November 15, 2021
Thomson Reuters 2021 Tax Technology Report Illuminates “Burning Platform” Syndrome for Corporate Tax Departments; Ripple Effect of Tax Burden on Business Productivity and Profits
Mounting Government Pressure and Liabilities Drive New Strategies to Meet Compliance Across Industries and Jurisdictions
DALLAS and NASHVILLE, November 15, 2021 – Today, Thomson Reuters released its inaugural 2021 Tax Technology Report, Indirect Taxes – Much More than Just a Process, illuminating how the growth of indirect taxes is impacting compliance, operational efficiencies and overall revenues across the global business landscape. A striking 80% of global tax managers reported significant challenges around indirect tax compliance, shining a spotlight on the increasing burden of taxes on businesses as governments seek to raise additional revenues in the wake of COVID-19. Report findings and commensurate strategies were compiled based on responses from over 800 international corporate tax departments from the global Thomson Reuters corporate customer-base in more than 200 jurisdictions. Further analysis was conducted based on in-depth interviews with over 30 global tax directors from large corporate tax departments.
As a proportion of the overall tax take, sales taxes have risen to an average of between 25% - 35% across OECD countries, the nations that constitute the majority of the global nominal GDP. Driving the report’s focus is the increasing tax burden on businesses to collect taxes on behalf of the government faster, more efficiently and with stricter penalties for those not in compliance. “Tax authorities are becoming more aggressive so there are challenges we need to address. The compliance burden is increasing worldwide, so how do we mitigate that burden?” commented one survey participant. Unfortunately, businesses are often relegated to wait until they hit the point of the “burning platform,” or compliance failures, before they can garner the necessary internal support and investment to proactively manage the increasing burden on corporate tax departments.
“The burden of keeping up with tax complexities has never been as acute as it is today, as is the cost for errors born from constantly evolving regulations,” said Sunil Pandita, president of Corporates for Thomson Reuters. “As national and local governments are looking to increase revenues to counteract staggering losses from the COVID-19 pandemic, tax teams are saddled with the burden of collections, while also battling ambiguous guidance, outdated legacy systems and poor data. The good news is tax teams are also adding greater value than ever before: maximizing revenue, predicting cash flow models, and providing visibility across the organization. More than ever, tax professionals need smart strategies and tools to mitigate risk and add deep strategic value.”
The report highlights the catch-22 facing corporate tax departments today: risk severe penalties for late or underreported taxes, or jeopardize customer loyalty and cash flow through overestimates. This predicament underscores the need for corporate compliance strategies that guarantee speed, efficiency and unfailing accuracy. Companies must also ensure this compliance while battling ambiguous jurisdictional guidance, legacy systems and poor historic data-gathering techniques. Indirect tax “is a very fast-changing area of taxation,” comments one U.S corporate tax executive. “States are always finding new ways to pull more taxpayers into the tax rolls. Once a state has an idea that seems to work, you can expect the other states to do something similar.”
The 2021 Tax Technology Report, Indirect Taxes also identifies a significant area of opportunity for corporate tax departments. As federal and state governments seek to strengthen fiscal health post-pandemic, while also avoiding levying more politically-sensitive income taxes or stricter tariffs on goods and services, indirect tax plays an increasingly important role. The upside to this environment is better data and visibility, paving the way for corporate tax departments to take a more strategic business role across the organization.
Additional Findings from the Report Include:
Fiscal Fears Plaguing Tax Departments: The Three C’s
Calculations, Collections and Compliance are three forces keeping tax managers up at night.
- Tax departments report growing fears not only about monies due, but the pace and scale at which taxes are calculated and collected – speed and efficiency have become paramount to compliance success.
- One-quarter (25%) of the tax directors interviewed highlighted the impact of e-commerce and digital products, especially in states where businesses do not have a physical presence, as areas of concern. This is exacerbated by the selling of products and services via online marketplaces, adding further complications as firms have to decide which legal or regional entity to use on a global e-marketplace.
- Tax departments faced with multiple legacy systems report ‘cleaning up the data before it enters the tax process’ as a primary pain point. One remarked that the team, “spends too much time checking spreadsheets and handling data, not interpreting it.” Another aptly commented, “the tax engine is only as good as the data that comes into it.”
- Companies experiencing significant growth (via acquisitions in new jurisdictions or expansion into new markets) are challenged with staying abreast of unique regulations or guidance to avoid tough penalties for late or inaccurate filing.
Global Growth Creates Indirect Tax Quagmire
Tax fears are directly tied to the local and global markets in which businesses operate. The paramount challenge for global corporations is the multiple unique national regulations with which to comply; US respondents highlighted the fast-changing state regulations as a significant challenge.
- Within the U.S., respondents repeatedly mentioned specific key states, including oft-cited Colorado and Alaska, as sources of anxiety due to the complexity of their rules.
- Several countries were regularly cited by respondents as being particularly challenging:
- Brazil, due to its multiple layers of indirect tax regulations at federal, state and municipal levels, with each of the 26 Brazilian states having unique legislation. Penalties in Brazil were also very high: up to 150% for non-compliance.
- China was also frequently referenced as “being quite troublesome,” as were India and Russia.
Automate to Extrapolate
Corporate tax departments are increasingly looking toward automation to achieve two crucial benefits: minimize the risk of human error, and save time cross-checking and manipulating antiquated spreadsheets.
- The majority of respondents reported the use of some form of IDT software, with varied use cases and the full extent to which the software was utilized.
- Overwhelmingly, survey respondents indicated the need for solutions that are user-friendly, require a limited number of steps to gather key data, and make sense of complexities and peculiarities of their businesses without requiring excessive customization.
The Upside: Increased Burden Drives Increased Influence
Tax teams are adding greater value across the organization, taking their roles far beyond crunching numbers, avoiding penalties, and maximizing reclaims. Respondents commented on a desire to move from pure compliance into a more strategic role, with proactive management across business functions to “do better analysis to find the root cause of discrepancies and fix it (sic) at the source.”
This new-normal is facilitating strategic data-driven wisdom, helping finance teams determine new cash flow models, providing greater visibility around customer behavior and the supply chain, gleaning unique insights to support due diligence around acquisitions and new ventures, creating better pricing, and improving relations with government entities and authorities.
- Survey respondents reported deep involvement in strategic discussions around acquisitions, new product launches and market entry, demonstrating financial value and strategic insights gained from data.
- Respondents who had a desire to move their function to a more value-added role noted viewing technology as fundamental to improving their work.
- Corporate tax departments also referenced the benefit of better understanding government functions and the data they are collecting, enabling them to stay one step ahead of authorities at all times.
Report Learnings and Recommendations for Tax Departments Include:
- Streamline data into a single ERP ‘source of truth.’
- Elevate the value of proactive compliance and support internally, ensuring there is tax expertise in-house to avoid fighting for resources, as well as senior advocates in both finance and IT.
- Integrating better technology, automation and digitalization to drive trust in calculations from authorities, resulting in greater control over tax processes and reporting.
As governments continue to seek ways to extract additional dollars without angering and losing voters, indirect tax presents an opportunity for better business oversight and new revenue streams. In order to realize the full benefits and avoid peril, tax departments must consider investing in new technologies early to avoid dousing a ‘burning platform’ before it incinerates productivity and profits.
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