It is often said that nothing in life is certain, except death and taxes. It’s uncanny to compare the two, but having compared, it's impossible to overlook the fact that death is mostly an event while tax is something that one needs to endure through their life. There is one more certain thing in life: ‘change’. The shape and form of tax endurance is changing and tax teams today find themselves right in the middle of it.
The degree and extent of change in the tax environment in recent years has transformed the very problem statement that tax teams of companies are dealing with. Tax teams, which traditionally used to solve technical tax-related issues now need to solve process and data problems as well. To tackle these new challenges, they must choose between using their existing traditional tools or re-equip themselves sufficiently.
The answer is obvious. You can’t bring a knife to a gun fight.
What has changed over the last few years and what is corporate India’s take on the transformation in tax? EY India did a survey recently to scratch the surface and find out.
Like most things in the tax world, the buck starts with the government. The government has brought a slew of legislative changes [such as goods and services tax (GST) and base erosion and profit shifting (BEPS)] which significantly enhance the level of data required for compliance. While a lot of these legislative changes are positive moves in the right direction, 61 percent of EY survey respondents believe that they are do not have adequate resources to deal with these changes.
To add to this, 80 percent of respondents believe that data management is a huge concern for tax departments of corporates. With the newly rolled out e-assessment scheme, the government is changing its style of tax administration from a subjective, people-driven administration to an objective, data-driven one. With e-assessments, companies stop meeting the tax officer and instead interact through a digital interface. While this comes with a number of advantages, it significantly increases the need for corporates to be proactively prepared. For instance, e-assessments would leave taxpayers with little chance for a retake – companies would need to ensure they get their communication with the tax department right the first time and ensure the data submitted speaks for itself.
If Newton’s third law applies to the world of tax, an equal and opposite reaction from corporates is now due for every action of the government.
What does it take to meet these evolving needs of tax functions? At a micro level, solving today’s tax function problems begins with solving their data and process issues. Getting the ‘right data’ for compliance is much harder than it sounds. Today, the problem is not the lack of data, but the abundance of it. Systematic organisation of data and strong processes can help reduce the risk of ‘surprises’ emerging from unintended tax positions that companies sometimes end up taking. For obvious reasons (such as speed, efficiency, accuracy and cost), technology can play a large role in achieving this.
At a macro level, it takes the right strategy to deal with these new challenges. A large part of the strategy that needs to be revisited is the tax function operating model itself.
Specialist skill sets for every area of tax are now a ‘must have’. Getting these subject matter experts closer to business (rather than serving at the back end on a need basis) will help raise the right questions, identify risks and opportunities as business and legislation evolves.
Also, contrary to traditional belief, tax specialists alone cannot make a tax team anymore. 91 percent of the respondents believe core competencies will move from tax and technical skills to process and technology skill sets over the next three years.
Yes, getting the right mix of people, process and technology to meet today’s tax function challenges takes investments. But given the massive tax costs for which tax teams are custodians, companies are finding that investing in the tax function to get the right balance is a small price to pay for a larger stake (which is tax cost optimisation).
It is therefore not a question anymore of ‘whether to transform’, but one of ‘how to transform’. While some companies choose to take on the transformation in-house, some are considering outsourcing their tax function.
Outsourcing the tax function is quite different from outsourcing tax services in its traditional sense. With tax function outsourcing, tax consultants make a leap from merely supporting the tax function to actually becoming the tax function of the company. When one becomes the tax function, he is responsible for not only the answers, but asking the questions also. We believe – better the question, better the answer.
In addition, the outsourcing option comes with added advantages like access to talent and technology, reduced internal people dependency, scalability, and so on. However, unlike some other basic functions, tax is quite specialised and core to business. Finding the right outsourcing partner with a strong tax domain knowledge therefore becomes more important than the decision to outsource itself.
The results of the recent EY survey indicate that India Inc has recognised all the right problems. An overwhelming 88 percent of the respondents are also looking at addressing these problems. We agree, it is time for India Inc to act. After all, one must remember that the price of inaction is often far more than the cost of making a mistake.
(Views expressed are his personal)
The author is Tax Partner at EY India.