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Tax compliance presents an increasing challenge for companies despite technology convergence and an increasing use of automation.
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How to find the tax compliance model that fits
09 January 2023
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12 minute read
At PwC we are often asked by clients, “How is everyone else responding to the increased volume and complexity of tax compliance reporting obligations?”
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We’re hearing from tax professionals that for most tax functions:
- Reporting requirements are getting more complex, locally and globally
- Tax department budgets are not increasing
- Technology is used sporadically, at best, in most tax departments
- ATO filing deadlines are not extending
- ATO expectations on governance are increasing, as is their focus on review and assurance
- Many corporates are spending big on transformation and enterprise resource planning (ERP) cloud migration, but is tax involved?
When I started my career, a corporate tax return was about four pages. Now, most are over 40 pages. You could be forgiven for thinking that we’ve been on a long slow walk back from a self-assessment regime. Layer on a multitude of new reporting requirements and the likely introduction of e-invoicing and real-time reporting, and the challenge to tax functions remains how to ensure all obligations are met on time while retaining the capacity to be a strategic partner to the business.
And that’s before the arrival of the greatest data challenge ever faced by tax departments: the OECD’s Pillar 2 global minimum tax rules.
These challenges are not going away in a hurry.
Decide on your model, then build compliance practices
The first thing to be clear about is the target operating model for your tax function. They are all different. What are you good at that you should keep doing? How is your company’s technology and operating model changing? How should you adapt your team, and what is best to outsource to others?
We observe four key sourcing/operating models used in practice, two of these emerging recently.
1. Insourcing
Insourcing involves the tax department undertaking all of the compliance obligation in-house. It can be well suited for larger tax teams and brings great control, but often involves little or unsophisticated technology, unless licensed from a third party.
Even with an insourced model, the ATO expects more external review of governance controls and testing over tax processes. This is often the first thing the ATO asks to see when commencing a review. What do you have in place and what is your three-year roadmap to extend and improve it?
2. Outsourcing
Covering everything on the spectrum from co-source to outsource to managed services, this is a wide field of play. It may involve as little as a high-level review of an FBT return that was prepared in-house, to an outsource of a corporate tax return preparation, or even full accountability of the end-to-end process in a managed service.
Where it is best for you to play across all of your obligations will depend on your target operating model.
A couple of key things to keep in mind:
- To avoid important obligations falling through the cracks, all processes should be connected.
- Many are consolidating external advisers to bring more connectedness to reporting responsibilities.
- If you are using email as an integral part of your process, you probably already have (or will have) a governance gap that leads to inefficiencies at best, and failures at worst.
- Outsourcing can be efficient as the provider may be able to leverage lower costs, specialist labour and more technology. It also relieves tax departments of employee managerial responsibilities like hiring, technical training and performance management.
3. Hybrid
Insource or outsource have been the traditional models for tax compliance, but the bright line around this is changing. Corporations are now investing heavily in transformative technology as they migrate to cloud ERP platforms. Some are also implementing third-party tools seeking more automation across certain taxes (see more below).
Where this occurs, the sourcing/operating model for tax functions is being turned upside down. The question they pose is, “How can you assist us by leveraging our own broader technology investments, including being agile to change your delivery model to our company as we evolve?”
This requires new ways of thinking. It’s more about systems configuration, ensuring the constant updating of content such as rules and rates, governance over data flows to third-party tools, and more analytics to understand trends and look for outliers.
All of this still needs to be connected in a way that those responsible for tax reporting gain comfort over positions taken and returns filed.
4. On system
We use this term to describe a future state where an organisation has decided to migrate to ERP cloud software. This is becoming prolific particularly in the US and UK, which are a few years ahead of Australia. However, some Australian companies have now started to explore on system opportunities for GST, withholding tax, fixed assets, operational transfer pricing, tax provision and tax return calculation as their companies migrate to the cloud. This could be the ultimate form of really “connected compliance”.
Making the connection, sourcing and automation for different tax areas
If you are not about to embark on an ERP cloud migration, what are common ways to increase your level of governance and automation across corporate income tax, GST, transfer pricing and FBT? Below are some observations based on our work across a wide sector of Australian companies.
One final thing to mention. Perhaps the largest governance issue we encounter is the wide use of Excel, especially when adapted or extended from the provision to return process.
Of course, there is nothing wrong with Excel in itself. It’s a robust, well-tested and flexible tool.
However, the issues start to emerge where companies use an Excel based “tax pack”, likely designed years ago by someone else, either globally or locally for provision reporting purposes, and this is then bridged to a local tax return calculation tool.
In such cases, we often find many shortcuts are taken, the “whole story” is only found in combining the two data sets, there are many mini calcs and “cut and paste” jobs from other systems and numbers can be hard coded, particularly in the tax return data set. No doubt the key preparer is fully across both sets of data at the time the return is prepared. No doubt. But if that person leaves, and the next person leaves, it becomes a process of following whatever was done last year. This is a big risk. And if all communication to collate data, interrogate and review calculations etc is done by email, then dial up the risk a little bit more.
If this sounds like your team, then we recommend you consider alternatives to Excel or more governance over your tax working papers to ensure final positions are traceable, supported by evidence, easy to follow and to explain to other stakeholders.
Warren Dick is tax reporting and innovation leader at PwC.
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