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What’s keeping CFOs awake at night?

Head of Corporate Tax and Trade at Thomson Reuters, Ray Grove, explains why a new wave of global corporate tax reforms and a host of real-time reporting obligations have put the issue of tax transparency front-and-centre for CFOs

Tax has quietly become the biggest reputational and financial risk confronting CFOs in 2024 as regimes around the world double-down on technology and adopt increasingly sophisticated methods of assessing, auditing, and collecting tax revenue.

While complex initiatives such as the Organisation for Economic Development and Cooperation’s (OECD) new “Pillar Two” rules, which set the stage for new global minimum tax legislation, and the widespread growth of e-invoicing regulations and real-time tax reporting have not claimed the same level of attention as macroeconomic uncertainty, geopolitical unrest and technological disruption, they are rapidly becoming big concerns for the finance department.

Are they up to the task?

In many cases, the answer is no. While most multinational finance departments have spent the last few years fine-tuning their operations to be as agile as possible, focused on preserving working capital in the face of persistent economic volatility, tax has largely been treated as a sideshow.

Sure, tax has always been an important line item on the balance sheet, and the finance department is always working closely with the tax team to make sure it’s being optimized, but when it comes to developing fully synchronized workflows between the two departments, very few companies have managed to put all of the pieces together.

As a result, many corporate finance and tax departments are still wrestling with cobbled-together enterprise resource management (ERP) and tax software platforms that do not allow a complete view of the global landscape.

Until recently, even the largest enterprises could get away with that. Now, however, a new wave of global corporate tax reforms and a host of new real-time reporting obligations have put the issue of tax transparency front-and-centre for CFOs.

Hyperlocal tax transparency in the spotlight

For example, the OECD’s Pillar Two global minimum tax regime, which came into force this year, requires companies with revenues that exceed €750 million to pay a minimum tax rate of 15% in each country where they do business. To-date, some 138 countries have agreed to implement the new rules, which means that multinationals will now need to overlay each local interpretation of the standard into their existing tax frameworks.

To do that, corporate tax and finance departments will need to widen the scope of data they collect across their organization, including details such as stock compensation, pension expenses and deferred tax assets in each jurisdiction.

Adding to this increased demand for hyperlocal tax transparency, tax authorities themselves are getting more sophisticated about the way they collect and enforce tax compliance – in many cases outpacing the technology development of multinational-corporations. The best example of this is the growth of e-invoicing technologies, which are making it possible for tax authorities to receive transaction-level reporting in real time at the point of sale.

Under an e-invoicing scenario, tax authorities can immediately see both sides of a transaction and compare the sales invoice that was issued with the purchase invoice that was received to make sure that tax collected and tax paid are all in sync. There is no room for interpretation or re-stating. Once the transaction is completed, the e-invoice is automatically issued and it underpins all future tax reporting for that business, becoming the single source of truth for tax compliance.

Ray Grove, Thomson Reuters

According to a 2019 study conducted by the International Monetary Fund, the introduction of e-invoicing in Peru increased reported taxable sales and purchases by seven percent in the first year, and that rate grew steadily over time. Tax authorities in Chile, which was one of the first countries to implement e-invoicing, have reportedly increased tax revenue by $600 million annually thanks to the technology, and in the EU, member states are expecting to close a €164 billion gap in VAT tax revenues by deploying e-invoicing.

Harmonizing global tax and finance functions

The common theme across all these examples is that there is no room for error and nowhere to hide for companies who are found to be not in compliance with these new standards. Tax authorities have made no bones about the fact that they are implementing these new reforms and technological advances to increase – not decrease – their ability to force large corporations to pay their fair share.

The tech-enabled, data-driven manner in which they’ve done it now gives them instant, concrete evidence when companies miss the mark.

Suddenly, those technical details that used to be the domain of the back office have become front-and-center reputational and operational risk issues that the C-suite needs to take seriously. For many multinationals, however, getting that harmonized data is still very much a work in progress.

Perhaps that’s why 44% of respondents to Thomson Reuters’ recent Future of Professionals C-Suite Survey listed “digital transformation” as their highest priority for the next 18 months.

Getting to a point where tax software and ERPs can share standardized data across every transaction as it happens in real-time with a direct pipeline to tax authorities is a big undertaking. While the technology exists to connect those dots, businesses are going to have to get serious about overhauling their operations to make that happen.

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