World: How to turn data to your advantage
09 December 2014
Posted by: Author: Joe Dalton
Author: Joe Dalton (EY Tax Insights)
Advances in digital technologies are increasingly spurring companies to use their data to discover more about customer behavior, increase efficiency and generate strategic insights. This holds true in tax – multinationals are increasingly realizing how important their tax data has become. But much needs to be done in terms of infrastructure and systems in order to benefit.
In the wake of the financial crisis of 2008—09, tax authorities remain under pressure to deliver increased revenues with fewer resources. To do so, many of them are adapting their methods, particularly regarding their treatment of large corporate taxpayers, which in turn has significant consequences for how multinationals manage their data.
One of the clearest shifts large taxpayers have to deal with is the demand for more detailed information about their business activities — such as the emergence of country-by-country reporting (CbCR) initiatives that will require businesses to detail how many employees they have and how much operating income on a per-country basis. Complying will be especially tough for the many organizations that still rely on spreadsheets to manage and store their financial data.
Speed is one of the new challenges companies are facing. Countries such as Australia, Canada, the Netherlands, the UK and the US now offer large taxpayers the choice of being audited in real time. Such systems enable taxpayers to gain certainty about the tax treatment of a specific transaction much earlier than would ordinarily be the case, while the tax authority benefits from transparency. But delivering on this requires taxpayers to develop the capability to report all relevant transaction tax data — including complex data related to transfer pricing models — in real time to the tax authority. This is challenging to implement but also enables tax leaders to provide internal stakeholders with a far clearer picture of their financial outlook and related tax risks.
Albert Lee, partner, leading the EY Tax Performance Advisory practice for Asia-Pacific, predicts that a new type of audit process, in which tax authorities effectively "plug in” to a company’s raw data sources with their own technology, will become more commonplace.
"It’s far easier to pinpoint exceptions and errors with an algorithm than to search through a paper file,” Lee says. "Companies need to get ready for the fact that if they have data that can be processed, it can also be audited. This is something companies should stay on top of.”
Some governments are already plugging into companies’ raw data to audit indirect tax payments. In EY’s 2014 global survey on VAT/GST electronic filing and data extraction published in April, 69 countries reported that their tax administration uses data extracted electronically from taxpayers’ systems to carry out audits and detect errors or weaknesses in the enterprise resource planning (ERP) systems and controls of taxpayers. Seventy-six percent of attendees of a related webcast said they expect tax or trade authorities to increase their use of data analytics in the next two years.
The prospect of entire databases being audited at will by revenue authorities has huge repercussions for how taxpayers hold and store their data. "Private industry needs to be on equal footing with the organizations that regulate and investigate them,” says David Remnitz, Head of Forensic Technologies and Discovery Services at EY in New York.
Multinationals also face a wave of new tax regulations as governments seek to increase transparency on corporate tax affairs. Increased disclosure of corporate tax data is central to many of these changes, and these will challenge companies to update their systems and invest in new technologies, such as cloud-based financial systems and new data management systems.
For example, recommendations for CbCR in the OECD’s base erosion and profit shifting (BEPS) action plan mean that far more granular data will likely be required by tax authorities and potentially by the public.
Jeff Westphal, CEO at Vertex, provider of tax technology that many EY clients use, says CbCR will require companies to reorganize information in new ways. "Ensuring that tax, finance and legal data are organized in a common data format and stored safely will become even more important if widespread country-by-country reporting becomes a reality, placing a significant burden on companies to change their data systems,” he says.
The US Foreign Account Tax Compliance Act (FATCA) is another example of regulation that will stretch taxpayers’ data management capabilities.
Vertex’s Westphal says many companies have a long way to go to deliver on these new data demands.
For example, it is not uncommon within global organizations to see data silo issues arising: data sets are often tied into different ERP systems, spread across divisions and countries, and in multiple formats, making access and exchange of information from different parts of the business challenging. These problems can be particularly serious for companies that have grown quickly or gone through a merger or acquisition and can leave tax professionals struggling to consolidate data sets or manually review spreadsheets when asked to respond to a tax inquiry.
Turning data to your advantage
However, those that are embracing these challenges are realizing that benefits are available in embracing the changing role of technology, not least from implementing more effective methods of collecting, processing and analyzing their tax data. While some may focus purely on compliance, other companies are asking what additional benefits may be gained. Businesses are recognizing that there are several ways that a new approach to tax data can deliver-competitive advantage. Some of these are as follows:
Live, standardized tax data. Creating a broader base of data that is up-to-date and highly accurate to share with revenue authorities will make filing and reporting processes more efficient and reduce the time and resources needed. Tools can also be implemented that generate ready-made or custom reports for audit and planning and automate the management of filing due dates.
Strategic insight. Once data is re-ordered into a format that is accessible across the global business, the possibilities to manipulate that data and extract business insights can be greatly enhanced. Tax data dashboards that make consolidated tax data easier to visualize can also be a great help in identifying potential tax issues as they arise. This data can also support scenario planning, helping business leaders better assess the tax implications of major investment decisions.
"The finance department has stopped collecting information just for the sake of reporting it to shareholders. Tax professionals should do the same; if they must collect more information for tax monitoring or tax disclosure requirements, they should find a way to make it useful to the business as well,” explains EY’s Lee. "Tax data reporting is about getting an overview of tax indicators to run your business better. Companies should perform dashboard-level monitoring — not to please regulators but because it’s good business practice.”
Improved risk management. Some revenue authorities, such as the Canada Revenue Agency (CRA), are seeking to implement risk-based audit processes for large taxpayers. Data analytics tools are used to establish taxpayers’ risk profiles, with effective tax rates and gross margins compared across taxpayers within an industry. As businesses implement more sophisticated analytics tools themselves, these can help to proactively determine the level of audit scrutiny they will likely be subject to.
Tax authorities themselves are already embracing such approaches. For many years, Revenue, the Irish Tax & Customs Authority, has been electronically screening taxpayers’ data covering several years and uses 400+ business rules to quantify risk, says Duncan Cleary, formerly a senior statistician in Revenue. Using business rules and predictive models in combination, Revenue also monitors the real-time risk of fraud and error, for both PAYE (pay as you earn) and VAT (value-added tax) taxpayers.
Tapping nontraditional data. Tax authorities might seek to tap nontraditional sources of information during investigations as their digital sophistication increases. Such sources may include third-party watch lists, news media and social media, among others. Taxpayers can take advantage of such data too: with tax becoming so strongly linked to reputational risk, using external data sources can be an effective way to set strategies to counter any potential reputational damage. "If companies had more advanced technologies in place, they could analyze a far wider data population in a much more sophisticated way,” says EY’s Remnitz. "Companies only scratch the surface when they conduct fact-finding, investigations or diligence exercises using basic tools or data sets that are too small.
Detecting internal fraud. With advanced analytic capabilities, internal auditors can help companies gain confidence that their underlying business is free of bribery, corruption, asset misappropriation and financial statement fraud. EY’s 2014 Global Forensic Data Analytics Survey of more than 450 executives in 11 countries found that advanced data tools are already being used to better manage internal fraud risk.
Big data and analytics have seen major investment over recent years and are likely to reshape how any
companies operate. In the tax world, there are few more important trends than the global push for greater corporate financial transparency. Tax leaders with the foresight to adopt new data technologies and harness these forces will not only better position the company to cope with transparency pressures but may also deliver new benefits from their existing data, including enhanced compliance and efficiency, to safeguard the reputation and brand value of their business.
This article first appeared on taxinsights.ey.com.