errors or heightened tax risks, or even where there is a lack of transparency over their data, or controls over their tax processes. Tax authorities now have an exponentially greater prospect of finding them, even if you don’t. Furthermore, many of the reasons put forward for not deploying tax technology solutions merely represent excuses for apathy, which potentially creates greater problems later.

Returning to the question of ‘why’ you would invest in tax technology — the answer is for all of the reasons set out above. However, in today’s environment, there is an added pressure in place in many jurisdictions: namely, the prospect of the tax authorities being able to shine a light in the deepest darkest crevices of your organization’s data and tax reporting. Would you prefer to be in control of finding it and fixing it, or would you prefer others to do it for you?

What should you do?

Once you know the answer as to ‘why’ you would choose to embrace technological change in your in-house tax function, you then need to consider ‘what’ you will do. To help answer this question, we have returned to our four ‘buckets’ or categories of tax technology solutions, and our aim here is to provide you with insights into some of the tax technology solutions that are available, and aspects we see as being ‘core’ to your business needs, or ‘optional’ depending on your specific organizational risks, efficiencies or business activities.

Category one — Automating the tax compliance process

The main purposes of tax compliance solutions are to improve efficiency in generating tax returns as well as the accuracy of those returns.

These kinds of solutions leverage data that has already been collected as part of the core business processes carried out by the finance function, namely procure-to-pay, order-to-cash and record-to-report (general ledger accounting). In those processes a variety of data is captured in the ERP system.

Let’s take the example of the order-to-cash process. Salespeople initiate sales orders for the sale of products or services. Information about the nature of these transactions (goods or services) and critical location information such as ‘ship-to’ and ‘ship-from’ countries is captured as part of this process.

ERP systems support these processes and help to automatically calculate (indirect) taxes as well as reporting
revenue for CIT purposes on an accruals basis, based on the business characteristics of the transaction. In the case of automated tax determination software, these decisions are made based on what information is captured — for example, the product code or service code may determine the applicable VAT rate, or whether the sale is to be exempted or zero rated. In the case of manual tax decisions, these decisions are based on the level of tax expertise of the users that capture these transactions.

Now, getting back to the tax compliance process itself. In order to generate a tax return, the outcomes of the key business processes relevant for tax are used to map these tax outcomes to the relevant sections/boxes in a tax return. As such, the key features of any tax compliance technology solutions are to: (1) collect the relevant tax information from the various data sources in an organization; and (2) make sure that this information is automatically mapped to the tax return.

The core intelligence of these solutions sits in the underlying logic that bridges relevant tax data with tax
return requirements. Furthermore, by deploying appropriate infrastructure or technology components, additional benefits beyond merely automation may be created by means of visualization (to enhance user experience and oversight), central data storage and even workflow. But we’ll discuss this later as part of Category four, below.

As mentioned earlier in this publication, it is highly unlikely that tax returns will be generated straight from ERP data, at least for the foreseeable future. This is because of two main factors: (1) the way the data in an ERP system is entered will need to be ‘sliced and diced’ differently from the way it needs to be presented for tax return purposes; and (2) because ERP data is not the sole source of information for tax return purposes — other sources and indeed manual interventions may be needed.

By way of example, in many jurisdictions data such as from customs or from manually prepared spreadsheets, which record various adjustments, is needed for VAT return preparation, and for reporting such as Country-by-Country (CbC) reports, employee or human resources related data may be needed. As such, the role of tax compliance solutions is to serve as a channel or funnel to bring together these different data sources, to ‘slice and dice’ the data to prepare it for tax reporting purposes, and to serve as a prompt for any necessary manual adjustment processes.

Another key aspect of high quality tax compliance solutions is the functionality to run ‘trend analysis’, by comparing key indicators of the current return against previous periods. If the total throughput VAT (i.e. the sum of VAT output and VAT inputs) in the current period is significantly higher (>20 percent) than for the previous period or significantly greater than for the comparable period 12 months ago (for seasonal businesses), this might be an indication that something is wrong in the source data or some unusual transactions have taken place. Similarly, an organization will want to monitor its effective tax rates for CIT purposes, or its proportion of entertainment expenses, to ensure it is properly capturing this information given the propensity of tax authorities to monitor non-compliance.

The core intelligence of tax compliance solutions sits in the underlying logic that bridges relevant tax data with tax return requirements.

Category two — Solutions that provide greater insights

The second category of solutions are those that typically aim to show you data, information or outcomes that you need to know but may not have been able to see before. The main idea here is to transform data into insights, which can then deliver value to your organization.

In the data driven world in which we now live, these solutions have the greatest potential for growth over the coming years. Consider the operation of Moore’s Law, 5 which is the observation that the number of transistors in a dense integrated circuit doubles approximately every 2 years — a theorem that is now routinely applied to data, too. It then follows that the growth of data, and therefore the need to be able to analyze it and identify trends or insights from it, will also grow. It is truly amazing how much information and value may be concealed in your data, which can be unlocked if you deploy data and analytics solutions.

Solutions providing insights into data typically have three main aspects to them:

  1. data extraction — that is, where the data comes from and how it gets into the solution
  2. data transformation (or cubing) — which we colloquially call ‘slicing and dicing’, or more accurately, where the data points are transformed, dissected, amalgamated or cleansed
  3. data visualization — this is what the user (you) sees and is able to generate insights from.

Whereas 1 and 3 are mainly components, though very critical, the core intelligence of insights (D&A) solutions is in the data cubing area. This is where the data is transformed into value.

 

Aspect one — data extraction

An important component of a data insights solution is the availability of sophisticated technologies to facilitate the data extraction process. Data extraction is referred to as the process of pulling or obtaining relevant tables and fields from ERP systems, tax authority systems or customs. As data volumes nowadays are incredibly large, data extraction technologies are essential. The ‘old days’ of obtaining data through requesting and delivering Excel spreadsheets is well and truly over. If data extraction does not work or takes too much time for the organization’s IT department to prepare, insights solutions simply cannot be successfully deployed. In other words, data extraction is the foundational component upon which all insights solutions are built. Absent the data, absent the insights!

Effective data extraction needs to be able to work with multiple ERP systems, and for multinational organizations, this process can be complicated further by the fact that there is much greater variety in the types of ERP systems used across jurisdictions. For example, across much of Europe and the US, multinational companies will typically use well-known ERP systems such as SAP, Oracle, JD Edwards and similar. Data extraction from these systems will often be pre-configured so that the tax insights solutions can map the data fields from these well-known ERP systems to the tax insights solution. However, the same company may operate in China using other ERP systems such as Kingdee, Inspur, Aisino and other local Chinese systems. This means there is a need for data extraction to be able to work with virtually any ERP system when it comes to the needs of most multinational organizations.

 

Aspect two — data transformation (or cubing)

The data transformation or cubing part is where the various data points are connected to each other to build a so-called ‘tax data warehouse model’, which is a model that brings all tax related data together with the right granularity and a lot of calculated fields that contain critical information, to drive the tax insights solution. As mentioned, this is where the data is transformed, dissected, amalgamated or cleansed. Let’s explain what we mean by this.

If you consider a common ERP system may have 50 different data points for every transaction, such as the date the order was placed, the price for the goods or services, the number, quantity or extent of goods or services being sold or purchased, the general ledger account number, details of the seller or buyer, the delivery date, the ‘ship from’ country, the ‘ship to’ country, and the list goes on. Some of these data points may be relevant for tax purposes for certain insights, but many will not be relevant — so the first objective of data cubing may be to exclude those irrelevant data points for each of the insights to be delivered. The second objective may be to aggregate or disaggregate certain data points, or to match different data points from each transaction. Think of it like a very complex series of Excel spreadsheet formulas.

 

Aspect three — data visualization process

This is the end result or product of any insights-based solution, and it is what the user experiences. Ease of use of any tax insights solution is critical. The tax insights solution needs to be logical, and for the most effective solutions, they are often the result of many hours of user acceptance testing, feedback and improvements. It is often said that what makes Apple products so successful in the market is that they are so intuitive, as evidenced by the number of 4- and 5-year-old children able to operate products such as iPads and iPhones. Just as these products are intuitive to the user, effective tax technology solutions must be visually appealing, attractive and enticing to the user, and above all else, produce insights the user can readily see and interpret.

But it is equally important to remember that data visualization must go hand in hand with proper data extraction and data cubing. For example, we recall seeing for the first time the demonstration of a new tax technology solution developed by a third party software provider — it looked visually very appealing.

However, what differentiated those clients without much technology experience from those with it, is that the former group focused on the ‘wow’ factor, whereas the latter group focused their questions on the following:

  • what data sources did you use in this solution?
  • what types of ERP systems can the data be extracted from?
  • how is the data cubed?
  • what types of analytics tests can be conducted?\

It was only after these questions had been asked that it became clear that the software provider had built what was akin to a brand new car, but without building the engine. In short, what they were showing was a fancy presentation but without the underlying extraction and cubing having been built.

So in short, tax insights solutions will only grow in importance to an organization’s tax function as data expands at an incredible pace, as the demands of tax authorities increasingly shift to real-time reporting and as the multitude of different reporting obligations continues to expand. But, as a buyer or user of these tax insights solutions, the focus needs to be on not just the ease of visualizing insights associated with these solutions, but also their data extraction and cubing capacities.

If you take a look at a typical end-to-end tax process, tax insights solutions will provide insight into the quality and efficiency of the various steps in the process before the compliance process starts. Typical examples of areas where insights solutions can be of benefit include:

  • highlighting the accuracy of indirect tax calculations
  • calculating actual gross and net margins on intercompany transactions
  • providing an overview of actual supply chains based on real transactions
  • determining business scenarios that are not reported for tax purposes (but should have been reported)
  • managing tax residency risks through the tracking of employee time in various countries— identifying anomalies in HS codes used for goods importations for customs purposes
  • finding indirect tax savings opportunities due to the use of wrong tax codes.

Effective tax technology solutions must be visually appealing, attractive and enticing to the user, and above all else, produce insights the user can readily see and interpret.

Category three — Process management solutions

The third category of solutions is usually referred to as ‘workflow’ solutions since the main purpose of these solutions is to create better controls, governance or efficiencies over the completion of work tasks, usually by ‘enforcing’ a process.

During a process a lot of information may be captured and processed by a number of different people. Furthermore, there may be a lot of dependencies between various steps in an end-to-end process. By way of example, the completion of a single tax return may require data to be input by three or four different people within an organization; the tax return may be prepared by one person, reviewed by a second person and ultimately approved by a third person.

In order to facilitate this process, technology solutions may be used. These solutions have modelling capabilities in order to bring in the relevant company-specific process steps, documentation requirements and activity dependencies.

In modern tax functions, process management solutions are being used for:

  • handling of research and development (R&D) claims (see case study on page 29)
  • preparation of VAT and CIT returns (as a component of any tax compliance solution)
  • Transfer Pricing documentation preparation— tax invoice handling
  • Global Mobility process tracking.

In general for all these kinds of processes, process management solutions help to improve the efficiency and transparency of the entire process. They make sure that information is available on a timely basis and to the right people. The time taken to complete the process may also be reduced because the waiting time due to missing information may be minimized and miscommunication in terms of roles and responsibilities is also clarified.

Workflow management solutions also serve to better control risks associated with various tax processes. For example, the policy of an organization may be that issuing a special VAT invoice higher than a certain amount requires approval from a certain tax manager before issuing it to the customer — a workflow management solution can be used to force these kinds of approval steps.

Similarly, company processes that were historically documented and defined using manuals gathering dust on the shelves can now be embedded into workflow management solutions, to ensure clear lines of accountability. An excellent example of this is for companies deploying the RACI framework — this is the framework through which key tax risks or decisions should be assigned based on who is to be ‘responsible’, ‘accountable’, ‘consulted’ or ‘informed’. Now these frameworks can be built into workflow management solutions. User access, approvals or tasks may be assigned to a variety of different users with different profiles (roles and responsibilities).

In practice, we very often see process management solutions combined with compliance or insights solutions, rather than being implemented as stand-alone solutions. In other words, they may be a feature of either Category one or Category two solutions.

Process management solutions make sure that information is available on a timely basis and to the right people.

Category four — Accessories, components and infrastructure

The last category of tax technology solutions, previously referred to in this article as akin to the foundation of a house, are key enablers for all tax technologies. The solutions in categories one to three simply cannot run without having a proper infrastructure in place to host the technology or to be the visualization towards the end-user via a user interface.

A key characteristic of any accessories, components or infrastructure is that they are not tax-specific in the same way as the core tax intelligence (compliance, insights or process solutions) referred to in categories one to three. Other non-tax technologies used in the business may be able to leverage the same underlying infrastructure, accessories or components.

To use an Apple iPhone analogy, the platform is the iOS that enables all apps (our categories one to three) to run smoothly and leverage the usage of shared components (storage, visualization libraries, etc.)

So in fact this category isn’t a solution in itself but rather a part of all the other three categories of tax technology solutions, however equally important.

Usually this category contains existing software applications developed by third party providers, programming language work benches or cloud environments. Let’s discuss some specific examples of what types of software are contained in this category.

Take the example of a powerful tax insights solution, which needs a good visualization front-end in order to make it easy for the end-user to see vast quantities of data, or to identify patterns from that data. Industry-leading Business Intelligence (BI) software providers like Qlik, Tableau or Microsoft have developed applications (QlikView, QlikSense, Tableau or Power BI) that can be used in any tax technology solution. The benefits and importance have already been outlined in the tax insights solution category.

Similarly any tax technology solution that uses data also needs to deal with the process of receiving data and making sure it is loaded into the right format for the solution. The process of moving from obtaining data, transforming it into a structured format and then loading it into a database is usually referred to as Extraction, Transform and Load (ETL). The ETL process is a very technical process, but critical in the sense that if it isn’t done properly, the data engine that contains cubing procedures simply does not work. Once the ETL process has been set up, usually starting with a one-off definition of the various process steps, it can then be set up as a repetitive process. This is also an interesting area for the application of Robotics Process Automation (RPA), which is discussed later in Part C of this publication. There are various third party software solutions available to support the ETL process. The most well-known software applications are Informatica PowerCenter, SAS Data Integration Studio and Oracle Data Integrator.

A third example is related to infrastructure: hosting and storage. Any tax technology solution provided on a cloud/online basis needs to use hosting and storage services. Hosting is effectively an online environment where programs can run. Storage refers to the amount of space that is available in that online environment to store data. Users of technology solutions usually only notice hosting and storage servers when they are not working; for example, when the server is down and they cannot access their programs and data. Or when there is not enough storage to capture data — i.e. the disk is full.

Therefore, an important quality criteria for third party providers of hosting and storage services is to provide an environment that is accessible anytime, anywhere and with virtually no down-time. Furthermore they should provide sufficient flexibility to scale up or scale down in terms of data storage, processing power, etc., in case there are unexpected increases in data volumes that need to be processed. This is indeed one of the key benefits of using cloud services, because most customers pay cloud providers based on an actual cloud ‘usage’ basis, rather than on a fixed license basis. Some major cloud-service providers on a global scale are Microsoft (Azure), Amazon (Web Services) and Alibaba (Cloud).

Although these examples don’t seem to have a lot in common at first sight, the real benefits to support tax technology solutions will arise when you start combining and packaging them into a platform concept. The term ‘platform’ is, in our view, an often over-used or mis-used term because people associate the success of many e-commerce giants with having an effective ‘platform’ and therefore others have often tried to mimic this by describing particular solutions as comprising a platform.

A ‘platform’ is simply the package of solutions, applications or components that all come together effectively for the benefit of its users. The platform may have standard components that may be relevant for each ‘application’, such as data visualization, ETL, storage, workflow, etc.

An important quality criteria for third party providers of hosting and storage services is to provide an environment that is accessible anytime, anywhere and with virtually no down-time.

The combination of these is what creates a common platform on which various solutions (or apps) can then run. With a common platform a lot of benefits can be realized:

  • uniformity of user experience: all applications have the same look and feel
  • rapid development and/or deployment of new applications: components may only need to be set up once and can be leveraged across new applications
  • centralization of data storage: data can be used for multiple purposes across different applications
  • centralization of user management: users can access applications via a single login and access is granted based on a ‘need to know, need to have’ basis.

So what we have learned is that the accessories, components or infrastructure may not be specific to the tax function, but rather they typically leverage these within the broader organization. Their significance is akin to the foundations of a house — they are integral to the success of deploying any tax technology solution.

Who should help you do it?

The short answer, if you spend too much time reading sensationalist media reports, is that you don’t need people, instead you just need robots. You can happily make your staff redundant and replace them with robots —  machines that don’t take coffee breaks, don’t need to get paid overtime, and don’t take sick leave or require annual leave — the perfect employee!

Thankfully the above paragraph is nothing more than a work of fiction.

An Australian journalist recently pulled apart some of the sensationalist reporting that had suggested that 40 percent of jobs would be automated within the next 10 to 15 years. The journalist referred to more reasoned studies by organizations such as the McKinsey Global Institute, which suggest something much more balanced:

The McKinsey Global Institute, for instance, estimates that only 5 percent of occupations will be able to be fully automised by 2065. But it reckons that about half of the activities within occupations will be automatable. So, 95 percent of occupations will remain but the work within will change. Over the next halfcentury. You can see why this study didn’t get as much publicity as the apocalyptic ones — jobs will change over the next 50 years, nothing too shocking, not many hurt.6

The same journalist portrayed the future as follows:

But the most important counter to the panic is the evidence of the past three centuries. As each wave of technological change has hit, from the agricultural revolution to the industrial to the digital, many job categories have indeed been wiped out. But many more have been created. So that there has been a net gain every time. The simple fact is that we can always see jobs disappearing but we can never imagine the jobs that will arise in their place.7

The significance of these quotes is twofold. First, the vast majority of jobs will not disappear, and will not be replaced by robots, at least over the next 50 years. Rather, the nature of the tasks and responsibilities in most jobs will change. Second, while some jobs may disappear (and obviously there is not a consistent view from the experts on the percentage affected), new jobs will emerge in their place. In other words, it’s an evolution, not a revolution!

So the true answer to the question — what people will I need to help me do that? By and large, you will still need your current people. However, the nature of their roles will need to change, and you need to start them on that transformational journey now, albeit by taking incremental steps.

Let’s consider how best to do that. Set out below we provide a framework of the skillsets you will need within a technology powered tax function:

Transforming the tax function through tax

Critical to the success of a tax technology enabled tax function is that you will need IT people to develop some tax skills and tax people to develop some IT skills.

The very simple proposition is to recognize that if your tax function uses technology to carry out much of its work, then you will need people within your organization with tax skills and IT skills. However, critical to the success of your technology enabled tax function is that these skillsets need to meet in the middle — in other words, you will need your IT people to develop some tax skills, and your tax people to develop some IT skills. Let’s explore this a little further.

Starting with your IT people: they may currently sit within your IT function, and your role is to provide them with only a high-level of information about your tax systems and processes. They need just enough knowledge to be able to help you to ‘fix’ the problems you encounter. Spend some time with them so that they know what you do, and how you do it. They don’t need to understand tax technical issues — rather, they need you to walk through things like the compliance process — show them how you progress from the data in your systems to the completion of tax filings. Also show them the problems you are currently experiencing — say, for example, you don’t receive the data in the format you need it, or you don’t have visibility over certain data.

Importantly, for those with IT-related skills, as mentioned you can typically access these people within your existing IT function. However, it may be important that you get a specific allocation of those people. Put simply, you do not want a situation where you are calling a virtual help line every time there is a problem and encountering someone different without any background knowledge in the technology solution. Otherwise, they won’t be able to meet you in the middle.

You want them to develop an affinity for your business; you want them to develop experience so that they get to see the same issues over and over and learn from them; you want them to have formed working relationships with you, so that they are accountable to, and feel invested in, the outcomes from your tax function. And if you don’t have these people available to you within your organization already, then you will either need to hire them, or you need to ensure that full and consistent access is provided to you as part of any outsourcing arrangement. In other words, if your organization will not allow you to invest in IT expertise in-house, consider whether you can access that expertise under an arrangement with your technology provider.

For the tax people in your organization, you need them to develop some IT-related expertise. This does not mean they need to learn how to program, nor do they need to become IT experts. Rather, you want your tax team to possess skills in areas such as data and analytics — that is, the ability to identify anomalies or discrepancies in data, or to see patterns in data. They may need to be able to see how solutions can be built through computer programming, though they need not have the skills to do the programming themselves. They need to understand the processes within your organization — for example, how to get from data entry through to the completion of a tax return. These people will often have a background in areas such as mathematics, science or computer science. Even consider people who write Excel spreadsheets at the moment and are adept at thinking of tax problems in terms of formulas, or tax compliance in terms of a series of processes.

To use a football or soccer analogy, the whole aim of this exercise is to develop people who can ‘kick with both feet’, meaning they can speak intelligently or proficiently to both tax and IT matters, while not necessarily being an expert in both. Think of these people as akin to translators — they need to be able to speak the language of tax and of IT well enough that they can build a bridge in communication between your tax and IT teams.

The most important aspect to recognize is that this is a skill that can be learned, rather than necessarily acquired. A tax person who is adept with numbers and at problem solving can develop the IT capability by working hand-in-hand with their IT counterparts, and in generally taking an active interest in technology developments, and what the market needs. Likewise, an IT person who invests sufficient time understanding your tax function, being co-located with your team, and learning the processes and systems you use will quickly develop the capability to serve as the ‘bridge’ for your organization.

Critically, the tax technology solutions your organization is either acquiring or developing serve to ‘enable’ the tax function — they do not serve to ‘replace’ decision-making within the tax function. This means, for example, that workflow solutions should serve to facilitate processes within your organization, but in each step of the process, it may not necessarily act as a substitute for your tax knowledge or ability. Oftentimes we see tax people becoming bogged down in trying to design processes to deal with the 1 percent of situations, whereas a process that automates the other 99 percent of situations with the ability to override for the 1 percent, would suffice.

How should you do it?

In the previous sections of this publication we have considered why you should develop your tax technology capabilities, what you should do to develop a technology centered tax function and who should help you do it. The last question is: how should you do it?

In our experience, even where the tax managers in an organization may want to implement a technology centered tax function, they still need to overcome one of the biggest inhibitors to any change, and that is the need to have a valid business case to support any investment decision.

In this section of our publication, we examine some of the key aspects to building a successful business case for change. And the process for building any business case for change is really no different from any normal budgetary process. The numbers need to add up.

Consider the following two examples:

The tax leader at Organization A learns about a new tax technology solution being provided by a third party software provider. He examines the costs and submits a request to buy the technology solution at a total cost of US$1 million. The tax leader says it will make his job more efficient and will help him in preparing tax compliance returns. The tax leader puts this proposition to the CFO but is rejected.

Now consider the position of a tax leader at Organization B, who learns about the same tax technology solution. He examines the costs in some detail, understands the different ‘purchase’ options available — from an outright purchase, to a periodic license, to full outsourcing of the tax compliance process. He concludes from his assessment that a 3-year license period most likely represents the effective life of the solution. He assesses the extent of man hours that the solution will save and the consequential flow on impact to costs. He then approaches the CFO with a proposition around deploying the tax technology solution in exchange for a reduction in headcount in the compliance function (to be achieved through natural attrition). The outcome of the proposition is a net cost saving, and this is even before factoring in the benefits of greater accuracy. To help to manage any unexpected problems or risks in deploying the solution, the tax leader also negotiates an obligation-free trial period for deploying the tax technology solution. Not surprisingly, the CFO accepts the proposition.

Transforming the tax function through technology

What these examples highlight is that the same tax technology solution, when proposed in two different ways but for the same purpose, may give rise to two very different outcomes. The outcome of any proposal is very much a function of how it is positioned within the business, and the ability to present a business case in a persuasive way to stakeholders.

While this example may be overly simplistic, in the real world there may be other more complex factors that can be used to support any business case for change. Fundamentally though, the task is always the same — it is around aligning the benefits from deploying the tax technology solution with your organization’s overall strategy and objectives, and this may mean pitching any solution as fulfilling objectives such as:

  • providing stronger governance and controls, which is especially important in organizations that may have recently been subject to adverse audit outcomes, or self-reporting of unexpected liabilities
  • providing cost savings or efficiency gains to the organization, through reductions in headcount, overcoming manual processes or freeing up resources to focus on high value added activities
  • meeting new compliance challenges, which may be as diverse as country-by-country reporting, new R&D incentives or even an organization’s internal audit requirements to enhance controls— moves to adopt greater real-time reporting, which may necessitate investments in insights-based solutions to monitor data reporting
  • measurement of tax function performance (or even individual performance) through Key Performance Indicators (KPIs) aligned with the successful deployment of value creating tax technology solutions.

In addition to aligning tax technology investment decisions with overall business strategies and objectives, consider a few tips that may help to get investment decisions ‘over the line’, such as:

  • Do you really need to buy it? For many organizations, large capital investments may be subject to greater oversight and control, as compared with periodic expenditure. Software-as-a-Service (SaaS) based solutions may help to bridge that gap.
  • Do you really know the cost or value to the organization? In the above example, the savvy tax manager was able to successfully deploy the tax technology solution initially on a trial basis, which can help to validate and quantify the potential benefits to the organization before committing to a longer-term investment decision.
  • Whose budget should the investment come from? While the cost of tax compliance solutions would logically fall within the tax budget, solutions providing insights to particular aspects of your business operations, such as an R&D technology solution, may reasonably have their costs met by other parts of the business. Likewise, infrastructure, accessories or components may serve many parts of the organization and therefore their costs allocated accordingly.
  • Can you get some quick ‘wins’? Tax technology solutions such as certain data and analytics solutions can initially be deployed to find tax savings, which in turn justify the costs of deploying the technology solution.

The flipside is to recognize potential ‘traps’ or hazards along the way. For example, consider how to manage key risks in deploying tax technology solutions, such as:

  • the risk of premature redundancy — that is, the risk that the technology solution or even the tax problem the technology is seeking to solve may become redundant earlier than anticipated. Access to regular updates as part of a solution package should be seriously considered
  • the need for maintenance and repairs — all technology solutions require regular repairs and maintenance and this should be packaged into any budget request
  • the risk of cost overruns or delays in deployment — the tendency for many IT-related projects to be subject to cost overruns or delays is very real, and the same is true with tax technology deployment. Project managing this is critical, and so too is the need for input and ‘ownership’ by your IT specialists.

While all of these aligning features, tips and traps should form part of your business case for investment in tax technology, it is worthwhile to quickly summarize the key components of any business case. They are:

  1. What is the specific request you are making, and the context in which you are making it?
  2. What are the objectives in deploying this tax technology solution, and how do they align with both your broader tax function goals and your organization’s overall objectives?
  3. What value or benefits will this deliver for the organization? Consider short-term versus long-term, and financial versus non-financial benefits.
  4. How will the tax technology be deployed, what is the timeline including key milestones, what is the allocation of responsibilities, what are the key risks, the dependencies, etc.?
  5. What are the other available alternatives to deploying this technology solution, and how do they stack up on a comparative basis?
  6. What other similar organizations are deploying this technology and what has been their experience?
  7. How will success be measured, and are there ways to mitigate investment risks?

Finally, and perhaps most fundamentally, any investment in tax technology solutions needs to be aligned with the objectives of the business, and it must serve the business. For example, consider how the deployment of any tax technology solution aligns with your organization’s broader risk tolerance, or how it aligns with your organization’s governance procedures.

6  ‘How to ensure Australia thrives when the robots come,’ Peter Hartcher, Sydney Morning Herald, 30 September 2017, smh.com.au/comment/how-to-ensureaustraliathrives-when-the-robots-come-20170929-gyrgr9.html


7  ‘How to ensure Australia thrives when the robots come,’ Peter Hartcher, Sydney Morning Herald, 30 September 2017, smh.com.au/comment/how-to-ensureaustraliathrives-when-the-robots-come-20170929-gyrgr9.html


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