2021 Indirect Tax Report
Transitioning for indirect tax compliance specialists to strategic advisors
Corporate indirect tax professionals have been told for years that they can garner more influence and respect within their organizations by transitioning the indirect tax function from a purely compliance-oriented activity to a strategic advisory role. If most of the compliance function can be automated — and most of it can — there is an opportunity for indirect tax teams to leverage the financial data at their disposal, identify hidden tax savings, and provide decision-makers with valuable strategic planning and forecasting advice.
Indirect tax teams are in an ideal position to make this transition, provided they have tempered tax compliance through outsourcing or adequate investment in tax technology. At the moment, admittedly, most indirect tax teams are still focused primarily on tax compliance. However, in the recent Thomson Reuters report, “Indirect taxes: Much more than a process,” several of the tax directors surveyed had successfully adopted a strategic advisory role, and their insights about the challenges and priority such a shift entails are instructive.
According to the report, the major factors involved in moving from compliance to a strategic advisory role were:
- Effective relationship-building with other departments
- Understanding the strategic relationship between departments
- Development of different skill sets (for example, data analysis, communication, technical expertise)
- Recruitment/development of skilled talent, particularly in tech
- Investment in appropriate tax technologies and training
The indirect tax advantage
One big advantage indirect tax teams have is that they interact with almost every other department in the company, so their knowledge and expertise across the enterprise gives them a comprehensive perspective on how well the organization is executing its strategic vision. Beyond simply complying with indirect tax regulations, indirect tax teams have a treasure trove of data at their fingertips. When this data is properly analyzed, it can provide unique insights into a company’s supply chain, customer behavior, and cash flows, and can shine a light for the C-suite on factors that could affect acquisitions, investments, new product development, and other key decisions.
Undertaking these responsibilities all at once is unrealistic, therefore prioritizing the most fruitful contributions is a more reasonable path. In any case, the process itself starts by earning trust with leaders at the top.
Indirect tax professionals actively involved in strategic decision-making reported they were able to take on this role because most or all regulatory tax compliance processes had been automated, freeing up time for various types of strategic analysis. Furthermore, those involved in higher levels of decision-making — such as acquisitions, new product launches, pricing — got there by first demonstrating their financial value, mainly in the form of reclaimed taxes.
For example, one tax leader successfully reclaimed $150 million in back taxes that were essentially invisible until their team started using a new indirect tax technology tool to analyze past returns. Another leader said their team expected to recover up to $500,000 per year in value-added tax (VAT) that was too tedious and time-consuming to reclaim until their VAT process was outsourced to a more efficient new service.
Adding value to the enterprise
Once the indirect tax team’s strategic contribution yields some tangible financial results, attention can start to be paid to other areas where these insights can add value to the organization.
Some areas where survey respondents reported success in adding value were:
- Avoiding penalties and maximizing reclaims
- Providing supply-chain transparency
- Analysis of customer behavior patterns
- Due diligence and structuring advice for new ventures and acquisitions
- Crafting market entry and pricing strategies
- Advice on structuring contracts
- Customer-service support through accurate invoicing
- Preparing for changes in the tax code
- Leading and managing relationships with tax authorities
Each of these areas comes with its own opportunities and challenges, but one of the most important factors across the board is convincing leadership that indirect tax teams can play a significant advisory role if given the chance. Indeed, survey respondents involved in mergers and acquisitions (M&A) activity indicated that their contribution would be much more significant if CEOs involved the indirect tax function much earlier in the due diligence process.
“Indirect taxes won’t stop a deal from going ahead, but they might change the way we do an acquisition,” one respondent said. Another lamented that the indirect tax team’s role in acquisitions was too often relegated to solving problems after the deal was done and indirect tax problems surfaced.
Expanding the indirect tax skill set
As enticing as many of the above opportunities might sound, none of them can happen without a highly skilled indirect tax team that knows how to use the technology at their disposal. In addition to tax and accounting knowledge, the skills most often needed for developing a strategically relevant indirect tax department involve technical know-how, expertise in strategic analysis, and communication skills — particularly when it comes to explaining the rationale for indirect tax recommendations to leadership.
Interestingly, for many companies, a desire to develop the capabilities of their indirect tax team can also dovetail with the organization’s need to attract and hire top talent. Given the possibility of playing a more strategic role in indirect tax, many professionals are seeking opportunities to develop a broader skillset and position them for larger roles in the future. Consequently, many indirect tax teams — particularly smaller ones — are offering prospective hires a chance to do more interesting work and carve out an attractive career path within the company.
In the report, technical skills were at the top of almost everyone’s wish list for their fellow indirect tax team members, but there is still debate on whether it’s better to hire indirect tax experts and teach them about technology, or hire technology experts and teach them about indirect tax. The terms of this debate appear to be shifting, however, as Millennials and younger digital natives enter the profession.
In general, most respondents said that “understanding indirect tax is more important, they can learn about technology” — but many also stated it was easier to teach someone the technicalities of indirect tax than to teach them how to get the most out of their technology. Furthermore, considering the increasing importance of technology in the tax department of the future, one respondent noted, “People who are handling indirect tax compliance will need to change from being tax experts and start hiring systems people who understand what the systems are doing and can translate that into the tax compliance process.”
Given that increased automation is a prerequisite for indirect tax teams that want to transition to a more strategic advisory role, and that expert use of software tools designed for tax analysis is the key to extracting strategic insights from a company’s data, it would seem that technical acumen is in high demand, however it is achieved. Fortunately, the most diplomatic responses in our report suggested that people with varying strengths vis-à-vis technology and indirect tax brought different perspectives to the team, and that teams with a more diverse range of skills across their members tended to be stronger.
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