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Reshaping Future Growth: Top Tips on How to Manage Tax Forecasts

The COVID-19 pandemic has increased market uncertainty, making it more difficult for tax teams to make accurate tax forecasts. However, as a growing number of large multinational corporates are discovering, the use of relevant software can reduce the manual work involved in aggregating and double-checking data when preparing tax forecasts, as well as enhance the overall value that tax professionals deliver.

Increasing market uncertainty

Speaking at a webinar chaired by Jamie Eagan, VP of Product Marketing at insightsoftware on August 27, 2020, Susie Cooke, Partner, Consulting at Deloitte, confirmed that the companies she works with are experiencing “challenging global headwinds.” “Globally, tax authorities and governments have implemented various levels of assistance programs that have never been seen before, which aim to stimulate economies impacted by a rapid decrease in business activity,” she explained.

Such activities and the changes they have brought need to be factored into detailed reports based on historical data, but that also forecast potential future scenarios. Reporting must be done with care, since governments’ attention is refocused on the tax governance of multinational corporates, who have themselves needed to become agile to stay afloat, changing how and where they operate.

Kathryn Abate, Director, Presales at insightsoftware added that the wide range of fiscal measures is adding to this volatility. Governments may be adjusting tax rates, introducing tax credits, or even allowing deferred payments to be made: “There are changes being made on a daily basis,” she said, “which means ever-more flexible businesses need agile forecasting and reporting that help create information needed by leadership teams.”

Such information could include top line findings, such as a reduction in sales within a particular country or part of the business, but also the impact of these findings on the overall tax position of

the business. This in turn leads to the critical requirement to manage liquidity through the pandemic and into a potential recession.

Cooke agreed that managing ongoing liquidity is critical for businesses large and small. Changes in the way people are shopping, travelling, or even getting their hair cut mean we are all seeing more and more companies announcing unexpected financial results.

There are four essential principles of robust liquidity management, Cooke explained: identify the risks early; monitor and control liquidity; conduct regular stress tests; and have a Plan B. All four stages require reporting of relevant data points and preparation for a wide variety of scenarios.

An online poll with webinar attendees revealed that the biggest challenge/concern for tax professionals in the current financial climate are as follows:

  • Confidence in the forecasted effective tax rate (ETR) (11%)
  • Quality of the finance team’s reforecast (42%)
  • Struggling to keep up with numerous forecasts (25%)
  • Being able to forecast corporate liquidity requirements (8%)
  • Challenges with remote access to people/data (14%)

“The findings highlight the difficulties tax teams have when receiving forecasts and reforecasts from finance,” said Cooke, “with 67 percent of people finding this a challenge either because of the quality or the timeliness of reports.”

“Another problem is that reports from finance don’t always forecast at the legal entity level,” said Eagan. “This is critical for the tax team, and data can be difficult to convert for tax forecasting in the best of circumstances, let alone at the moment.”

Maximizing your software

Cooke acknowledged that gathering the right data is just the start. Manipulating data and getting it in the right format and granularity for tax reporting can also be difficult. This is largely because while the tax team is a major user of data, tax was not historically considered when financial reporting systems were implemented.

This means that a lot of time is spent by tax teams consolidating and deconsolidating the data they receive. Not only is it time- and resource-consuming, but it does not represent value-added work for tax professionals. Using the right software, data gathering and manipulation can be automated and calculations made as soon as data arrive, rather than having to wait for a human to reach it in their ”to-do” list.

Learn how a multinational enterprise replaced spreadsheets to reduce uncertainties in tax planning

“The use of software can also drive the collaboration between finance and tax that is so valuable to both teams,” said Abate. “It is particularly valuable to align tax and finance forecasts so they include the right level of detail, but also provide the context behind the numbers.”

By getting systems to do more of the legwork, tax teams have time to make adjustments along the way if needed, or model best case/worst case scenarios that would be meaningful to the business. These could include scenarios such as:

  • What if we move R&D to a new jurisdiction?
  • What if we source or store materials in a different area?
  • What if country X drops its corporate tax rate?
  • What happens if a specific country’s currency begins to tank?

This kind of modelling gives a much more granular level of detail, and is especially useful when people need to dig into the data to support commercial decision-making. “It’s even better when people can use intuitive tools to find the answers themselves,” added Eagan. “Providing reports with the right level of detail and context also speeds up information flows while reducing the number of follow-up questions tax teams need to answer, freeing up more time for more complex tasks.”

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A second online poll asked attendees where they saw the biggest benefits from software and found the following responses:

  • Greater automation/integration with finance data (38%)
  • Quicker reforecasting, aligning with finance (28%)
  • What-if scenarios and the ability to understand the impacts of variables (18%)
  • Reporting and visibility of data (15%)
  • Nowhere (3%)

Eagan noted that the results of the second poll reflect those of the first, and show the importance of collaboration between finance and tax. “The need to leverage and share finance data is now top of mind,” said Abate. “But it is encouraging to see a fifth of respondents looking beyond gathering data to see the value of scenario planning.”

Enhancing your value

“By becoming more responsible for providing insightful reports, forecasts, and scenarios, tax teams can demonstrate added value to the business,” Cooke explained. “Tax has often been seen as a cost center because teams have historically not had the time or resources to do additional work outside of accounting activity and revenue protection.”

Abate believed that there’s a real opportunity for tax to change that view by adopting relevant software and a standardized reporting framework. This eliminates the risk of relying on calculations in spreadsheets, and reduces the time needed to check, double-check, and validate the data that tax receives.

Instead, tax can provide value-added initiatives and opinions that contribute to the success of the overall business. Tax can deliver timely reports that lay out a range of strategic commercial choices and are easy for the executive team to work with, especially when presented in a graphical format.

Understanding the future tax function

“Tax also becomes a strategic partner to the office of the CFO,” said Eagan, “and vital to the health and stability of the business.” Given recent trends, decision-making is no longer a single-threaded process: organizations need to almost constantly adapt and pivot, whether that involves changing resources used, divesting lines of business, or making acquisitions. The CFO plays a critical role at the centre of any fast-moving digital organization, and tax teams have a critical role to play in supporting them.

However, the question asked in the third and final poll identified that there may be some way to go before this is the case for everyone. When asked how executive leadership teams view tax departments’ role in the wider finance organisation, respondents said:

  • Reactive (14%)
  • Compliant (31%)
  • Collaborative (22%)
  • Proactive (14%)
  • Strategic (19%)

Cooke noted that a lot of organizations are still in the 45 percent represented by the top two responses. Given all the changes going on around the world, however, collaboration should be a key focus moving forward.

Finally, the panel answered questions from the floor, including how to make a case for investment in new software in difficult economic times. Eagan said that investment should be balanced against the risks of continuing to do nothing, but that a couple of first steps would be to look at the tools already in place and where the critical pain points are that could be solved quickly. “Knowing where the company could benefit from making process improvements would set a useful roadmap.”

Asked how else tax could take proactive steps to change the role of tax from a cost centre, Cooke concluded that some changes in this area are being led by the executive team, others by finance or tax themselves. In any case, it’s all about proving proactive value by identifying issues and solutions. “The value of such insights will give tax teams a seat at the top table, instead of forever being seen as ‘the no people,’” she concluded.

Find out more about how you could use Longview Tax from insightsoftware to reshape your tax function, book a demo, or drop us a line.