Tax analytics promises to change a function traditionally viewed as a cost centre into a strategic powerhouse.
According to the World Economic Forum, the amount of data globally was estimated at 44 zettabytes at the start of 2020 – that’s 40 times more bytes than the number of stars in the observable universe. By 2025, Seagate UK estimates the amount of bytes in the datasphere will have grown to 175 zettabytes.
The challenge for governments, companies and professionals is how to harness this immense wealth of information. In the finance space, tax analytics has emerged as one method of using historical business data to unlock future opportunities.
What is tax analytics?
‘Tax analytics involves using the granular enterprise data a business already holds to make more holistic enterprise decisions and add value, rather than just providing a retrospective view,’ explains Andy Hung, Segments Director, CCH Integrator, Tax and Accounting, Asia Pacific, at Wolters Kluwer. ‘Tax analytics is a shift from the traditional tax function, which focused on how much tax a company needs to pay. It’s a change in mindset for tax professionals from what they need to know, to becoming a strategic partner to the business.’
For many tax professionals – especially those coming into corporate workplaces from professional services firms – using tax analytics is a natural extension of their keen eye for detail, regulatory and tax knowledge, and technological skills.
Says Kim Olsen, Head of Product, Enterprise Software, Tax and Accounting, Asia Pacific, at Wolters Kluwer: ‘It’s good for tax professionals because they can do more with the data they have. They can leverage their analytical skills and their deep knowledge of regulatory requirements, so it plays into the natural mindset of a tax professional.’
From reactive to proactive
Once your tax data is on a platform such as CCH Integrator, tax teams and advisers can interrogate the data for trends, model tax scenarios, project the impact of different business decisions on a future tax position, and provide insights into commercial levers for a business. The information can be viewed and presented using business intelligence and visualisation tools such as Microsoft Power BI and Qlik. This type of simple, elegant storytelling is particularly important because the insights from tax analytics will often be shared with stakeholders who don’t have financial or tax expertise. They will also be shared with CEOs and boards charged with the governance of tax compliance and reporting obligations, who need to understand business impacts at a glance.
‘Without the tools and technology software we have today, a team of people looking at data at this level of detail would take months,’ Olsen says.
‘Tax analytics allows you to look across datasets to spot the outliers: the anomalies and opportunities. It’s also a better demonstration of good governance and risk management. It shows your control over the data. For example, accounts payable and receivable make decisions regarding tax. With tax analytics, you can confirm they are making the right decisions, and proactively find and fix anomalies.’
Adds Hung: ‘Tax professionals are the custodians of all that data and CFOs look to tax to be that business partner. They look to them to be sharp and insightful, to add value beyond just doing the job.’
Strategic insights everywhere
‘If I had to summarise in one word what tax analytics can help you uncover, it would be “efficiency”,’ Hung says. ‘Looking at the operations, revenue and costs in terms of tax efficiency can show you how to run a business better. You can find out your ROI drivers on a particular portfolio, product or transaction type, and you can make better, more profitable decisions.’ Olsen has seen this herself, when working in mergers and acquisitions. ‘We often used to model acquisitions – examining the trends of the business we were acquiring, and calculating the implications for the overall tax position. Back then, we didn't have today’s tools, so we used to manually make our calculations in Excel.’
‘The same is true of supply chains and transfer pricing. You can use tax analytics to calculate the environmental impacts, or the inefficiencies of operating across borders, and find out if and where you have tax leakage or risks.’
Multinationals and businesses looking to expand overseas can also use tax analytics to monitor in which tax jurisdictions they operate most profitably, to inform decisions to mitigate tax risks, or choose where and when to expand. Others might model the impact of a tax legislation change, such as New Zealand’s pandemic-triggered 2020 reversal of its 2011 depreciable asset legislation regarding corporate real estate, or India’s changes to corporate capital gains tax on the indirect transfer of Indian assets.
Ahead of the game
Tax authorities worldwide have made no secret about their intentions to ramp up digital transformation and share tax data, to improve compliance and track tax almost in real time. Governments have to find revenue to pay for COVID-19 related spending, and many tax authorities such as the Australian Tax Office (ATO) and New Zealand Inland Revenue have already announced the industries and expenses they intend to target. Actively monitoring and managing the company’s tax position can help reduce those ‘please explain’ conversations with the tax office.
Says Olsen: ‘Tax authorities may say they want to get data directly from ERP systems, but we all know that lots of work goes into translating ERP system data into a tax position. However, at some point in the future, the tax authorities may be able to send a pre-completed corporate tax return. At that point, you’ll want to know ahead of time what the tax authority thinks your tax position is. It is easier to stay in front of where the tax authority thinks you're going to be – even for PAYG payments.’
Adds Hung: ‘You can spend months after lodging a tax return answering the tax authority’s questions. If you have done your tax analytics, you will be able to tell a story to explain how you've proactively managed your tax. You can, to a certain extent, pre-empt the tax authority’s questions so, again, it improves efficiency. The more you know, the better prepared you’re going to be.’
Make the jump
To do tax analytics well, the finance team needs to move away from multiple spreadsheets, to shared, online storage of tax data. This allows tax professionals to add to and interrogate the same dataset, knowing the data is accurate and up to date. While the advantages for companies with tax teams in different locations or countries is clear, tax analytics isn’t just a tool for large multinationals.
‘Multinationals can definitely benefit from using tax analytics, but it’s also really good for mature businesses looking for new opportunities for growth,’ Olsen says. ‘In fact, everyone can benefit but some have deeper pockets, so I would advise businesses to see what’s available at their price point.’
Hung and Olsen agree that professional accounting and consulting firms that hold customer tax information often already use tax platforms to manage and file tax returns. For them, tax analytics could be a way to differentiate themselves and provide another value-add service that also moves the conversation from transactional to strategic.
What does your business value?’ Hung asks. ‘If you look at your KPIs and metrics and you value efficiency, there’s a business case for tax analytics. You might need to find out how to use limited resources in smarter ways. Big or small, data analysis will be valuable. The return is there.’
Five questions to ask before you invest in new tax technology
Wolters Kluwer has put together a comprehensive guide to asking the right questions when buying corporate tax technology software.
In the guide, you will learn the importance of a tax software solution that:
- fully integrates the tax provision and tax return
- produces a full tax balance sheet
- automatically produces your tax provision
- configures easily to meet your organisation’s changing needs
- provides timely, effective customer support after implementation.