Making tax matter again
A recent survey by tax services company Ryan found five key challenges that tax departments must face in order to succeed
Tax departments are facing a new reality as they manage their organisation’s tax function. A perfect storm of external factors, many beyond the organisation’s control, is aligning to drive a unique set of challenges for tax executives. These evolving changes present both risks and opportunities as tax departments seek to manage the increased complexity of regulatory and corporate governance requirements such as Sarbanes- Oxley, as well as rapid globalisation, technology and infrastructure limitations, increased risk, and a lack of resources.
Ryan recently commissioned a study
with CFO Research Services, Inc. (“CFO
Research”) to validate our long-held beliefs
related to the dynamics of a changing tax
environment, formed as a result of our
extensive work with many of our premier
Fortune 1000 clients. The objective of
the study was to determine how each
organisation defined and measured the
success of their tax functions, as well as gain
unique insight into the objectives, challenges,
and dynamics of tax from the perspective
of both senior finance and tax executives.
The resulting data overwhelmingly pointed
to five key challenges that inhibit the tax
department’s ability to be more strategic,
and ultimately more effective.
The study provides deep insight into the alignment issues that tax departments face when understanding and connecting with the objectives of its key stakeholders. Exponentially increased complexity in compliance is presenting a serious challenge for tax departments. While tax executives seek to maintain pace with the changing regulatory requirements and compliance complexities, they struggle with securing the talent and financial resources needed to stay ahead of the growing demands and expectations.
While the impact of each specific challenge varies by organisation, the outcome is often the same. The inability of tax and finance executives to appropriately focus and address these key challenges often results in a preponderance of low-value activities that dominate the resources of the tax department. The tasks associated with managing compliance requirements and resource issues often prevent tax departments from elevating its presence in the organisation to focus on more strategic initiatives.
Tax is Trapped in the Low - Value Loop
An overwhelming majority of tax executives reported that the primary allocations of tax department resources are devoted to compliance, as opposed to planning. As the tax department spends more time on preparing tax returns and record keeping, the time devoted to the more strategic activities such as analysing the tax consequences of business decisions is reduced. As a result, high-value activities are giving way to low-value demands, leading to a focus on the urgent rather than the important, and resulting in the misalignment of priorities and resources that deliver the greatest return on investment.
As more and more tax departments are being forced to focus on what is urgent at the expense of what is important, they become trapped in a low-value loop that decreases the perception of the tax department’s performance and damages their organisational credibility. Tax executives essentially have two choices: do nothing and perpetuate the status quo, or do something to enhance reliability, accuracy, and the overall efficiency of tax through the right alignment of people, processes, and technologies.
Key Challenges Facing Tax Departments
Ryan’s research study points to five key challenges. These are broadly defined as a lack of alignment between tax and the rest of the organisation, the increasing complexities of regulation and globalisation, reduced budget and human resources, managing and mitigating risk, and technology issues related to disparate systems and data integrity. Clearly, the choices organisations make when facing these challenges have significant and lasting effects.
1. Lack of alignment
The study indicates that there is a lack of unity between the tax function, tax executives, finance executives, and those who define the success of tax in the organisation. Senior financial executives continue to rank tax minimisation as a high priority, yet the time that the tax department spends on managing tax liability continues to decrease while compliance demands continue to increase. While seven in 10 tax executives are immersed in compliance activities, a major priority of the finance executives is the strategic initiative of reducing the company’s overall tax liabilities.
2. Increased Requirements and Complexities
As organisational demands and compliance requirements increase, so does the burden on tax executives. In addition to the day-to-day operation of the tax function, tax departments face new developments in tax laws, changes in accounting standards, rapid globalisation, and compliance with Sarbanes-Oxley’s internal control requirements. As a result, increasing regulatory compliance is now a complex burden for many tax executives.
3. Reduced Resources
With fewer qualified resources available in the marketplace, tax executives must seriously consider the implications of maintaining the status quo on their ability to attract and retain top talent. The reality is that talented professionals are drawn to a more dynamic environment and welcome the challenge of contributing to strategic and meaningful activities that provide an opportunity for growth and advancement.
4. Mitigating Risk
Tax departments face the daunting pressure of demanding audit committees and regulatory bodies who demand greater certainty and transparency. To ensure that reporting is timely and accurate, and that the underlying processes are robust, it requires a significantly greater investment of resources from an already overburdened tax group. Given the consequences of inaccurate financial reporting, uncompromising quality and success in this area is expected. The markets stand ready to punish an organisation’s stock price at the first hint of restated earnings. With this type of exposure, nothing short of excellence in the tax department’s ability to mitigate business risk is acceptable. However, only a small minority of the finance executives surveyed actually believe that their tax function is performing “excellent” in mitigating financial risks.
5. Data Management
Current technology, combined with best practices in process improvement, can dramatically upgrade the tax department’s ability to avoid tax-related errors in financial statements and facilitate the reallocation of resources toward higher value strategic tax planning activities. However, CFO Research data indicate that decentralised, redundant, and unreliable data continue to inhibit the ability of tax professionals to operate at peak efficiency and effectiveness. Additionally, existing financial system limitations beyond the direct responsibility of the tax executive seem to be compounding the challenges.
Conclusion
Tax executives must find a way to leverage experience and best practices to transform their function into a Tax Competency Centre. Ryan has a proven track record for maximising our clients’ overall tax performance.
We provide innovative solutions for addressing the issues and errors that we identify, creating opportunities to improve efficiency, become more strategic, and deliver outstanding value to shareholders. We guide our clients through a total performance assessment of their current processes relative to their desired objectives and stakeholder expectations.
Through benchmarking current performance, identifying best practices in relation to peer and historical performance, and measuring the delta between reality and the department’s potential, we help clients develop a clear roadmap for transformation. Armed with this vision, tax executives are poised to develop an effective business case that outlines and justifies financial and human resource needs, and the anticipated return on investment.
For more information, contact:
Michael Camburn, Managing Director of the Ryan London office
Tel: +44 (0) 207 872 5635 - Website: www.ryanco.com
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