Including Tax within the Finance Transformation – the CFO’s imperative
Including tax in a finance transformation brings numerous benefits for the tax team; but how does it benefit the CFO and wider finance function? What benefits will accrue to stakeholders outside of the corporate tax department?
A great deal has been said and written for Heads of Tax about the benefits they can derive by ‘getting a seat at the table’ in a finance transformation. CFO’s also generally know – at least intellectually – that they should include tax, but how and why they should go about this is less clear. Notwithstanding the fact that many of the objectives of Heads of Tax and CFOs will be aligned, this article aims to establish and make clear the incremental benefits that a CFO and finance function can expect in return for expanding the project to include tax. These include:
- significantly increased transparency over tax numbers and insights into the drivers of tax outcomes;
- improved extensibility or readiness for handling and automating regulation changes and future compliance obligations;
- improved governance and control and thus less risk of non-compliance;
- significant reductions in manual processes and overheads and a corresponding decrease in the total cost of complying;
- improved operational sustainability; and
- lastly, but perhaps most importantly, simply making work-life easier and less stressful when it comes to managing and interacting with tax.
In addition to gaining a deeper understanding and appreciation of these potential benefits, we also explore what the CFO and finance team can practically do to help the tax team through the transformation process and ensure that these desired outcomes are achieved. To make a meaningful impact on the success of tax in the transformation process, a CFO should be asking upfront:
- Is our existing tax governance framework fit for purpose? If so, is it right to simply ‘lift and shift’ into our new ERP system, or should we take this opportunity to reconsider and reset?
- What is our position towards information sharing with regulators?
- What is our position towards information sharing with the general public and our customers?
- With respect to our desired approach on information sharing and governance, how do I manage reputational risks associated with paying our ‘fair share’ of tax in every country that we operate in?
- What specifically must we prepare for now, and what else do we feel we should prepare for in the future?
Making conscious decisions on these matters will not only provide clearly defined and measurable success criteria, but it will also inform many other elements of the transformation process. This will range from key design decisions, to resourcing, product selection, and of course implementation and testing activities. This in turn will allow for better and more detailed planning up-front and thus minimise the risk of budget and timeline overruns.
What’s the value of bringing Tax within Finance Transformation?
One of the major, and perhaps easiest to achieve benefits of properly integrating tax processes in a finance transformation, is significantly improved transparency and insights into tax data for the CFO and finance team. Traditionally, finance teams provide raw data to tax, and get back tax journals, tax note disclosures and some summarised working papers. In theory, cloud based tax engines have made the detailed calculations and logic more accessible, but the complexity of these systems, overlaid with different user interfaces and experiences has presented a practical barrier that has prevented tax data being democratised as it should.
Putting more of the end-to-end tax process either in, or closely integrated with the ERP solves this problem; a seamless and homogenous user experience will give finance far greater access to tax data insights. Just as it will minimise time spent by finance in providing and explaining data, it will facilitate more of a finance self-serve and most critically, save time towards the end of close processes, when it is otherwise lost going back and forth on the tax implications of each late adjustment.
Furthermore, using an integrated approach means that tax can also leverage the finance team’s analytics and insights. For example, having tax data feed directly into SAP Analytics Cloud puts tax data where it should be, in the same context as all other financial data. Rather than separate visualisations and reports for finance, then tax, a single ‘CFO Pack’ of reports can be updated in real time. It also becomes a ‘single source of truth’ where users can not only see calculated tax results, but also see results of control tests and non-compliance risks from SAP Tax Compliance, as well as the status of all external reporting from SAP Document and Reporting Compliance. This will enhance the efficacy of the analytics overall and facilitate better data driven decision making for both tax and finance. This is becoming ever more critical as the importance of tax transparency rises. Media outlets are increasingly reporting on companies that are not perceived to be paying their fair share of tax, often in simplistic terms that can have a negative impact on a company’s reputation. Real-time access to tax data, presented in a visually descriptive way can ensure a CFO is on the front foot in terms of messaging on tax contributions; not only for the media and the public, but also for regulators, governments and other business clients who are increasingly sensitive about the ESG credentials of their supply chain.
Using a tax sensitive Chart of Accounts, a tax non-leading ledger, and custom tax fields will enable basic tax calculations to be completed within SAP S/4HANA. This can potentially eliminate the need for off-system processing and cut-out the time taken to export data, perform calculations and then re-import it. Going one step further, complex tax provision processes can be automated by configuring SAP Profitability and Performance Management, which integrates natively with the SAP S/4HANA general ledger. Alternatively, PwC’s tax reporting system, Tax Automate, can also integrate with SAP S/4HANA via API. The combination of proper integration and advanced automation capability means that with the right processes in place, tax teams can turn-around tax journals in a single day. This gives finance, the CFO, and auditors the maximum time possible to deeply analyse and thoroughly understand tax results.
In addition to faster reporting and better insights into tax data, bringing tax into the ERP also allows tax to leverage the inherent extensibility of these tools. Revenue authorities around the world are trending towards mandatory real-time electronic filing and tax based electronic invoicing and we expect most OECD countries to adopt forms of this in the coming years. This means tax calculations, particularly VAT and GST, need to be calculated correctly in real time, at the point transactions are posted, so that the right amount of tax is included on invoices and sent in data files to the regulator. Businesses will not have the comparative luxury of 21 days after month end to adjust and analyse GST and VAT data before it gets reported to the revenue authority. If tax is left out of the ERP transformation, then the roll-out of real-time electronic filing will mean an additional point solution in every jurisdiction. Not only will this cost more over the long term, but it will take up more of the finance team’s time every time a tool needs to be integrated or upgraded.
To deal with these current and emerging requirements, an organisation may decide to implement automated tax calculation using native SAP capability enhanced by tax determination engines to calculate GST, VAT and some withholding taxes accurately and automatically, at the transaction source. Businesses are also looking at tools like SAP Document and Reporting Compliance, which is designed to handle and streamline all types of mandates, from electronic business documents to statutory reporting in multiple jurisdictions around the world. These types of solutions will significantly reduce the need for point solutions to manage tax calculations and reporting and give the CFO and the board confidence that the finance team is as prepared as possible for today’s compliance requirements as well as the next wave of mandatory tax reporting. After all, cloud-based ERP transformations are all about planning for the medium to long term, as much as they are about meeting today’s requirements. It also minimises the overall time that the CFO will need to spend on decisions regarding the systems aspects of new regulations, as a single decision taken early on, will eliminate the need for multiple decisions down the track. Such standardisation commoditises tax operations, improves scalability and makes tax operations more sustainable because more tasks can be owned and completed by finance.
Another revenue authority trend on the radar of CFOs is the implementation of larger penalties for non-compliance. For example, in Australia, an entity classified as a ‘Significant Global Entity’ can face penalties of up to $575,000 for any missed filing, including monthly indirect tax filings. These penalties reflect a broader shift towards revenue authorities expecting more from corporate taxpayers, especially with the adoption of the OECD’s concept of ‘Justified Trust’. Using Australia as an example again, the concept of Justified Trust has led to the Australian Tax Office’s ‘streamlined assurance review’ program and their publication of specific board and management level controls that they expect to be incorporated into a tax governance control framework. Leveraging a suite of sophisticated SAP tools for tax processes can go a long way towards showing that such controls are in place, particularly in respect of ensuring sufficient capacity and capability, ensuring information technology controls, and assuring the flow of information from accounting records. SAP’s Tax Compliance solution is built specifically for this purpose, and allows you to check 100% of transactions in near real-time and streamline end-to-end remediation so you can reduce your reliance on downstream exception testing.
Revenue authorities are explicitly noting that positive assurance of such controls will minimise their tax audit activity in future. Extending the finance transformation to incorporate tax and leverage the finance system’s controls will again put more time back in the day for CFOs who are avoiding costly and time-consuming tax audits. It also frees up space on the agenda for CFOs and Heads of Tax to focus on more strategic initiatives, rather than tax audit status updates.
If done right, a CFO can also expect to benefit from significant cost savings by including tax in the ERP transformation process. Just as savings can be made by renovating an entire house at once rather than room by room, so too an organisation can save via harmoniously revamping both finance and tax process in an integrated manner. In addition to upfront savings on transformation costs, there should also be a large reduction in manual processes, overheads and potentially software licence costs, resulting in a lower ongoing cost of the tax department. At a minimum it can noticeably slow the growth in the cost of a tax department for a large organisation that needs to stay compliant with ever-growing regulations in multiple countries around the world.
Lastly, there are worthwhile qualitative benefits to be gained. Heads of Tax and tax managers often know what the CFO and finance managers want but have little time to produce it after finalising calculations, journals, and tax note disclosures. Giving them the opportunity to leverage these tools and cut down on manual processes will give them time to work on those additional, ‘nice to have’ deliverables that make it easier to understand and analyse tax outcomes and their impact on overall financial performance. Harmonised tax and finance processes can also bridge the gap between the two departments, reducing friction and helping to realise shared goals and objectives.
How to approach Tax inclusive Finance Transformation for better outcomes
While choosing the right tools and leveraging their functionality to the fullest extent possible is of course a key part of the equation, a broad change management strategy must also be prioritised and applied to all transformation workstreams. To ensure completeness of business and functional requirements, it is also critically important to canvass all stakeholders, including finance, tax and IT teams to get a unified view on needs and challenges. This will ensure alignment on outcomes and a smooth transition with early effectiveness.
A harmonised approach towards end-to-end periodic finance processes is also key to ensuring that organisational goals are met. For example, when it comes to achieving a true continuous close process, there will be a natural trade-off between speed of turnaround and accuracy, and opinions on which is more important vary greatly depending on a person’s role, experience and KPIs. Making a clear and conscious decision on the speed/accuracy spectrum during design phase will keep everyone happier over the longer term and assures that there is clarity on expected outcomes.
Lastly, it is clear that data is at the core of finance transformation and successful outcomes do depend on accurate and high-quality data being available on demand to those who need it. Depending on the size of your business and its growth trajectory it may be worthwhile developing a comprehensive data strategy to provide guiding principles throughout the transformation process and beyond. With the right mix of data governance, analytics, and compliance automation tools, you can be assured of better data driven decisions throughout the organisation.
Combining elements of the best technologies with a cohesive finance and tax transformation approach will ensure your tax and finance functions execute in harmony, resulting in better outcomes for the CFO and the entire organisation.
If your organisation is planning an ERP upgrade or finance transformation and you’re yet to think through the tax requirements and automation opportunities, please contact any one of us on the details below to start a conversation.
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