By Richard Sampson, Chief Revenue Officer at Tax Systems
The task of paying the right amount of tax, on the surface, should be straightforward. Legislation is in place to determine how much tax companies should pay, the UK has a governmental body dedicated to the issue, and tax professionals are highly skilled and knowledgeable in completing these calculations.
Ideally, an organisation’s tax strategy will place them in a ‘goldilocks’ zone where it pays neither too much nor too little. But this is not always the case, with numerous finance leaders in the position of unnecessarily overpaying or incurring the displeasure of tax authorities by paying less than they should.
Paying the right amount of tax is not as simple as it at first seems – tax legislation is constantly evolving and changing, adding complexity to the calculations and the risk that organisations might end up paying the wrong amount. The ongoing transition from manual to digital processes and tax submissions, such as HRMC’s Making Tax Digital initiative, has not been seamless; whilst one of its intentions is to “reduce the amount of tax lost to avoidable errors”, the shift to submitting digital records has often, and ironically, involved manually copying and pasting data from one source to another. And whilst tax professionals are skilled and knowledgeable, being human, their judgements are subjective, so ensuring their talents are used in a way that delivers the most value is key. And arguably, this value is not realised in the manual moving of data, which is not only time consuming and error prone, but also benefits much more from an objective approach.
The rise of red tape
It is not just local tax laws that companies have to adhere to. Adding to the overall challenge is the increasingly complex global regulatory environment, with the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two rules the most important current example. Implemented under the Base Erosion and Profit Shifting (BEPS) directive, Pillar Two is designed to ensure that multinational enterprises contribute their fair share of taxes, irrespective of where they operate geographically.
The headline objective of Pillar Two is to establish a global minimum tax rate of 15% for companies with consolidated annual revenues exceeding €750 million. According to the OECD, this had become a necessity because the widespread digitalisation of the economy meant that the international tax system was “no longer fit for purpose”.
But how significant is it? According to PwC, the impact of Pillar Two will be “monumental,” particularly because it now means organisations need to source, integrate and report on much more data than ever before. Moreover, because it applies to geographically diverse business entities, the added level of complexity will also impact legacy processes, with the use of spreadsheets likely to become extremely inefficient and challenging. Local finance teams may also come up against the problem of understanding what is being asked of them, adding to the overall steep learning curve that Pillar Two is bringing to many organisations.
Complexity is causing change
There are a huge number of small businesses who often lack the resources and experience to get their tax calculations right each time. This presents a real challenge for HMRC – and in turn the economy as a whole – as it makes a significant contribution to the overall tax gap and underlines the importance of helping all organisations to better understand the processes involved in paying the right amount of tax.
Some organisations are dealing with the increasing complexity, compliance, and legislation by moving down the outsourcing route. This option allows businesses to reduce the risk associated with the challenges of understanding and acting on frequently changing rules and regulations, by partnering with third parties who are experts in the field and experienced in using the latest software tools. However this comes at a significant cost, which is prohibitive for many organisations, either due to size or complexity.
Innovation is driving efficiency
Organisations that can eliminate discrepancies and comply with the latest tax regulations place themselves in a much stronger position to maximise financial efficiency and, in some cases, improve bottom-line performance. But how do they achieve this?
While there are currently a plethora of technology solutions and services out there that play a key role in running effective and efficient financial processes, the digital transformation of tax has been given further momentum by the relatively recent arrival of generative AI.
Put simply, AI brings enormous potential to eliminate discrepancies and improve the effectiveness of tax-related processes. For instance, it is ideally suited to tasks that humans can’t easily do themselves, such as processing and managing huge quantities of data with speed and accuracy. This includes producing detailed and nuanced reports on the most complex datasets, backed by vastly improved data visualisation performance.
It can also be easily applied to the challenges associated with transfer pricing. Traditionally, benchmarking pricing between different organisations under the same ownership has been an onerous and time-consuming task, often resulting in inconsistencies. In contrast, generative AI can take on the core elements of the task and present insight to human experts for analysis and decision-making, improving both productivity and accuracy.
This not only gives tax professionals scope to save time by streamlining processes but also allows for a greater focus on analysing what the data actually says. Armed with the ability to drive insight from data, it can be applied to use cases such as those presented by Pillar Two and the wider issues associated with tax accuracy.
If compliance is king, then technology is queen
Technology is the backbone for streamlining processes and reducing the burden on tax professionals. Tax compliance may be the end goal and objective, but the route taken to achieve that can affect every aspect of the journey from data collection, assessment and reporting, to the submission of the tax return itself.
Ultimately, paying the right amount of tax can act as a catalyst for a more effective corporate finance strategy overall. Don’t forget, it’s not always about paying more tax – an effective tax strategy is finding the right levels of payment, within the rules, for each organisation. Those who deliver on this objective can enjoy a win-win whereby tax obligations can be met with more accuracy and without adding unnecessary inefficiencies to these vital corporate processes.
