With the stakes and challenges of remaining competitive mounting, globalisation, regulatory changes, shorter business cycles, increased scrutiny and the changing international tax landscape are all affecting the tax function, which now literally finds itself in the ‘hot seat’, with its ability to deliver value to an organisation depending on how well it is able to respond to these demands.
Operational ineffectiveness often prevents tax functions from supporting the company’s overall business strategy. These ever-evolving demands, coupled with limited resources, mean that most tax functions are challenged to demonstrate the alignment of their strategic objectives and key performance indicators with the expectations of their stakeholders, in a bid to create value for the organisation.
The first step in achieving an organisation-wide focus on value creation is understanding the sources and drivers of value creation within the industry, organisation and marketplace. For the tax function to determine its drivers of value creation, it must identify its internal ‘customers’ within the organisation. If for instance, these customers value foresight, no surprises, consistent quality and timely delivery from the tax function, then the skills, systems, and processes that produce and deliver quality tax outputs and services are highly valuable to them. Consistent alignment of the tax function’s actions and capabilities with its customer value proposition should be the core of its tax strategy execution.
Value creation in tax requires a consistent baseline for the tax function to strategically and comprehensively transform itself to deliver incremental value. Tax functions that pursue investment in process reengineering, robust governance, elimination of control failure, increased automation, better integrated data and more analytic capabilities, often experience reduction in the cost of delivery and sustained bottom line improvements, while simultaneously reducing tax risk to the organisation.
A modern, effective approach to value creation in tax must be built around three core areas:
To steer the correct course for value creation in tax requires differentiating capabilities and realigning the tax function towards growth. If you want to transform how you deliver future value, you need to understand how value is delivered today. Therefore the first step is to assess the current state of the tax function, including how it compares to peers. That means looking at its people, processes, technology, data, communications, structure, risk management and strategy. Often this kind of assessment produces some quick wins to save money or improve performance.
When the assessment is complete, you can set a vision for your tax function of the future, along with a cost-effective road map to achieve the transformation. Sometimes transformation needs to be across the entire function, but often it can be scalable. The important thing is to get started now. Having a close link between strategy and execution is critically important.
Applying a value lens to tax requires an understanding of the golden thread of tax through the entire organisation and the requirement for insight, strategic repositioning, improved business performance, tax optimisation and tax integration. This leads to improved decision-making, stronger consensus and alignment among stakeholders, and increased returns on your most important corporate and capital strategies. Your tax strategy is your promise to deliver value. Creating or preserving this value is usually the end-state objective.
We use the Value Bridge of tax optimisation to demonstrate the impact of value creation opportunities in tax and the journey to a ‘Fit for Growth’ tax operating model. Predictable value creation in tax focuses on identifying what outcomes are achievable to see the entire transformation journey from start to finish.
Enabling tax professionals to work smarter and faster by aligning leading practices and emerging technologies – freeing capacity to focus on insights, armed with the right information at the right time, tax functions can move from being task focused to value added business partners that facilitate a proactive planning and analysis environment. They can drive strategic value by:
• informing strategic decisions;
• identifying and supporting decision-making processes that have a material impact on the tax risk profile of the business, without becoming a roadblock to the smooth operation of the front line’s day-to-day activities and authority;
• ensuring that the focus of tax risk management at an operational level is robust and that the implications of business decisions at an operational level are clearly linked to an understanding of the underlying tax risk drivers; and
• engaging in trends analysis, forecasting, modelling and benchmarking – activities that let you adopt a one step-ahead mindset.
Tax functions need to radically reinvent themselves to prepare for a faster moving and unpredictable future. Well-targeted investments in the tax function can pay for themselves quickly. Aside from the obvious gains – reducing the risk of costly tax errors and lowering the organisation’s effective tax rate (ETR) – an up-to-date tax function can improve cash management, strengthen legal entity reporting and management, keep its own costs down, and offer strategic input into business planning, new product or service development, and M&A transactions.
To that end, every company should put together a mechanism by which they can manage and measure their return on investment (ROI) and the progress they are making toward value creation in tax. Metrics for measuring ROI, both quantitatively and qualitatively, need to be developed and linked clearly to the tax function’s overall strategy and goals.
Considering the current demands facing the tax function, a key aspect of value creation in tax is establishing a timeline and milestones in the form of a transformation road map/blue print.
A road map is not static, and each company’s journey will depend on its current state, pain points, desired future state and scope of change, including what activities should be performed, when and where. Your journey to value creation in tax can range from encompassing multiple phases over several years to focusing on more incremental, single-phase implementations.
Tax Reporting and Strategy Africa Lead, PwC South Africa
Tel: +27 (0) 11 797 5506