By Mike Bertolino, Deputy Global Vice Chair, EY
Not so long ago, tax departments could take the time they needed to adapt to new technologies.
Major innovations in the tax realm didn’t come along very often.
I remember when the first spreadsheet computer program, VisiCalc, came on the market in the late 1970s just when computers were entering the mainstream.
“The innovation journey is one that all the players in the tax ecosystem will need to embark on and continue to enhance.“
In 1983, Lotus 1-2-3 followed and became the cutting-edge tax technology.
With the launch of Excel and tax preparation software in the early 1990s, we marveled at the pace of technological change in the tax space.
Innovation felt fast, but it was glacial compared with the pace of change today.
In the ensuing two decades, innovation has gone from slow but steady into overdrive.
With the streamlined introduction of OneSource, ProSystems, Corptax, Spotfire, Tableau, SharePoint, Vertex, Blue Prism and many more, new tax software and programs are being launched continually.
Tax departments no longer have the luxury of time to make decisions.
They must constantly try new technologies and innovate or find themselves behind the curve.
Whether it’s technology, business models or regulation, the tax world is transforming at an increasingly quick rate.
Keeping pace with this evolution is both critical and increasingly challenging for companies today.
It helps to focus on what all these changes have in common: data.
Data and disruption
Data is power in today’s world.
Those who possess the ability to gather it quickly, manipulate it and turn it into knowledge will be better placed to reap the benefits from this era of unprecedented innovation.
We are just at the beginning of the Fourth Industrial Revolution, one in which the “speed of current breakthroughs has no historical precedent,” according to the World Economic Forum.
Companies are reconsidering their business model in the hope that they can adequately prepare for what is still an uncertain future.
The only thing certain about the future is that change and digital disruption will be a big part of it — innovation will be the great divider.
The tax industry is fair game for disruption.
Technology has already shaken up and revolutionized the taxi, hotel, health care and automotive industries, to name but a few. Tax is no exception.
Those in the tax field must now brace themselves to disrupt or be disrupted.
Look no further than the many tax administrations that are embracing technological change today with the goal of improving data collection and ultimately boosting tax revenues.
We are seeing more of the emerging markets, including Russia, Mexico and Brazil, take the lead in embracing digital to help with their tax efforts.
The trend is also visible in developed markets as the UK has declared its plans to make its tax system fully digital by 2020.
The outcome is that the tax function is now being disrupted by what was once thought of as an effective, but rather sleepy governmental agency.
Tax authorities have moved swiftly from paper tax returns to e-filing, and then to e-accounting, e-matching and e-auditing.
Some are now at the beginning of e-assess, where traditional tax returns will be replaced by digital tax accounts.
This is all possible because of real-time and large-scale data collection and analysis digital tools.
Brazil plans to go live in 2016 with its eSocial program, a module of its standardized public digital bookkeeping system (SPED), which will require companies to file electronic books with payroll information to capture data faster and to assess real-time.
Companies, which have lagged tax authorities in adopting new technologies, are now under pressure to respond sooner to tax administrators’ queries.
As tax authorities migrate toward e-assess and beyond, companies could face dwindling time to challenge an assessment and find themselves left wanting.
Being technologically behind today is a major disadvantage, but it’s a situation facing many companies.
This is no surprise since tax is often at the bottom of the list when it comes to IT investment within a company.
Legacy IT systems are ill-equipped to deal with the changing world of tax filing.
Until now, tax returns have involved the collection of data from a range of systems and the consolidation of this information into a draft, which was analyzed and questioned by the tax department and sent on to the tax authorities.
This process is quickly being replaced by automated reporting, with the tax data going straight to the tax administration.
Quality checks and assurance controls on that information will need to occur a lot earlier in the process and best-in-class controversy management on the back end will be critical.
No finish line in sight
There is more innovation still to come.
Digital automation advances, through robotics process automation, will see software programs replace people in performing repetitive, form-driven tasks.
Those people, in turn, will be leveraged to perform higher-level assignments.
Further out, cognitive artificial intelligence will bring more change to the tax industry, putting high-level planning decisions in the hands of computers.
And the new blockchain transaction system has the potential to profoundly change the tax and audit industry in coming years.
The talent pool within tax is already shifting as a result of this technological transformation.
Companies and tax administrations are shifting their hiring focus from a preponderance of tax technicians to include a blend of data scientists, technologists, mathematicians and computer scientists.
A global stage
Of course, technology is just one of the innovative forces altering the tax industry.
Globalization is another. In the space of 50 years, companies have gone from operating in local, regional or national markets to a global stage.
Tax departments of international companies today are charged with the daunting task of staying abreast of changing tax laws in dozens of markets across the globe.
International companies’ increasingly global and complicated tax affairs have led to the introduction of tax transparency, substance and consistency initiatives, most notably the Organisation for Economic Co-operation and Development’s project on base erosion and profit shifting (BEPS).
The 15 BEPS Actions are ushering in substantial change that will affect all parts of an organization, from the supply chain, legal and IT to accounting and human resources, and are transforming how multinational companies interact.
Further, these ongoing initiatives, mixed with the continuous technology evolution, have forced the tax discussion into the C-suite and boardroom.
A key pillar of BEPS requires that multinational companies report and retain specific financial and tax information on a country-by-country basis.
While the intent of the BEPS project is to enhance transparency and consistency, it could also lead to a stronger focus on tax controversy to determine that the correct taxes are paid to each tax jurisdiction.
It’s obvious that better technology can help with the new reporting requirements and reduce the time spent gathering the detailed information year over year.
How to keep up
So how can the tax function choose the right strategy for the future when the pace of change in business models, regulation and technology continues to accelerate?
I believe the answer can be found in the right technology, processes and people.
Tax departments can no longer afford to pursue a wait-and-see strategy when it comes to adopting the latest technological advances.
To do so would have a costly and detrimental impact.
Instead, the tax function must move quickly to embrace innovation to improve tax management, hire the right talent and build collaborative and streamlined relationships with key players within the tax ecosystem.
New ways of working together
We understand this holds true for our organization as well.
Here are some of the steps we have taken:
- We created global digital and innovation leaders across all service lines.
- Last year, we announced the appointment of a top Silicon Valley executive, Jeff Wong, as our Global Chief Innovation Officer.
- Our teams are examining innovation opportunities within our company, as well as consulting with our external clients on their digital strategy.
- We are considering new approaches to the market, new services and new ways of working together.
- We are deliberately disrupting ourselves to become better, faster and smarter.
In terms of opportunity, I believe there are many doors still to be opened.
The innovation journey is one that all the players in the tax ecosystem will need to embark on and continue to enhance.
The beautiful thing about technology is that it doesn’t sit still — constant change is part of technology’s DNA.
Global companies possess the capital, knowledge and connections to navigate this era of unprecedented innovation.
But they will have to move decisively and work harder than ever to determine the best way forward.
This article is included in Tax Insights issue 17 – Transformation and innovation (pdf)