How does a Tax Governance Platform work
How does a Tax Governance Platform work
Tax teams right now are trying to weather a regulatory, financial and strategic storm. Some are thriving, whereas others are sinking. To understand why some are more resilient than others, we looked deeply into how the tax function operates.
What makes some more successful than others? Why are these teams completely in control of the tax affairs of the organisation? Through this exercise, we realized that the most resilient teams share one common trait. They adopt a proactive approach to Tax Governance.
What is Tax Governance?
Tax governance refers to implementing clear and sustainable processes and procedures within a corporate governance framework to manage tax risks and ensure compliance with tax laws and regulations. This involves creating a long-term tax strategy, assigning clear roles and responsibilities, and managing tax risks on a project-by-project basis.
A robust tax governance framework integrates tax considerations with broader organizational strategies to ensure proactive responses to the challenges of a constantly changing compliance and reporting environment. This positions the enterprise for long-term success.
Regardless of the above, Tax Governance remains one of those hard-to-define concepts, like happiness or the Danish concept of hygge.
Breaking it down into smaller components, Tax Governance is commonly expressed through three main pillars:
- Tax Strategy, or the business goals which fall within the scope of the tax function, and how the tax function expects to achieve this. It should be agreed at the highest level of the organisation, and ideally align with the business’s corporate governance strategy.
- Processes to implement the Tax Strategy, providing detail on actions, checks and responsibilities.
- Reporting and accountability measures, ensuring that the Tax Strategy and processes are monitored, have authority and are able to indicate to what extent the tax function is in control of the tax affairs of the business.
At Loctax, this is how we define it as follows:
Tax Governance brings the Tax Strategy, and the underlying principles, to life. It refers to the processes and controls an organization has in place to support its tax decision-making and manage its tax risks. This includes reporting on its overall tax footprint and demonstrating that the organization acts in line with both the letter and the spirit of the law.
Defining Tax Governance is one thing, operationalizing it is another story.
Operationalising Tax Governance
This is the difficult and annoying part. Everyone talks about it, everyone thinks everyone else is doing it so everyone claims they are doing it. While most teams make great strides on some elements the large majority gets lost along the way.
We have identified three pillars that help tax teams on their journey.
1. Connect
There are three levels at which disconnects occur that hinder tax governance maturity. When there’s no connection, the tax function works as a silo and is unable to become a strategic business partner.
People
Tax teams face unique challenges due to their remote and scattered nature, which can create communication gaps and difficulties in aligning their work towards common goals.
The lack of face-to-face interaction and collaboration results in a lack of understanding of other team members but also other internal stakeholders. In order to be successful, tax teams are highly dependent on finance, legal and treasury colleagues, as well as external stakeholders like tax advisors.
Tax governance is not just a case of eliminating chaos but also of necessary tooling that follows how an organisation consciously is set up.
Data
Organizations are living ecosystems that evolve and change all the time. Each entity has its own background and legacy. Unfortunately, any governance framework is only as strong as its weakest link.
A point solution at HQ is great but what about the other entities on the Legal Org Chart? Tax people need a lot of qualitative data that doesn’t necessarily live in any source system. It is trapped in an inbox, spreadsheet or the heads of people.
Chances are some tasks are outsourced or a tax manager is MacGyvering their way out to get the job done. They are probably the true heroes of the Tax organization, but heroes don’t scale and it’s not sustainable.
It complicates communication between systems and makes obtaining a holistic view of the company's global tax position very difficult.
Regulation
Tax teams need to be aware of and comply with a range of ever-changing tax regimes. Each country, state and city has its own specific tax rules and regulations. Tax teams need to be able to develop a deep understanding of these rules in each jurisdiction in which the company operates. It’s the only way to ensure compliance, identify risks and opportunities and develop a strategy tailored to the company’s specific needs.
If everything and everyone is able to be connected, a single source of information has been established.
2. Collaborate
When the Connect pillar is secured, tax managers can stop being data hunter-gatherers. They can emerge from a reactive state dominated by firefighting, and get the bandwidth to think strategically.
Through solid, repeatable and scalable processes, the tax function will achieve a next level of collaboration that is both efficient and effective. Most importantly, tax governance stays organically top of mind.
Tax jobs are organised, structured andf automated to enable solid governance. From the collaboration, all the essential data, documents, KPIs and a full audit trail are captured. As a result, “single use” data is converted to data which is available for future use.
From this, the next level of tax maturity becomes available.
3. Control
Effective control processes enable the tax team to identify and manage risks proactively, reducing the likelihood of errors, omissions, or non-compliance. Teams that are in control have oversight, efficiently manage their compliance burden, and identify tax risks and opportunities proactively. Which is why a Tax Control Framework is critical for rock-solid tax governance.
There is real-time visibility on tax obligations, liabilities and opportunities. Tax teams can identify areas for optimisation and improvement. Outliers are easily identified and informed decisions are made, aligned to the overall the tax strategy.
Thanks to formalised control processes the organisation becomes more trustworthy and reliable towards stakeholders, including the board, the audit committee, other business units, investors, and regulators.
Once the required levels of controls are in place, the company will be able to communicate with context and confidence towards stakeholders. This is a condition precedent for successfully managing transparency initiatives like public CBCR and Total Tax Contribution.
Finally, being in control also facilitates continuous improvement. Given the high degree of change in the environment tax teams are operating in, they need to be resilient and prepared to continuously improve the maturity of the tax function.
Conclusion
In conclusion, a proactive approach to tax governance is essential for the success and resilience of an organization's tax function. However, operationalizing tax governance is by no means a walk in the park. The "Connect, Collaborate, Control" framework, empowers tax teams to build a strong foundation for long-term success and resilience.