The Essential Role of Data Access in Tax Functions
Both Finance and Tax departments require access to data that illustrates how transactions are processed and how IT systems are configured. Data integrity poses a significant operational risk, particularly when transactions are booked in various countries without proper evaluation for tax purposes.
Additionally, financial data within the system may not accurately reflect the business model design, or changes may not be effectively managed. Accessing relevant tax data necessary for reporting to regulators, investors, and tax authorities across multiple business units and jurisdictions often presents challenges in the current state.
Ensuring Efficiency and Reliability in Tax Operations
To produce timely deliverables and meet the expectations of the board and other stakeholders, a tax function must exhibit effective governance, operations, and infrastructure.
This article highlights the business challenges and potential areas for improvement in these essential components.
Governance: Challenges and Improvement Opportunities
The tax function may encounter significant challenges in the absence of a formally documented strategy, set of objectives, or planning to guide its operations. Furthermore, when senior management lacks written and agreed-upon objectives and risk tolerance levels for tax planning and strategy formulation, it can lead to inefficiencies.
Without a robust tax policy, progress often relies on individual influence within the organization, resulting in a fragmented approach where not all stakeholders are aligned. This fragmentation can hinder the establishment of standardized and global controls.
Improvement can be achieved when the tax department’s strategy, objectives, and risk tolerance are clearly understood throughout the organization and formally approved by senior management. Moreover, the objectives and strategies of the indirect tax department should align with the company’s broader business goals and overall tax strategy.
Building direct relationships with key stakeholders, including the CFO, audit committee, internal audit, and tax authorities, is crucial. Efforts should be made to create and maintain productive and proactive relationships to enhance tax stakeholder engagement.
Developing a tax risk policy that defines risk tolerance levels for tax planning is essential for effective tax risk management and resource allocation. Additionally, the organizational structure should meet the needs of the tax department, ensuring alignment between the indirect tax department and other key functions—such as corporate finance, procurement, legal, IT, and business operations.
Clearly documenting the division of roles, functions, and responsibilities between the tax department and the business is vital. Manuals, procedures, and working instructions should be readily accessible online for all stakeholders. This accessibility enables tax professionals to engage proactively with multidisciplinary teams in various projects while demonstrating the tax department’s value to the business.
The tax department must stay current with developments within the organization to fulfill its advisory role effectively. A robust learning and development environment will equip tax staff with the latest insights and knowledge.
External representation and lobbying efforts should also be considered to influence policies across local, national, and European levels. Building and maintaining relationships with government and industry stakeholders will enhance indirect tax planning and contribute to the broader objectives of the organization.
It could also be that the financial data in the system does not reflect the business model design or that change is not properly managed. Besides that, in the current 'as is' it is often a challenge to get access to the relevant tax data that must be reported to regulators, investors and tax authorities in every business unit and country in which a company operates.
Operational Challenges and Areas for Improvement
In practice, we often observe that few, if any, performance targets are established or monitored, leading to unresolved issues as accountability becomes unclear. From a best practice standpoint, it is essential to set targets and establish technology-enabled KPIs that allow for regular monitoring—both formal and informal. These targets should also reflect the interactions between the tax function, the business, and other stakeholders.
A common challenge is the lack of clear procedures for critical VAT processes, as well as inconsistent evaluation criteria for VAT planning. Essential VAT information required for compliance, financial reporting, and other tax activities is often not readily accessible throughout the year. To support informed business and tax decisions, this critical information should be produced frequently and made available as objective evidence.
A systematic approach to tax planning is necessary, including well-defined evaluation criteria, such as guidelines for engaging external advisors. For instance, when corporate entities seek advice and assistance from external consultants, a policy may stipulate that all written advice be provided in English and that the tax department must be informed before consulting these advisors, especially on material tax issues.
Tax risk management should continuously inform operational decisions and strategic direction. To facilitate this, a uniform tax risk process must be implemented, ensuring a structured and consistent evaluation of potential events that could adversely impact the company’s objectives. This approach should also account for missed opportunities, such as potential savings.
Resource allocation and budgeting should align with the outcomes of the tax risk assessment. Given limited resources, it is crucial to focus efforts on high-risk areas. The indirect tax department should actively identify opportunities to optimize tax planning across jurisdictions, business units, and tax types.
For significant non-routine transactions, such as mergers and acquisitions, all indirect tax liabilities must be assessed before the transaction is finalized. This includes considering all regulatory, legal, and corporate record retention requirements, as well as identifying relevant indirect tax risks in consultation with the indirect tax team.
The indirect tax department's risk management strategy should differentiate between strategic, operational, financial, and compliance risks, and it should include detailed action plans for managing these risks. This also entails adopting an efficient internal control framework that is fully implemented for all tax functions globally, with reporting on internal controls as part of its performance indicators.
Infrastructure Challenges and Areas for Improvement
It is vital to ensure that both hard copies and electronic corporate documents, tax files, and records are organized, retained, and easily accessible—not stored solely on employees’ hard drives. In addition to accessibility, these documents should be backed up according to the company’s IT policy. Any tax audit adjustments, including settlements, should be thoroughly documented and archived for future reference, ensuring compliance and readiness for any potential audits.
Establishing Robust Documentation and Technology for Tax Processes
When documentation for critical tax processes is lacking, and tax authorities or corporate record retention requirements have not been adequately addressed, it is crucial to implement a comprehensive documentation process. This process should be regularly reviewed and updated to reflect changes in the operating environment.
The effectiveness of the tax department can be significantly enhanced by employing appropriate technology and tools that minimize the need for manual input. Utilizing integrated tools and technologies allows tax data to be collected once and reused across various applications, streamlining workflows. The indirect tax department should engage with key stakeholders regularly to facilitate knowledge exchange, with technology supporting these collaborative efforts.
ERP systems and other relevant technologies must be properly configured for VAT compliance, financial reporting, and planning. Additionally, dedicated IT support should be available for tax functions to ensure that the tax department has access to critical systems and applications. Ensuring the correct VAT configuration is implemented and maintained is vital for ongoing operations.
Substantial improvements can be achieved by replacing spreadsheets with advanced technology tools and systems designed to enhance effectiveness and reduce risks. Furthermore, systems and processes should be established to maintain the critical data required for tax compliance and strategic decision-making. Regular consideration of reporting, compliance, auditing, and planning needs will ensure that the tax department operates efficiently and effectively.
