Companies are underusing their tax functions as an asset that can help them make better strategic decisions but the solution is not to plow money into tax data-crunching technology but to work with partners that cover both the technology and the talent side of the equation, a KPMG executive says.
Much of the technology that aims to help finance leaders incorporate tax considerations into their decision making is new and requires resources to get the most out of, so it makes sense to co-source with firms that have already made that investment, KPMG tax CTO Brad Brown told CFO Dive.
“Part of it is the newness of the technology being applied to the tax function,” Brown said. “The other challenge is, you need a conversion skill set. You need folks that know tax law and are comfortable with technology, and that conversion skill is not highly prevalent in the market right now.”
The challenge CFOs face trying to turn their tax function into a strategic asset is an over-abundance of technology that can quickly become a resource drain.
“The view in the C-suite [is there’s] a wild, wild west of technology choices,” he said. “The difficulty of pulling all this data together has been a burden on companies investing sufficient amounts to get to that predictive modeling, so I think that’s why we’re seeing a shift in how the C-suite thinks about building technology and skills to get after this opportunity.”
The payoff can be significant for companies that turn their tax function into a strategic asset, whether by building that function in-house or working with a partner to get access to those capabilities. That’s because C-suite leaders are able to make better business decisions because they can ensure to a greater extent their decisions factor in tax implications — both present and potential future ones.
“You don’t want tax considerations driving business decisions, but … understanding the tax application has become a business issue,” he said. “Any new market or new business that a company enters is going to trigger a bunch of tax obligations, both from a compliance reporting perspective as well as what it means from a total cost basis.”
Changing tax environment
Including tax as part of strategic business planning will get trickier in the years ahead as tax requirements in the United States and globally are on the verge of changing in big ways.
Among other things, the Biden administration has proposed raising the top corporate tax rate and adding a minimum tax on book income along with changes that would lead to higher taxes paid on global intangible low-taxed income (GILTI). In addition, 130 countries have signed an agreement to pursue a minimum corporate tax rate of 15%. All of these changes will further add to the strategic character of tax issues.
“Changing U.S. rules under potential reforms combined with global shifting rules with BEPS 2.0 is making it more difficult to get both sides of the tax equation to work in concert,” he said.
BEPS stands for base erosion and profit shifting, which relates to how companies move operations and assets around globally to optimize their tax planning.
The ideal situation is for the CFO or tax function head to be part of the leadership that’s making business decisions and contributing the outcomes of scenario planning exercises that incorporate existing and potential tax law. These exercises factor in the company’s historical tax and financial reporting data in addition to how tax laws, both domestically and globally, could change.
“Imagine you’re at the leadership table with a series of toggle switches so the business leaders can see the various impacts of different laws getting pushed forward and then understanding both the operational impact on the company as well as the financial impact, all through modeling that data,” he said.
Findings from a survey KPMG released last month make it clear C-suite leaders want and expect tax function leaders to be part of the business planning process, but there’s a big gap between this expectation and the reality.
The survey shows almost 90% of leaders want tax at the table but only 35% see their tax function as strategic and only 31% are using tax data in their modeling. And almost 75% say their finance function doesn’t know how to use tax data in a forward-looking way.
“We’ve been clamoring as a tax community for years to get tax to that leadership table, so it’s great to see that data,” Brown said. “On the flip side, we’re not as optimistic about seeing that only 35% of that C-suite was describing their organization’s tax function as strategic.”
The findings can be interpreted as a call to action, he said. “It seems like it’s setting up this expectation of what their tax function [can] bring to the leadership discussions,” he said.
It’s this gap that CFOs and their tax chiefs working with a partner in a co-sourcing relationship can help close, Brown said.
The alternative is to try to build that capability in-house, but that can become a resource drain until two things happen: technology solutions are further refined so they’re more effective and user-friendly, and the talent gap is closed.
The talent gap stems from the disconnect finance leaders face trying to hire people who understand both tax law and data analytics.
More than 80% in the KPMG survey say it’s hard to hire good tax talent, and a similarly big number say there’s a confusing array of technology choices, making it hard to know which investment will produce a measurable return through optimized tax planning.
“There’s a lot of noise in the system in terms of wanting to bring technology to the tax function and in knowing what’s the best skill set to hire,” he said. ”The expectations of the tax professional today are nothing like it was before. The C-suite is looking for strategic thinking, technical accounting, a tax background, and the ability to do data analytics. We would not have expected that complement of skills a decade ago, and now those are the skills at the top of the list. So, in a tough market to hire, [finance leaders] are looking for even more qualified folks.”