cite increased complexity or uncertainty as their top challenge
are concerned about global minimum taxes and related disputes
will invest in new technology to support reporting in 2022
It’s never been easy to be a tax leader, but perhaps it’s never been as hard as it is today. Sixty-one percent of the tax leaders who participated in our survey cited either increased complexity or uncertainty as their top challenge, while only 37% cited higher corporate taxes or exposure to new foreign taxes. These concerns are more than understandable, since the rules aren’t just multiplying. They’re also still in flux.
In the US, tax increases are on hold—but they may return, with details still uncertain. Whenever power in Washington changes hands again, yet another shift in tax policy direction may take place. In response to Organisation for Economic Co-operation and Development (OECD)’s proposals to reallocate how global business income is taxed among countries and establish a new 15% global minimum tax rate, the European Union has proposed tax legislation that would impact companies operating in Europe, regardless of where they are headquartered. Other jurisdictions also are considering how to implement the OECD proposals. While the details of US and foreign tax proposals may change, the direction of current proposals all point toward increased tax payments, more compliance challenges and the risk of multiple jurisdictions asserting the right to tax the same income.
The 92 tax leaders in our survey are largely enthusiastic about technology. Sixty-six percent of tax leaders say that capitalizing on digital transformation initiatives (such as the move to the cloud) is very important for their company’s ability to grow in 2022. That’s one of the highest rates of any leadership group. Tax leaders’ enthusiasm for digital transformation could serve them and their organizations well—if they take the right approach.
Policymakers in the US and more than 130 other countries have committed to a straightforward goal under the OECD’s proposals: to ensure that multinational companies pay at least a minimum tax rate, and that the amount of tax to be paid should be calculated on a country-by-country basis. If the theory looks clear, the practice looks to be extraordinarily complex. It’s uncertain how these laws will evolve, and cross-border alignment is often lacking. Seventy-one percent of tax leaders surveyed cite as their single top concern either the impact of country-by-country minimum tax laws, related compliance challenges or intergovernmental tax disputes—which are a likely result of these laws and other proposals to reallocate global business income.
Adding to their previous burdens, many tax functions will now have to perform separate minimum tax calculations for every jurisdiction in which they operate. As negotiations between Europe and the US continue, it remains unclear for which sectors minimum tax laws will lead to higher taxes—and if so, how much higher. When cross-border rules conflict, companies may face double (or triple) taxation. During disputes that may ensue, obligations and fines may keep rising.
In response to these challenges—as well as rising pressure from governments and stakeholders to disclose more tax information—many tax functions will need to build up internal and external resources. Here, as with their other challenges, new technologies and skills will likely prove invaluable. Some tax functions may also wish to engage with policymakers to help craft a fair, pro-growth tax environment that would encourage foreign direct investment. Nearly every tax leader would do well to be prepared for tax controversies, a potential rise in audit frequency and continued changes in global minimum taxes.
Nearly two-thirds of tax leaders intend to invest in technology to support the reporting function this year. In fact, many tax leaders are emerging as technology leaders inside their organizations. Fifty-nine percent report that, in response to the evolving global tax environment, their company is considering automating more processes. Along with chief information officers, tax directors are most likely to report that their company will accelerate digital transformation to keep up with the evolving global tax landscape (53% for both versus 42% for all executives). Many tax leaders also understand that new technology tools by themselves won’t be enough. Over half in our survey say they’ll invest in technical upskilling. Two-fifths will use more outsourcing, managed services or third parties.
These are logical responses to the complexity of the current tax environment and the need to quickly adjust as rules evolve. It’s hard to keep up if you haven’t updated your systems, upskilled your people and found trustworthy partners to help with specialized work or sudden surges in your workload. When done right, new technology tools, accompanied by new skills and partners, can also bring down costs so you can do more with less.
To effectively upgrade your tax function, it’s often wise to focus on four imperatives: addressing pressures to do more with less by making the most of your operating budget (in part through scalable solutions), aligning with company-wide digital transformation initiatives, managing change with a focus on culture and trust and mitigating risk through consistent standards, protocols and tech-enabled controls. The end result should be not just an effective way to handle continued change, but also a simplification of the complexity of tax reporting.
There’s some great news for tax leaders who understand the importance of digital transformation. Their CIO colleagues overwhelmingly report including their input into transformation projects: 93% say that they seek to align digital strategy with tax strategy at some point in the project lifecycle. It’s critical that tax get a seat at the table in digital transformation projects, because—faced with such incredibly complex challenges—tax professionals are usually “super users” of digital technology. They need to be able to align their priorities with the overall strategy and make sure that their needs are met. This alignment of tax with technology and finance is especially important today, with so many organizations embarking on cloud transformation and enhancements to enterprise resource planning (ERP) systems.
There’s also a real opportunity for tax to be a value driver for digital transformation initiatives, by finding tax efficiencies to help offset the costs. Many tax functions, for example, can find R&D tax credits to help pay for cloud investments. Many can also reduce future tax exposure if they make sure that digital transformation projects will provide them with the right data. If, for example, new or updated ERP systems offer more details on purchases, taxes paid to vendors or logistics costs, tax can more easily find savings and prevent overpayments. Digital and cloud investments also tend to impact companies in three ways: they modify the character of revenue streams, introduce new sales channels, and transform the type and location of internal capabilities. These changes present both a requirement and an opportunity to revise tax operating models (flows, economics, entity structure) in a way that captures new value and protects associated income from being taxed more than once.
To provide this value, it’s highly beneficial for the tax leader to be involved in the project early. Unfortunately, only 13% of CIOs report including tax throughout the project life cycle. Only another 17% involve tax in the planning stage. The other 70% may be bringing in tax too late to add significant financial value to the project. That’s a major opportunity waiting to be seized.
Our latest PwC Pulse Survey, fielded January 10 to January 14, 2022, surveyed 92 tax leaders from Fortune 1000 and private companies, along with other C-suite executives, about business priorities, investment plans and concerns as they think about the year ahead. Find all of these insights in our PwC Pulse Survey.