Introduction
The impact of taxation on business is becoming increasingly complex, caused by a mix of external and internal influences – including the constantly evolving nature of business models, changing tax regulations and evolving tax authority initiatives. The complexity of the impact creates a challenge for business and tax leaders – how does the organisation's tax function continue to stay ahead of the changing tax environment to ensure consistent delivery of value to all stakeholders?
Clearly, in order to respond to the changes, the tax function MUST pivot from the traditional operating model to a dynamic tax operating model. As Susie Cooke, Global Tax Transformation Services Leader at KPMG, puts it: "Tax teams and Heads of Tax are increasingly finding that the status quo just can't continue to meet every single demand and requirement, while at the same time delivering value to stakeholders...."
The tax operating model is the summation of how the tax function creates value for the business – from the development of a tax strategy, tax processes, people, culture, and technology maturity. It describes how the organisation achieves the optimal mix of people, processes, data, technology, and sourcing model for the tax function. Having the right tax operating model is essential as it enables organisations to navigate the complex and dynamic tax landscape with agility and efficiency.
According to statistics published by one of the big four professional services firm, tax departments can save as much as 23% to 31% of their total cost through better employee utilization, process efficiencies, hiring and replacement cost savings, technology, and other synergies accrued from the consolidation of operations to a single service partner.
There is no standard tax operating model.
Since no two business operating models are exactly the same, it is impossible to establish a standard tax operating model for all types of businesses. The tax operating model must be bespoke to each organisation. Factors that influence businesses such as the industry trends, size of operations, cost profile of the business, talent retention levels, level of technology, maturity of the organisation, etc. would have to be considered in designing the optimal tax operating model for each organisation.
We will briefly touch on each of the pillars of the operating model:
- Governance: To have an effective tax operating model, the ultimate responsibility for the tax affairs of the business must rest with the management (the board of directors or C-Suite) of the organisation, not just the tax leaders. The management of the organisation must set the tax vision, approve the tax strategy, and tax policies, and ensure that ongoing oversight is implemented over tax matters. The level of involvement of the management would vary from organisation to organisation, depending on factors like size of business operations, and would leverage heavily on the personnel and technology adopted in the tax function.
- People: The tax operating model requires an appropriate number of personnel with the right mix of skills in the tax function. The number of personnel required would depend on factors like total compliance requirements, extent of tax authority activities on the organisation, level of technology adoption and preferred sourcing model.
- Data: Data is fueling increased tax compliance by regulators. Many tax authorities are adopting technologies for real-time or near-real time extraction of data from operating systems. Therefore, it is important that the tax function has access to and regularly interreacts with the relevant data of the organisation to be able to provide valuable insights and proactively manage tax risk. Data must be digitized with analytics capabilities. It is important to consider the skill requirement of the personnel in the tax function and the technology adopted.
- Technology: Due to emerging trends, the potential of technologies, such as data analytics, robotic process automation, and artificial intelligence, may need to be considered to enhance the tax function. The technology maturity of the tax function must, at the minimum, be at par with the level of maturity of the overall organisation. This would require automation and implementation of technology like workflow tools.
- Tax Processes: This is a consideration of the controls over tax processes and the efficiency and effectiveness of tax work steps. The goal should be to automate or outsource low value repetitive tasks, while choosing the right sourcing model for more complex and high value work. Again, the right mix will depend on factors like the size of the business, tax staff utilization rate and level of technology maturity of the organisation.
- Sourcing model: It is important to consider how tax
processes should be executed in the organisation in the light of
the number and quality of personnel in the tax function, the
technology maturity, and the policies around tax assurance for
management. Based on this evaluation, the organisation can easily
arrive at the type of tasks that should be in-sourced, outsourced,
or co-sourced to efficiency and effectiveness.
- in-sourcing, where the tax or finance team within the organisation will handle all tax-related tasks. This can lead to better integration with the organisation's overall strategy and operation.
- outsourcing, which is the practice of hiring the services of a resolute service provider to perform defined tax activities for the organisation. This can free up internal resources and allow the organisation to focus on its core business activities. A recent survey report published by KPMG projects that over the next five years, there will be a rise in the outsourcing of tax compliance and technology transformation services.
- co-sourcing, which considers the collaboration between the service provider and the internal employees of the organisation.
- Performance measurement: Establishing the right performance measures (KPIs) will drive the desired results and behaviors in the tax function. As the saying goes "What is not measured is not achieved". In our experience, setting the right KPIs will help drive the desired response around the other pillars.
As shown above, the right mix of all these pillars is required to achieve the optimal tax operating model for each organisation.
Conclusion
Companies should consider the above pillars when evaluating their tax operating model. Business leaders needs to identify and implement practical steps required to adapt to the changing tax environment. Some quick wins that would help business along the journey of adapting the optimal tax operating model for the business include:
- Review and update the current tax governance framework of the organisation – develop a tax strategy for the organisation and approve relevant tax policies that will govern how tax is operationalized in the organisation.
- Conduct a gap assessment for the tax function focused on people and skills level, data, and technology adoption. This assessment would indicate the necessary changes in these pillars for the tax function.
- Ensure that all relevant technology solutions being used within the organisations are immediately evaluated for use in the tax function. Automation should also be a key focus are for transition purposes.
- Revamping the performance measurement system for the tax function. Ideally, quantitative KPIs like value of total tax savings should be introduced to drive desired results in other areas.
Ultimately, it is important that organisations align the tax operating model with the overall operating model of the organisation and that of the finance function.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.