Does your corporate tax department have an effective risk reduction strategy?

Most tax professionals know that dealing with forces beyond their control—and the costly disruptions they cause—is a way of life. Unfortunately, many tax departments are feeling a strain on their resources as a result of these events. This, in turn, puts tax departments at greater risk for even more audits and stiffer penalties. This trend has been especially true during the past five years, and is sure to continue in the years ahead.

“We are living in an environment where every day we are hearing about new requirements, whether it’s reporting, compliance, or new taxes being introduced,” said Lubov Mikulaninecova, Director of EMEA Tech, Technology, and Transformation at EY, during the Thomson Reuters webinar “Effective risk reduction strategies for today’s corporate tax department.”

The good news is that there are proven strategies for tax professionals to effectively navigate this change while achieving their goals and balancing their workloads. During the webinar, panelists discussed ways to reduce risk, avoid audits and potential penalties, and explore solutions to the challenges ahead.

Tax technology and automation: two of the biggest differentiators for tax departments

An important component of any strategy involves automation. For tax departments, it comes down to operations with built-in adaptability and resiliency that will determine not only their survival but also their competitiveness within the market.

Technology and automation can absolutely help increase efficiency in corporate tax departments, especially when it comes to mitigating tax risk and liability and guarding reputational risk. Automation is also considered an essential part of improving processes and productivity. And, not surprisingly, Artificial Intelligence (AI) is viewed as a game changer for tax compliance and automation, helping with resourcing issues and helping tax professionals provide higher-quality advice with less effort.

That’s why it is crucial for firms to integrate technological solutions to streamline processes and manage compliance risk. “There is a bigger push to kind of focus more on the operating efficiency and trying really to streamline, standardise and automate the compliance tasks with the introduction of technology solutions.,” Mikulaninecova said.

Nadya Britton, Enterprise Content Manager for Thomson Reuters, emphasises the critical role of technology in managing tax risk. Britton notes that a big reason many firms feel they can “mitigate and manage risk and decrease tax liabilities” is because they’re relying on technology to help them.

Britton says that investing in automation has additional benefits, such as freeing up staff to focus on more meaningful tasks, or even saving firms money that can then be invested in hiring additional staff.

One such solution is ONESOURCE Indirect Tax Determination, a global tax determination software that automates tax calculations. The software can help firms drive greater efficiency while giving firms confidence in the results and the process.

Under-resourcing in corporate tax departments leads to higher penalties from audits

Half of the respondents to a 2023 survey conducted by Thomson Reuters, in partnership with the Tax Executive Institute, felt under-resourced and experienced higher penalties from audits. The survey consisted of more than 350 senior tax professionals across different industries.

“Under-resourced tax departments are more likely to incur higher penalties when audited,” Jesse Shannon, Global Indirect Tax Specialist at Thomson Reuters, said during the webinar.

Nadya Britton pointed out that “for the departments who felt under-resourced, they were likely to have more audits and consequentially face higher penalties. 72% of the under-resourced departments incurred at least one audit within the last twelve months.”

These serious consequences underscore the need to have a strategy in place. It can help under-resourced departments manage audits effectively. Mikulaninecova notes that even if a firm is under-resourced, having a strategy in place to manage the role of technology at a firm is a good way to proactively prepare for “all these circumstances.”

Mikulaninecova further notes “a lot of movement in that space as well, where new roles like head of tax operations or tax technology manager or tax data scientists are being introduced again to manage also the projects and have this kind of continuous improvement cycle really working and manage well.”

Measuring performance in corporate tax departments is essential

A formalised process for performance measurement is an absolute necessity in corporate tax departments. Yet, only a third of the departments polled in the Thomson Reuters / Tax Executive Institute survey said they have a formal process in place for measuring performance.

This poses several challenges, including making it extremely difficult for corporate tax departments to evaluate their success and identify areas for improvement. Mikulaninecova emphasised the increased adoption of qualitative Key Performance Indicators, or KPIs, for short.

“There is a shift towards looking more at the operational side of things right,” Mikulaninecova said, adding that firms are examining the efficiency and effectiveness of the processes they have employed and questioning if they’re “really focused on the routine compliance work or really focus on what we call value add activities right.”

Success in the years ahead depends on not only employing the right technology but also being able to effectively measure success. Having effective processes in place will give you an edge over the competition and help your next tax department audit go smoothly.

To learn more about the challenges facing today’s corporate tax departments,
see our 2023 State of the Corporate Tax Department Report.