In the coming years, tax functions will face significant challenges simultaneously: the changing supervisory environment and the digital transformation of the tax function. As the world of tax changes, we will see many new regulations from local authorities. Each authority will have different expectations of the companies that they supervise: for some, taxpayers will be expected to be able to provide data on a real-time basis, whilst others will require detailed analytics to be conducted before they accept any tax related submissions. With all of these external factors pulling companies in different directions, it can be difficult to determine where to invest.
It is clear that you cannot focus in all areas at once, so you need to prioritise.
We believe that the first step to prioritising investment is to understand how authorities in your main jurisdictions are developing, and how your current position compares to them. This is the starting point for a tax disruption risk assessment, modelled on the original COSO framework for organisational risk management and visualised in the format of a cube.
The tax disruption risk framework (tax disruption cube)
The main goal of the tax disruption risk framework (tax disruption cube) is to strategically determine where and when to invest in digital capabilities, addressing the prioritisation and resource allocation problem faced by all management teams.
In our experience, areas of digital transformation within businesses are often defined by employees tweaking existing systems or by searching for politically acceptable ‘quick wins’. Such changes typically focus on a very particular field, trying to improve internal capabilities, free up workforce or simply reduce costs. The novel and important risks that digital tax administrations pose are often overlooked or underestimated with this approach. This has prompted us to develop the tax disruption cube to help you monitor these novel risks in a simple manner and plan your digitalisation efforts throughout the organisation.
Like a sound weather forecast, it’s intended to prepare you for the likely future in the best way possible. Although a weather forecast is never perfect, in most cases it helps you avoid the worst effects of the weather.
As we are convinced that prevailing weather conditions are going to change, our model compares the progress of tax administrations around the world to your own planned digital capabilities. By differentiating for tax sub-type, area of activity and jurisdiction, the cube visualises where next to invest.
The tax disruption risk framework should put you in a position where you can see more clearly and prepare for the new world of tax.
Assessing your position
To assess your position, you need to think about what stage you are at on the tax disruption maturity model:
To help you think about how your company fits into this model, think about how you would answer the following questions:
Access to Data
- How do you collect financial and other structured data? Do you choose and extract the relevant data manually from ERP or similar systems?
- How do you collect qualitative business information? Is it gathered by interviews and e-mails or a structured questionnaire?
- Is qualitative business data digitised?
- Is there a significant post process required to prepare the data?
- Are information extracted and stored automatically? To what extent? What kind of information?
- Do you track, monitor and visualise the information flows to the authorities?
- Do you monitor and evaluate the potentially tax-relevant data that is publicly available?
- Do you try to monitor the information flows from third parties to the authorities?
- Do you operate a global, centralised tax data pool to compare jurisdictions?
- Do you control the direct data flows to the authorities?
Tax Return Preparation
- How are you preparing your corporate tax returns? Do you compile them manually?
- Are certain tasks of the process automated, for example with the help of robotic process automation software ("RPA")?
- Do you employ natural language processing or similar techniques?
- Are tax returns prepared automatically and only reviewed by the tax function?
- Are you only able to control the outcome, because the tax authority took ownership of the process?
Risk Management Analytics
- How do you analyse the risk and likelihood of being audited?
- How do you store, monitor and control identified tax risks?
- Is your tax team enhanced by analytics software focused on tax risk management?
- What kind of analytics do you use? Is it mainly descriptive? Do you deploy machine learning to understand the implications of more detailed and varied datasets?
- Does it have predictive capabilities?
- Do you promote a coordinated and uniform strategy to Tax Disruption Risk Management in your company?
- What kind and what amount of data is fed into your risk management.
- Is the (digital) tax perspective integrated in all business processes and systems automatically?
Reporting
- How do you organise the tax reporting in your company?
- Do you employ country-specific tax teams contributing to the report for each jurisdiction individually?
- Do you have oversight of all the information being shared with the authorities worldwide?
- How do you monitor the data being shared with authorities and other relevant third parties?
- How centralised is your tax function operating model?
- Is there a globally consistent tax narrative being developed and taken into account?
Response to tax authority audit
- How do you respond to tax authority’s enquiries?
- How do you assess the authority’s conclusions?
- Do tax experts review tax authority assessments manually? Are they supported by analytics software and internal data?
- Are you able to respond on the same data-driven level as the authorities are acting?
- In responding, do you consider tax authority decisions from other jurisdictions?
- Do you employ a comprehensive data model to predict and evaluate the likely ris authority outcome?
You would like to understand more about how you compare?
Get in touch with one of our specialists.
