The Evolution Of The Tax Function
01 November 2010
Posted by: Article: Albert Lee And Gisela Pieterse
The Evolution Of The Tax Function
Over the last decade, the role of the tax function has changed dramatically due to globalisation, technological progress, risk-based approach by tax authorities and the drive for efficiency to reduce costs.A tax function that adapts quickly to these new trends will minimise risks and create value for the business.To that end, it will have to master new skills such as an international outlook, risk management and proactive communications with tax authorities.The tax function also needs to be knowledgeable about processes and controls, and to integrate its work with business functions such as IT, internal audit and finance.
Tax professionals have seen the content and context of their jobs change profoundly over the last decade, due to the impact of some important international trends.For one, the number and complexity of tax-relevant international transactions has increased sharply.What is more, transactions originating in many different countries, each with their own national tax rules, are now often processed centrally, for example, in a shared service centre (SSC). Not so long ago, local tax managers could see themselves as deep technical experts in their own country.Nowadays, the globalisation and centralisation of many tax-related processes and transactions demand a tax function with an international outlook and a capacity to co-ordinate and integrate peculiarities of many separate tax jurisdictions.As business and processes globalise, so must the perspective and skills of a company’s tax function.
Globalisation is closely connected with a second trend impacting the tax function: technological progress.Digitalisation and the Internet revolution enable the processing and instant, worldwide distribution of vast amounts of tax-related data.The digital revolution has generated tremendous gainsin efficiency, but has also increased the risk of inappropriate treatment of tax-related data during its electronic processing.Trivial mistakes in transaction processing can have grave consequences from a tax perspective.Therefore, the tax function needs to be aware of IT and should be involved at an early stage in the design and implementation of financial systems. Moreover, IT can even be used to improve the effectiveness of the practice of tax by providing faster and more accurate information by which to plan and strategise.
New tax regulations and the changing attitude of tax authorities constitute another challenge for the tax function.The old days of cat and mouse are gone.It is becoming more common for both financial reporting rules and tax regulations to require a company to disclose tax contingencies or uncertain tax positions.The tax authorities in South Africa (and countries like the UK and Australia) now explicitly take a risk-based approach.Tax authorities in countries such as Ireland and the Netherlands are exploring more co-operative relationships with companies, but this promising development will prosper only if companies can show they have a solid internal tax control framework in place, a framework that allows a company to assess potential tax risks.
If companies want to benefit from this changing attitude of tax authorities, they have to adopt a risk-based approach.It is clear that tax risk management, including the measurement and weighing of uncertain tax positions, requires skills of the tax function that go beyond the interpretation of tax law and subsequent planning.The modern tax function should be capable of designing and implementing an explicit tax risk strategy as a basis for work prioritisation.
Tax professionals also feel the pressure to be more cost-efficient, to do more with less, especially since the onset of the recession after the credit crunch.Within limited budgets, the tax function has to make tough choices, e.g., dedicating time to short-term tasks such as preparing returns or to long-term needs such as strategic tax planning.
The demands of all these trends on the tax function often reinforce one another.For example, demonstration by the tax function of robust controls is necessary to improve the relationship with tax authorities.Over the last decade, SARS has significantly increased its technological skills and professional staff as well as its requests for information from companies.It now routinely requests downloads from accounting systems as part of an audit or enquiry process.It now also has the professional staff to go to company offices to perform detailed audits.
In order to adapt to and stay ahead of these new realities, the tax function should at least be on a par with the tax authorities. What is more, strong systems and processes will not only help the tax function to reduce a company’s tax compliance risk, but also add value.Techniques such as data mining can and should be used by the tax function to improve its own tax planning strategies, creating value for the company.
For reasons of efficiency and cost, the tax function must integrate and leverage the infrastructure of the business which gives rise to the tax liability.Therefore, now more than ever, the tax function should closely co-operate with other functions such as IT, finance and internal audit.
In short, a modern tax function has evolved from a domestic to an international scope; it needs to integrate with finance, internal audit and its businesses; it needs to leverage technology; and, problems, it should build a proactive relationship with tax authorities.This is the new challenge of a tax function.
Source: By Albert Lee And Gisela Pieterse (TaxTALK)