Tax and ERP – Planning your tax function transformation

Context

I’ll take it as given that tax and finance professionals are in search of something better. Beyond the desire and need to innovate, there appears to be consensus that there are increasing ‘supply side’ (scarce resources) and ‘demand side’ (more to do) pressures on the tax world. We explored some of these themes in previous articles by my colleagues, Warren Dick and Zac Correia. 

To be clear, I’m not suggesting that an organisation’s transformation agenda should include tax ‘for the sake of it’, but I do think it is now necessary to have an informed view on how to respond to the changing landscape. And while that may sound trite, this informed view is illusive for a few reasons, grossly simplified as follows:

• A disconnect between expectations (and lived experience) of IT, Finance and Tax stakeholders, complicating planning and design
• A disconnect between the skills (and lived experience) of Tax, Finance and IT professionals, complicating everything.

I should add that when I refer to ‘Tax’ I’m making a very broad generalisation. Clearly, there are many different types of taxes and the dynamics at play for each are different. In my experience, our collective understanding of the ERP considerations of indirect taxes is more mature. There are several reasons for this (e.g. maturity of the relevant technology, large volumes of transactional data, need for real/near real time reporting, etc) which are instructive and so will be explored in future articles, along with the specific dynamics for other areas of tax. 

Three further pieces of context before we dive in:

• I focus here on tax and ERP in a world where an organisation has chosen a Tax Operating Model closer to the ‘insourced’ end of the spectrum, though many of the issues are relevant across the spectrum of operating models, albeit with some important differences.
• This article focuses on evaluations of tax options as part of a broader ERP upgrade, but again, many of the issues are relevant to transformation post upgrades, again, with some important modifications. 
• The use of the term ERP is not strictly accurate, in that I’m really referring to the broader suite of financial accounting platforms and related modules that are often offered by the same vendor and integrated with the underlying ERP system (eg Enterprise Performance Management modules) or via the cloud hyperscalers (eg finance data warehouses).

The human side of change

I think the human side of change in tax is underestimated. Tax functions will often have different perspectives to IT and Finance on many issues such as risk, materiality, the true benefits of automation and the ‘on the ground’ challenges of dealing with accounting information. This means that the way that IT and Finance will view the tax process and therefore its transformation is quite different to how Tax stakeholders might.

One specific example is the heavy reliance for income tax automation on the Trial Balance. While this might be acceptable for some Finance processes, Tax users will need to access more detailed information and be able to classify it and then flow it back into the Finance process. The ability to accommodate this within the confines (budget, system architectures, timeframes) of an ERP project can be difficult. 

Our ability to address each of these issues has evolved exponentially and will be explored in future articles. In the context of understanding how to unlock the opportunity of a transformation, I’d simply note that a Business Implementer role is critical to truly representing, holistically, the needs of the tax users (or Tax Persona) in an ERP project and assisting in navigating the broader complexities of an implementation. Perhaps it's worth considering a few examples that bring this to life:

• In so many ways, tax is beholden to Finance and IT functions and processes. Ensuring tax is appropriately represented as those functions plan for change is critical, and often poorly executed in practice. A roadmap can be of great help here, focusing on understanding the timeframes other functions are working to, and being able to articulate the cost/benefits of decisions along the way, in the right moment, is critical to tax being truly accepted as a business partner in these transformation journeys.
• An evaluation of expectations and KPI’s of tax in this context is warranted. There needs to be an alignment of approach (risk appetite, governance, etc) between Tax and key stakeholders. 
• Manipulating data to enable tax analysis and the efficient classification of data for tax requires a deep understanding of various technologies (both ‘on’ and ‘off’ system - i.e., integrated solutions within an ERP environment and separate point solutions), the subject matter of the data (eg GST, tax effect accounting, transfer pricing) and tax operations experience (ie how processes actually work).
• The lived experience of many tax functions is that Tax is often held accountable for things which Tax would say is outside of its control, like timelines and the quality and format of accounting information. The outcome is that many Tax functions have created their own process to meet their goals, in a way which gives them greater comfort and control. An ERP project can be a threat to that control and is therefore challenging. Tax functions have expressed concerns that the information available to them post transformation, and their ability to interact with that information, might actually represent a backwards step.

This is an important area that is worth considering in further detail; more on this in future articles.

More changes?

It is trite to note that tax exists in a dynamic ecosystem. Beyond the normal demands of changing business models and evolving technology, there are the very real pressures of a rapidly changing regulatory landscape, both in terms of rules and expectations. 

There are several areas where the risk of not meeting regulatory obligations and expectations can be significantly compromised where they are not adequately considered in an ERP project. Indirect taxes are a prime example of this. These pressures will intensify with changes on the horizon such the OECD Pillar 2 rules, e-invoicing and the move globally towards indirect tax real time reporting. We’re already seeing such considerations influencing the business case for change.

Should we talk about data?

Some people have had enough of talking about data and of blaming data for poor outcomes. It is often cited as a reason for wanting to hold back on automation and process transformation; for example, there is little point in using a different calculation engine if the underlying data inputs are inadequate - we’re solving the wrong problem!

Assuming you’ve read this far, let me risk losing you here by making a few quick points on data:

• I think an ability to influence data set up will pay back handsomely when designing downstream tax calculations and reporting solutions. The finer details of these points, and their true power, are not widely understood. We will further explore this in future articles.
• Our knowledge of data structures and what is possible within the reasonable confines of an ERP implementation have evolved considerably recently.
• As previously noted, several looming changes (notably Pillar 2) will present significant data challenges. An ERP project presents a unique opportunity to assess the ability of an ERP to assist in this challenge. 

Wait, what about the actual tech?

Like data, the full potential of ‘on system’ technology and the ability to integrate ‘off system’ solutions is not fully appreciated. In the context of an ERP project, any tax assessment should include an evaluation of 'on system' solutions as a part of the end-to-end solution. We will further explore this important piece of the puzzle in our next article.

The end

I think the market is at an inflection point on tax and ERP. Evaluations of the possibilities are becoming more sophisticated and more commensurate to the risks and benefits on offer. Significantly, the opportunity cost of not changing is featuring more prominently in decision making, as a counter balance to the risk of sub-optimal adoption of new technology.

For many tax teams, it is a unique opportunity to address many issues that are difficult to tackle on a piecemeal basis. 

It is telling that tax is increasingly on the agenda for ERP transformations. I think the times demand it, and the technology and skills are there in the market to enable organisations to make better informed decisions.