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Digitization of tax ecosystem: Crafting the tax function of the future

tax digitisation, tax, income tax, corporate tax, tax ecosystem, Digitization of tax ecosystem, tax authorities, Tax function, Project Insight, Artificial Intelligence

Rapid globalisation, growing regulatory and business complexities and the evolution of tax technology are creating ever-increasing expectations from finance function/tax executives. In the new paradigm, CFOs need to look beyond traditional operating models and should plan to transform the tax function to provide greater value to businesses.

Though the tax function may be slow to adopt digitised processes, tax authorities are increasingly embracing the value of digital as they look for more real-time reporting. In fact, we are now entering an era in which perhaps all tax authorities globally would agree on the same position: That tax digitisation is good for everyone.

Observers have seen that tax authorities globally are setting sights on technology to enable digital collection and analysis of tax data/information. For example, we are seeing more countries in Latin America model their tax functions after Brazil's real-time reporting system; many European regulators are moving to the Standard Audit File for Tax (SAF-T) protocols. Spreadsheets are being replaced with web-based platforms, which in turn are being outfitted with machine learning software and Artificial Intelligence (AI) to reduce manual data entry, transform data, and speed up review processes. Shared drives are being retired to make way for more collaborative platforms that include functionality beyond document management. Each shift opening into more efficient, effective ways to complete existing tax tasks.

Back in India, the government's focus on policy and reform framework has powered the digitisation of various agencies and the tax department is not an exception. The government has joined the league of countries that have embraced digital technologies to augment capabilities of tax authorities. The stage was set by introducing systemic changes that act as levers for the digital matrix in which tax authorities have both access and tools to analyse taxpayers' data.

Welcome to the world of Project Insight!

Initiated by the Government of India, Project Insight's objective is to promote voluntary compliance, deter non-compliance, impart confidence and achieve fair and judicious tax administration. Under this project, an integrated data warehousing and business intelligence platform is being rolled out to collect information from various data sources (such as Registrar of Companies, GST database, RBI records etc.) in a secure fashion. The government would operationalise two new centres-the Income Tax Transaction Interaction Analysis Centre (INTRAC) and the Compliance Management Central Processing Centre (CMCPC). INTRAC aims to achieve smart tax administration by leveraging data analytics, predictive modelling and AI to flag discrepancies, while CMCPC aims to support voluntary compliance and issue resolution.
Armed with rich data from implemented systemic changes and public domain, through Project Insight, tax authorities will be able to create a single view 360-degree profile of taxpayers, set rules to detect anomalies, reconcile data, drive desired behaviours and build predictive models to prevent frauds on time.

Taking a leaf out of the government’s principle "Reform, Perform, and Transform", the Indian tax authority has started the journey to transform into a cognitive powerhouse. While the obvious tangible outcomes may be nabbing evaders, in the longer run, digital adoption will help the authorities drive better enforcement, increase the tax base, fix process gaps and plug tax leakages.

Tax function – Time to shift gears?

The pressure to transform existing practices was never this high for tax function across businesses. While there is a willingness to adopt technology, the tax function has predominantly been reacting to specific regulatory or reporting changes. Deloitte's "Reporting in a digital world" survey shows that tax teams spend almost half their time creating and updating reports. Considering that tax authorities are moving closer to source data, the tax function needs to start thinking about a blueprint to achieve data mastery, rather than traditional reworking from the source. Core business divisions are experimenting with cognitive technologies and new models under Industry 4.0. Further to this, the evolution of authorities and demand for higher efficiency in back office processes has made it an opportune time to prepare a digital transformation plan for the tax function.

As a start, CFOs are recommended to evaluate the current state of digital maturity index of their tax functions. CFOs can assess where their tax function falls on the maturity curve (from static in which the tax function is a low-return on investment cost center that manages basic compliance and reporting, to progressive, in which the operating model has been transformed and focus shifted to value-added activities such as planning, analytics, and cross-functional collaboration), see figure below, and then determine where they’d like it to be in future.

Figure-Where does your tax function currently fall on the maturity curve?

Organisations intent on moving up the curve may consider adoption of newer operating models. Options include:

1) The Insourcing model which relies on delivery of tax services by in-house staff, and is focused on identifying areas that can be combined to reduce headcount, as well as on process improvements and tax system upgrades to create efficiencies.

2) The Outsourcing model which focuses on joint delivery, with strategic teaming between in-house and third-party service providers addressing specific compliance and planning objectives. This is perhaps the more conventional model, in which outsourcing service providers are used tactically and in-house teams are focused on activities that require more company-specific knowledge.

3) The Operate model which entails complete outsourcing that covers not only routine tasks such as tax filing and meeting compliance requirements, but also vital technical, analytical, and/or advisory components. With the Operate model, a company can also shift data management and other technology responsibilities to a third party, which is typically not the case in a conventional outsourcing arrangement. Some members of the tax team may also become employees of the service provider. Under the Operate model not only can service levels improve even as the overall cost of operating the tax function declines, but the businesses may also gain new capabilities and insights that allow retained staff to play a more strategic role, and the tax function to deliver more value.

Regardless of the model adopted by the organisations, the digital transformation journey requires adequate investment and focus on specific work streams. These include changes in people skillsets augmented by new technical skills/analytics capabilities; understanding of newer technologies and digitisation trends; strong control framework ensuring data correctness and upstream integration into business and functional processes; ecosystem enablement and cultivating culture for change and innovation. The evaluation of the digital maturity index will be critical in customising work streams to suit the requirements of the businesses.

To be successful, CFOs need to undertake a thorough assessment of their current tax processes, of existing automation, analytics capabilities and the need to create a robust plan for new model. Tax functions that are open to exploring digital technologies and are ready to activate the above-mentioned work streams, will find themselves on the path to the "tax function of the future" and play a more strategic role in the organisations' journey.

(By Vineet Chhabra, Partner, Deloitte Haskins and Sells LLP)