Three questions to ask
- What are leading organizations doing to better prepare for the potential impacts of a variety of policy outcomes?
- How are organizations shifting resources and skills development to address the complexity in today’s dynamic tax environment?
- How can data and technology help drive an organization’s tax department transformation?
Transform for now or for what’s next? Perspectives on improving compliance readiness in the tax function
Faced with increasing tax complexity, new data and technology requirements, and challenges finding and retaining talent, companies now more than ever need to be thinking about updating their corporate tax compliance functions. In this series, we examine an evolving tax compliance environment that rewards agility, new skill sets and the ability to do more with less. In each article, we examine different factors affecting today’s tax departments and provide insights on how they can transform and thrive in the tax compliance landscape of today and tomorrow. This first article in the series focuses on regulatory, legislative and market complexities affecting tax compliance and how leading organizations are responding.
In a world marked by unpredictable tax policy shifts and an unprecedented number of new regulations, corporate tax compliance has become integral to a company’s broader strategy and risk management. Tax policy uncertainty at the global, national and state levels and the fast pace of legislative and regulatory change mean compliance departments must be prepared to pivot quickly and provide meaningful insights using a wider range of skills and tools.
Frequent updates to forms and processes, greater complexity and new data requirements make this a transformative period for the tax compliance function in which agility is essential. At the same time, companies operating in an unpredictable economy and an inflationary environment with higher borrowing costs are seeking ways to make more efficient use of scarce resources. In some cases, that may mean collaborating with third parties for corporate tax compliance functions. Companies that do not anticipate and adapt to these broad market forces are likely to face greater compliance risks in the future.
Tax policy uncertainty and risk
Growing tax policy uncertainty makes it more important than ever for companies to be able to react quickly to change. In the US, the path for tax legislation has been buffeted by political headwinds that are difficult to predict. Roughly a third of respondents to the 2022 EY Tax and Finance Operations Survey (2022 EY TFO survey) indicated that an inability to identify, evaluate and respond to legislative and regulatory change was the biggest barrier to delivering their tax and finance function’s purpose and vision.
Governments are also becoming more sophisticated in their approach to enforcement, collecting and analyzing data from new required disclosures and sharing that information with each other. In the US, the Inflation Reduction Act of 2022 (IRA), enacted on August 16, 2022, increases IRS funding by $80b over the next 10 years. Of that, $45.6b is earmarked for enforcement, which includes examinations, collections, criminal investigations, legal and litigation support, and digital asset monitoring.
The additional funding may result in more audits of complex partnerships and large corporations. According to the 2021 EY Tax Risk and Controversy Survey, even before this recent funding boost, 53% of tax leaders said they expected greater enforcement in the next three years.
At the global level, the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit-Shifting (BEPS 2.0) initiative is another example of policy uncertainty that companies must navigate. The BEPS project’s Global Anti-Base Erosion (GloBE) rules may present particular compliance challenges for multinational companies. The rules seek to introduce a global minimum effective tax of 15% through an Income Inclusion Rule (IIR) and an Undertaxed Payment Rule (UTPR), and according to a July report of the OECD Secretary General, most countries are planning for the rules’ entry into force in 2024.
Multinational companies should start thinking about whether they will be in scope and, if so, how to prepare for the complex tax reporting and compliance requirements involved, even as interpretive guidance and administrative processes supporting implementation are ongoing. Now is the time to analyze which systems and process modifications may be needed to capture the data that will be required for compliance with these potential new rules, and where they might apply.
At the state level, changes to tax regimes and policies are often adopted more quickly than federal policy changes, adding yet another layer of compliance complexity. As states decouple from federal provisions and respond to the state consequences of the Tax Cuts and Jobs Act (TCJA), companies must contend with more state computations, forms and disclosures. Shifting international tax policies also have state income tax ramifications. Furthermore, states have also taken steps to adapt their tax policies to new ways of working in the wake of the pandemic. All of these trends require dynamic monitoring and add complexity with respect to tax compliance.
Shifting regulatory requirements
New IRS and state reporting requirements are taking up more of companies’ time and budgets, and companies believe this trend will continue to accelerate. According to the results of the 2022 EY TFO survey, 80% of respondents indicated that enhanced tax disclosures or public reporting would increase the tax and finance function’s time spent on governing and reporting to key stakeholders. They face expanded federal computations and reporting, including significant additional international compliance forms resulting from the TCJA regulations.
Environmental, social and governance (ESG) considerations are also becoming an increasingly important element of tax compliance. In the 2022 EY TFO survey, 63% of respondents indicated climate and environmental issues would increase the tax and finance function’s time spent on governing and reporting to key stakeholders.
What we are seeing
The complexity of managing increased reporting burdens puts pressure on the tax compliance department. Several developments are driving this complexity, including:
- Increased effort and coordination needed to complete today’s tax compliance activities
- Tax authorities’ use of digital tools and advanced analytics to complete compliance reviews
- Increased data sharing across tax jurisdictions
- Greater standardization with an increased emphasis on consistent data across all tax return flows, including federal, international and state filings
These trends are increasing workloads and costs for companies.
“Our clients are telling us they have to spend significantly more time to achieve compliance, making it even more difficult to focus resources and energy on higher-value activities,” said Jill Schwieterman, EY Americas Global Compliance and Reporting Leader.
According to the 2022 EY TFO survey, 60% of respondents said complying with emerging digital tax filing requirements has increased the workload of their tax and finance function, while 59% said it has increased the cost of running the tax and finance function, and 59% said it has increased the organization’s risk profile.
There are ways companies can respond to the complexity of today’s tax world, building greater agility into their tax compliance model.
“Companies that are proactive and willing to re-examine long-standing practices and processes will be rewarded with a compliance function that is better able to withstand the uncertainties of the future,” Schwieterman said.
Leading companies are employing a number of approaches to transform their tax compliance function. These include:
-Tax policy engagement
-A focus on high-value activities
-Outsourcing or co-sourcing arrangements
-Use of shared service centers and lower-cost jurisdictions
By Christina Bowers Courtesy EY.
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