Cloud transformation is accelerating at many companies, but tax leaders are concerned about the impact it will have on the tax function. Their biggest worry, according to our PwC US Cloud Business Survey, is an expected expansion in global tax controversy and reputational risk (42%). Their concerns are fueled by a shifting international tax environment that includes the Organisation for Economic Co-operation and Development’s (OECD) efforts to shape tax frameworks for the digital economy and more countries levying digital services taxes.
Applying existing tax rules to cloud-based business models also presents a challenge, according to 34% of tax leaders.
Not surprising, given that many tax rules may not reflect the recent digitization of the economy and the pace of tax policy change often lags behind the speed of business.
But there’s more to consider than what tax is due, and tax leaders are preparing for cloud transformations and their impact on tax operating models.
Nearly a quarter (23%) of tax leaders say the most significant impact will be changes to tax reporting and other business processes as well as changes to roles and staff skills, likely due to the additional analysis and compliance burden from cloud-related endeavors. But cloud’s impact could present opportunities as well. Tax leaders are also focused on underlying financial systems, relevant data and tax software systems that drive tax calculations.
Obtaining tax-ready data at required levels directly from cloud-based ERP systems, for instance, could drive significant efficiencies and enable strategic efforts. Another opportunity lies in developing or enhancing small automation tools to help manage system changes and integrate data. Taking advantage of these efficiencies to eliminate manual tasks, alleviate burden on tax staff and spur the creation of other automations are all critical for tax to keep pace with an accelerated operating tempo.
Cloud solutions can enable digital transformation and growth, but ROI is still a critical metric for the C-suite. And while long-term strategies, capabilities and costs all drive direction and approach, make no mistake — costs can often alter decision-making.
Bringing the tax voice early into the process can help businesses understand how to potentially lower the overall financial burden of their initial cloud investment.
Can a tax lens really make a significant difference? You bet. Tax can apply to cloud spend in various ways. The R&D credit against US federal- and state-level income taxes, for example, can add up to significant savings back to the company for certain innovation-related costs. This can be a dollar-for-dollar reduction against cash tax outlays. Only 38% of CFOs say they’re very confident they’re taking full advantage of the R&D tax credits for their cloud investments.
Totals may not add up to 100% due to rounding. Q: How confident are you in your company's ability to take advantage of R&D tax credits for your cloud investments? Source: PwC US Cloud Business Survey. June 15, 2021: CFO base of 84
A holistic rather than siloed approach to cloud strategy can capture these types of opportunities — but robust analysis is key. Other tax implications such as taxable presence, withholding and indirect taxes, along with sustainable legal entity structures, may need to be analyzed as the broader business considers its cloud roadmap and spend. Partnering with the C-suite to evaluate the broader picture gives tax a seat at the table and bolsters its reputation as a strategic ally.
Cloud may be the engine, but human capital is the fuel. Tax leaders are focused on enhancing digital skills so people can take advantage of new ways of working. Without proper know-how, organizations could fall short of reaping cloud’s full benefits.
That’s also why digital upskilling continues to power the evolution of the tax function. Both tax technical and digital skills are critical backbones to run efficient processes.
While upskilling is essential, tax leaders highlight many other barriers to achieving cloud value, including alignment and clarity of roles and responsibilities relating to cloud ownership. Not surprisingly, a clear majority (79%) of tax leaders also pinpoint the governance challenges of managing cloud transformations given the tax function’s keen focus on risk management.
Tax has a valuable role to play by helping to integrate cross-functional governance into cloud strategy development and execution. Prioritizing data governance to preserve the tax-sensitization of source data can help lay a sustainable foundation for the future.