Introducing Technology to Manage Increasing Tax Compliance

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Introducing Technology to Manage Increasing Tax Compliance

Soorashree Sadekar, Associate Director, Transfer Pricing Americas, AIG

Soorashree Sadekar, Associate Director, Transfer Pricing Americas, AIG

With a constantly changing tax landscape, increased pressure of resources, and the COVID-19 pandemic, companies are focused on finding ways to do more with less. Technology becomes a natural solution when trying to drive efficiencies. However, with so many technology alternatives available, the choice becomes increasingly complex.

How do you choose the right technology? Let’s start with an example. Entities in the UK are subject to both Diverted Profits Tax (DPT) and the Mandatory Disclosure Regime (MDR). Simplistically speaking, the MDR requires corporates to identify and disclose “reportable transactions” within 30 days of when they are made available. The DPT requires UK corporations to identify and pay additional tax on transactions that are considered to divert profits outside the UK. In both cases, corporates have to analyze transactional data to verify whether transactions would be reportable under MDR or would be subject to DPT.

Start with identifying the problem(s) that you are trying to solve. A clearly defined problem will assist you in refining the ask. Analyze existing people, processes, and tools to document current processes and bottlenecks. Track and evaluate changes in tax requirements to identify overlapping requirements or compliances that might use the same data. Consider whether an improvement in processes or skill sets within the team would support using existing technologies in the organization to meet increasing tax requirements as that would be the most cost-effective solution and get quick wins. These considerations will help identify the drivers for the organization in adopting new technologies.

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Let’s define the “problem” with MDR and DPT compliance – For large corporates that initiate millions of transactions daily, all over the organization, collecting and analyzing data, and meeting the compliance requirements promptly can be a problem, especially within 30 days of the 14

transaction being “made available” in the case of MDR. Here it would be helpful to review historical transactional data to identify different types of transactions, identify transactions that may trigger either MDR or DPT requirements, determine the stakeholders for different transaction types, and establish strong processes and controls to ensure that transactions are identified for review as they are initiated/ conceptualized. Technology can support pulling transactional data, consolidating it, and analyzing it effectively, however, it can only help where the rules are standardized and predefined, and processes are consistent and well-followed.

Get support and buy-in within your organization. Introducing new technologies within the existing framework is extremely challenging and having buy-in from all relevant stakeholders goes a long way in ensuring a smooth transition. Will this new technology eliminate jobs, or require people to learn new skills? Will new processes are set up or will there be changes to existing ones? Having a well-defined vision would help in allaying any fears associated with change. Defining the cost of non-compliance is always a helpful factor. Communication should clearly articulate the new roles and responsibilities, changes to processes, how technology would be used in the new processes, and its benefits.

In the case of MDR and DPT compliance, the vision should define the new process of transaction gathering (will this be a pull from financial systems or obtained manually), analysis, controls to ensure that transactions are correctly identified and analyzed, and roles and responsibilities in the new setting. Educating stakeholders of the impact of non-compliance is extremely helpful in gathering cooperation, as it answers the “why” behind the change. In this case, corporates that do not comply would be subject to penalty.

Keep it simple. Setting up a technology that is cumbersome to maintain or has complex requirements is rarely the best approach. In such cases, it is likely that the users will not be motivated to keep at it with the same zest in future years as they did initially. This would result in unused technology and a lot of wasted money and effort. It’s therefore important to keep it as simple as possible for users, ensuring that it’s much easier to use the technology than fall back into old processes as the years go by.

In the case of MDR and DPT compliance, transactions in a large corporate would involve several departments within the organization, often with different skill sets in technology and sometimes with different system configurations and/ or domains. Having a complex technology that is difficult to learn, or results in access or compatibility issues will not make life easier; making it extremely important to keep it simple. For example, having a new process (think committee meetings) to gather data using existing technology (think excel) but use technology to quickly analyze the data. Here a smaller group of people would need to learn and incorporate new technology whereas the larger group would simply have a new process.

Strike a balance between scalable and customizable. Scalable technology can expand to accommodate increasing workload, and it can grow with time (or be upgraded) rather than need to be replaced. Such technology can grow more efficiently as the usage expands and therefore it is more cost-effective in the long term. Customization can be helpful but can also result in more issues that need troubleshooting. Over customization can make a solution more niche and less transferable to other processes in the organization, impacting scalability. It’s important to strike the right balance as you invest in new technologies.

Both MDR and DPT require an analysis of transactions for companies. A similar analysis of transactions would also be required for BEAT (in the US), the new tax reform in Mexico, and DPT in Australia. Transactional data also supports transfer pricing analyses around the world. Therefore, essentially, a process to gather and analyze transactions introduced for MDR and DPT compliance can also be used to support the tax compliances in the US, Mexico, and Australia; as well as transfer pricing documentation processes worldwide. An excel data gathering template with the right controls may be the most effective in this case, as it can easily be expanded to more countries. Having an effective process will often be the first step to a more sophisticated technology solution in the future.

In summary, introducing a complex solution, or doing so without effective change management may result in an ineffective rollout of the new solution: where it gains very limited adoption, or it is forced into outdated workflows not realizing the expected benefits. Therefore, it is important to keep all these factors in mind when considering new solutions and planning for implementation.

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