How effective is your tax function in dealing with tough and uncertain tax times?
It is no longer news that Nigeria’s oil revenue has dwindled and alternative sources are needed to fund government expenditure. This has led to various initiatives and proposed laws to increase tax collection. The aggressiveness of the tax authorities is seen in the use of non-compliance stickers on company premises, increased tax audit exercises, and more cases in dispute. Considering their potential contribution to revenue, banks and other financial institutions have been a target. State tax authorities are now collaborating with the Federal Inland Revenue Service (FIRS) in issuing non-compliance stickers, appointing companies as agents for collection of tax from defaulting taxpayers, and for banks to provide information on interest due on individual bank accounts. Consequence of noncompliance with tax laws can be distressing, leading to reputational and operational damage for the company. The growing demand for efficiency of the tax function has exposed needs and weaknesses that can and must be addressed. It is imperative for companies to focus on ways to improve operational effectiveness of their tax function in order to ensure their survival in the current terrain and to arm the tax function with the necessary tools for a swift reaction to the aggression of the tax authorities. Tax strategy: A roadmap to solving tax challenges The starting point for transforming a tax function is having a ‘detailed tax strategic plan’. This outlines the approach to be taken to achieve the companies’ tax objectives. A tax strategy must contain input from tax, finance, IT, and other functions in order to achieve consensus. This is because a good tax function must be seen to be adding value to the business and not just a cost centre. A company’s tax strategy must be documented and updated annually to reflect changes in the tax environment. The document must define the objectives of the tax function and establish the key performance indicators for the tax function. By creating a multi-year strategy and plan, a tax function can add value to the business and align itself to the broader company objectives. For example, a good tax function should mitigate risks (such as penalties and interest) and take advantage of opportunities to save money from tax at the group and subsidiary level. A tax function that does not follow a strategy may be comfortable to stick to routine compliance roles or act without warning outside the overall strategy of the Board.
A company should critically assess its tax function’s current capabilities against its desired state so as to highlight the areas that need improvement. Some of the questions that must be considered are; • Is the tax function meeting today’s challenges as well as getting ready for what lies ahead? • Is it able to take on new responsibilities while efficiently performing current obligations? • Does it fully support the needs of the business including responding quickly to planning requests that require analysis prior to shareholder meetings or press conferences? • What is our policy on tax matters, and do we have a policy document containing this? Defining these points in a strategy document helps the company to avoid mistakes such as employing a tax manager with the wrong profile for the business. An example of this can be employing a tax manager with only a tax compliance background when the company will be involved in mergers and acquisitions and complex investment structures in the immediate future. Enablers of an effective tax function In order to successfully implement a tax strategy, the tax function must consider the following tools and methodologies; 1. Data The tax function is one of the largest consumers of data within an organisation— not only core trial balance data from financial systems, but also data from other transactional systems. Tax functions face significant challenges in gathering effective and timely data, hindering their ability to contribute more strategically to enterprise wide decisions and to adequately respond to tax queries and investigations.
An economical way to address many of the tax function’s data needs is to integrate financial systems with tax systems. This offers timely, tax-ready data for direct and indirect tax reporting and analysis that supports tax provision, compliance, and audit defense capabilities. In many instances, the data of companies are not tax ‘sensitised’ and this can lead to material exposures. There are a number of well publicised instances which emphasise the importance of tax sensitized data. In one instance, a company gave financial information to the tax authorities with expense captions called “management services” for items which were routine logistics services. In another instance, a company accumulated a significant balance in an account described as “miscellaneous services” which is a red flag for tax auditors, thus resulting in tax exposures. There are other instances where data and presentation of ledgers prolonged the audit more than was necessary. Tax representatives should provide input in a company’s choice of accounting systems. This will; a. Ensure the classification of certain revenue and expenses is automated to easily produce information required for tax compliance and tax audit defence. b. Increase operational efficiencies by mapping comprehensive tax data requirements to the accounting systems to ensure information generated is optimized for tax. c. Improve the quality of tax data by tax sensitising the chart of account and defining tax reporting requirements.
Faced with increasing regulatory complexity, growing globalisation and significantly increased scrutiny, the ability of the tax function to deliver reliable information and value is dependent on the processes that are in place and the technology that is deployed. Technology solutions for tax must be integrated seamlessly with the accounting systems as having an efficient and well integrated technology solution will not only reduce the financial reporting risk but improve compliance with the tax regulations. Successful investment in technology results in faster and easier access to higher quality data and can reduce or eliminate the need for time consuming data collection, validation and manipulation within the tax function. Tax professionals are able to focus on more value adding activities thereby leading to improved job satisfaction and better staff retention.
As the expectations from a tax function increase, there is little or no tolerance for errors in tax reporting. An avenue for minimizing tax reporting errors is by enhancing the efficiency of the tax function through process improvements. Process improvement represents an opportunity to redeploy resources to pursue risk management, put in controls, communicate with stakeholders and business units, undertake tax strategic planning and ensure transparent disclosure. In addition to the technology improvements, process improvement is one of the best ways to substantially increase the chances that a tax function will consistently deliver on its commitments in the future. For an organisation to get value from optimizing its tax processes, it must consider the following; a. Does the organisation have a process for evaluating tax planning ideas and managing tax risks? b. Are processes constantly reviewed to identify inefficiencies? c. Does the organisation have process documents to guide new members of its tax team?The processes must also be integrated with the shadow tax role in other departments within the organisation. A tax process that functions effectively means that business owners can sleep well at night knowing that objections to tax assessments are being lodged at the right time, investment structures have been signed off with regards to tax, deadlines are not going to be missed, and the Board will be advised of material tax issues, among others.
Having the right people is a key enabler in delivering what is required of a tax function. Companies should re-evaluate their current talent needs against the desired additional capabilities so as to meet up with the increasing tax requirements. On the job training should be offered to bridge any knowledge gap identified and to ensure that the tax professionals within the organisation stay relevant. Going forward, the data skills needed by tax professionals will be less about gathering and managing data and more about analyzing the data from a broader vantage point to make valuable decisions. In order to maximize the value of a tax function to an organisation, the tax professionals need to understand their roles and responsibilities and how they fit into the group’s overall strategy. The need for an external tax advisor should be considered as this can provide insight in making strategic decisions. Senior members of management must also be involved in an oversight role in the tax function. In PwC’s recent research conducted globally on groups with foreign subsidiaries, most Chief Executive Officers believe that the skills required by their tax function will not just be limited to traditional accounting and tax qualifications, but there will be need for the tax function of the future to be equipped with Information Technology skills needed to react to constantly changing global business requirements. Apart from traditional accounting and tax qualifications such as Institute of Chartered Accountants of Nigeria (ICAN), Chartered Institute of Taxation of Nigeria (CITN), Association of Chartered Certified Accountants (ACCA) or Association of National Accountants of Nigeria (ANAN) qualifications, tax professionals in multinational groups may require skills such as programming, and financial modelling.
- Risk management/Controls
Risk management has become increasingly important over the years, driven by increasing regulatory searchlight on corporate governance and some high profile risk issues (including material weaknesses in tax accounting). Organisations need to be aware of the tax risks and what controls need to be put in place to manage these risks. One of the most important risks for the tax function is reputational risk. This is especially becoming prevalent in the form of various government commentary on media platforms about the tax affairs of specific taxpayers, as well as non-governmental organisations such as ActionAid and whistleblowing platforms demanding for more transparency in the tax affairs of multinationals including financial institutions. The ever increasing reputational risk facing companies means the risk profile in the tax space is shifting. Tax risk deals with how the decisions, actions, inactions, activities and operations of an organisation impact on the tax affairs of that organisation and affects the organisation’s strategy. Tax risk management strategy should focus on minimizing tax risks while maximizing the opportunities for tax optimisation. Managing tax risks involves;
- Identification of business processes that create exposure to tax risks;
- Evaluation of the risks based on significance and likelihood of occurrence;
- Evaluation of the control environment to identify the strength and weakness;
- Designing a tax policy based on the result of the above; and
- Reporting and dealing with publicity in the press, which is discussed in more detail under the communication enabler.
There are various stakeholder groups having different interests and agenda in every organisation. These could be internal (shareholders, employees) or external (tax authorities, host communities). Tax functions should place high priority on effective communication by anticipating the needs of each stakeholder group and employing the appropriate communication medium. For example, effective communication with tax authorities for navigating uncertainty around tax policies could be achieved through advanced pricing agreements, setting up enhanced relationship committees comprising representatives of the company and the tax authorities, and alternative dispute resolution mechanisms. In the nearest future, regulators will demand transparency regarding global taxation, necessitating clear and thoughtful communications with public stakeholders about the tax affairs of the business.
Conclusion An effective tax function is a viable tool that can be used to strategically position a company in the uncertain business terrain. Companies must focus on how their tax function should operate to achieve its objective of tax and regulatory compliance, optimisation of shareholder value and overall business growth.