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Putting tax up front: Activate your digital strategy with confidence

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Summary

  • Tax is evolving and it’s now a key ingredient in broader strategic planning.
  • Digital investments, such as financial data and ERP upgrades, bring an opportunity for CIO/CTOs to expand the benefits of their digital transformation spend.
  • When CIOs and tax leaders work together, CIOs can often find extra funds for their projects, enhance trust in technology and better meet the business’s needs.

Now, more than ever, companies should be bringing tax to the forefront of every business and strategy conversation. Whether they are contemplating a restructuring, trying to drive broader digital transformation, or evolving their supply chain, each decision has tax implications. By factoring in tax up front, the tax discussion can be a catalyst for — rather a consequence of — strategic business decisions.

Bar chart showing
When are tax leaders taking a seat at the digital transformation strategy table?
Throughout project life cycle
%
Planning
%
Requirements gathering and design
%
Implementation / post-implementation
%
Aren’t included / unsure
%
Source: January 2022 PwC Pulse Survey. Base of 678 business executives, CIO base of 89. Q: At which stage in a digital transformation project does your company start considering how your digital strategy aligns with your company’s overall tax strategy and implications such as R&D tax credits, state tax credits and incentives, intellectual property management and other tax considerations?

In a January 2022 survey, just 30% of chief information officers (CIOs) said their company’s tax leaders were part of the planning process for digital initiatives. Why does that matter? Thinking strategically about the tax-tech relationship can help you reap the maximum value from your digital investments — whether for large-scale transformations, enterprise resource planning (ERP) and cloud modernization, even special projects like environmental, social and governance (ESG) reporting or emerging tech pilots. Tax considerations like R&D credits, incentives and intellectual property management can make a big impact when looking at the overall digital and cloud investment strategy.

Digital and cloud investments can affect companies in three ways:

  • Modify the character of revenue streams
  • Introduce new sales channels
  • 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.

Four ways to build your tax-forward transformation strategy

1. Get your tax and tech leaders on the same page

There are considerable benefits to encouraging your CIOs and tax leaders to team up, early and often. In a recent PwC webcast, tax leaders and business executives were polled and voiced key priority focus areas for 2022:

Rank which C-Suite priority your tax function is most focused on right now
  1. Digital transformation
  2. Workforce challenges
  3. Growth strategies
  4. Operating model and supply chain disruption

Source: PwC Tax Readiness Webcast: The future of tax — What’s your workforce and tax technology strategy in 2022? (2,051 attendees; base of 1,819 respondents)

At the front end of a digital transformation project, working closely together can help build a stronger business case by:

Help offset the costs of cloud transformation and enhancement to ERP systems

A real estate development company that was building a new cloud-based platform worked with the tax team on its technology plan and identified an additional $200 million in tax savings over the life of the project.

Help pay for cloud investments

A global company that was developing a cloud-powered marketplace ultimately chose to house its research and development in the United States in order to realize federal R&D tax credits applied to contractor wages.

Inform taxability decisions

Sometimes it’s a matter of making sure transformation projects are capturing high-quality data that can inform better taxability decisions down the line.

Data that has more information about a particular purchase, taxes paid to vendors or shipping details can help companies identify where they might be overpaying taxes or where they can limit their exposure.

2. Make tax a priority to your ERP implementation plan

Upgrading outdated or overly complex ERP systems is one way companies are responding to market challenges. Involving tax up front in the implementation process offers an opportunity to help improve tax data quality and operational efficiency — saving companies’ time and money. By not including tax early, or at all, businesses may miss an opportunity.

Rank how integrated tax is in your company’s ERP upgrade
  1. Tax has a seat at the table and is helping to drive the ERP upgrade as a part of a steering committee
  2. Tax was included in initial requirements gathering sessions but is not a part of a steering committee
  3. My company is planning an ERP upgrade, or is already doing so, but tax has not been consulted
  4. We have completed our ERP upgrade

Source: PwC Tax Readiness Webcast: The future of tax — What’s your workforce and tax technology strategy in 2022? (2,051 attendees; base of 1,790 respondents)

ERP design decisions have direct tax, indirect tax (such as sales/use, value added tax, goods and services tax), and international tax implications that are not immediately apparent or understood by non tax resources. It’s also an opportunity for tax departments to enhance their tax technology ecosystem and focus on value-add tasks, such as tax planning.

3. Tell a better data story by investing in tech in the tax reporting function

Maximizing the use of technology within tax functions can address the challenges of gaining easy access to clean and robust data; working within tax reporting systems not being optimized; and multiple users making similar data requests. Automation can enable tax teams to better integrate data and processes, enhance analytic capabilities and deliver better quality output in less time.

For example, ensuring an optimal tax configuration as part of any ERP system upgrade is critical. Making that investment can transform the tax function into an in-house strategic partner, potentially helping to deter your workforce from joining the “great resignation.”

Rank how your tax function tasks have been most impacted by recent workforce challenges
  1. Compliance and reporting
  2. Planning, strategy and C-suite support
  3. M&A and deals

Source: PwC Tax Readiness Webcast: The future of tax — What’s your workforce and tax technology strategy in 2022? (2,051 attendees; base of 1,642 respondents)

Companies need to think broadly and examine whether the tax function’s historic ways of operating can meet the organization’s goals in the future.

4. Understand the unknown and potential risks related to tax implications of emerging technologies

Tax professionals are challenged to not only adapt to new technologies, but also have a comfort level with disruptive technology and innovation such as artificial intelligence (AI), machine learning (ML) and robotic process automation. Add the latest hot topic of demystifying the metaverse into the technology mix and today’s tax function is essential to the digital transformation conversation.

Stepping into the metaverse doesn’t mean escaping taxation, specifically when it comes to buying and selling non-fungible tokens and the sales tax impact. Digital assets are a new and rapidly evolving asset class, with several characteristics that make them unique from a taxation perspective. Existing rules have not typically been developed with digital assets in mind. Tax leaders will likely continue to be in the hot seat to develop an approach that incorporates an understanding of the tax consequences of their digital asset strategy and activities, including the characterization of asset classes, transfer pricing implications and reporting requirements.

Build advantages that will last

Tax can be a CIO’s ally at every stage of a technology initiative, but they can do the most when you bring them on board at the start. Tax can then help design the initiative to maximize direct and indirect financial benefits, enhance data use, maximize trust and win broad stakeholder support. In an upcoming series of articles, we’ll zero in on each of these potential benefits that can help when embarking on a technology transformation.

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Contact us

Dom Megna

Tax Reporting & Strategy Leader, New York, PwC US

Email

Chris Gilbert

International Tax Services Partner, New York, PwC US

Email

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