Improving your tax accounting operating model: A game of chutes and ladders

Hands up, who enjoyed the year-end tax provision process? All those Excel files, lots of last-minute new versions, mysterious hard-coded figures, chasing across time zones for missing explanations, all with Finance eagerly awaiting the tax submission – what fun! And now Pillar Two adds a new twist to this game.

The introduction of Pillar Two marks a significant shift in the global taxation landscape. From a practical perspective, for tax functions within impacted organisations it adds additional pressure on the tax provisioning process at year-end. For some, an already straining system risks breaking under the weight of the Pillar Two requirements.

Pillar Two could become a catalyst to finally reassess your operating model around tax accounting and kick-off a transformation. This may either be out of necessity to meet the imminent and dynamic compliance and reporting requirements of Pillar Two, from a wish to seize the opportunity and utilise synergies across tax data and processes, or the decision to finally fix a painful tax provision process.

To effectively navigate the gameboard to improve efficiency, accuracy, and transparency, we highlight some ladders to success that will accelerate your journey to an efficient tax accounting operating model. But watch out for the chutes representing pitfalls that hinder success and cause setbacks along the way.

New requirements putting more pressure on the tax provisioning process

Current and deferred tax provision calculations are already performed within a short time period and the Group level review is often done in only a couple of days. This can involve night shifts to deal with tight deadlines and different time zones and to refresh calculations for updates to underlying financial data. Excel files that have been adapted over the years can provide some automation, but if a formula fails there is no time to find the one person who understands it. Figures are ready just in time and the review process fills any remaining minutes before sign-off is required. The risk of slipping down a chute is ever-present.

Impacted organisations will now need to cope with the increased workload of Pillar Two without any additional hours in the timeline or additional resources. Not only are Top-Up Tax provisions and associated disclosures required, deferred taxes may need to be calculated and booked with greater granularity to be considered Covered Taxes for Pillar Two and to allow ongoing tracking. Preparing for these challenges requires a critical look at the existing operating model, technology solutions, data management and team skills.

Ladders for success

A successful tax operating model transformation begins with documenting existing systems and processes to identify current pain points, as well as to reflect how the new processes will fit in with existing operations. Going through these documentation steps provides valuable insights into how operations are really carried out and can help to validate assumptions made and plan a future-state process, a first ladder in the game of process optimisation.

Data is key for Pillar Two and automating the collection of as much data as possible will reduce the manual effort required and free up time for the Tax team to focus on review, strategic analysis and planning. The Pillar Two process can require adjustments to financial data and making these as far upstream in the finance process as possible allows the correct data to also be available for tax provision calculations. Each data point should have an assigned responsible person to ensure accuracy, timeliness, and completeness, and that person should have an awareness of the impact on the tax calculations.

Introducing a hard-close process can speed up year-end reporting and may provide the necessary reprieve to meet deadlines. Standardising local tax packs and simultaneously incorporating Pillar Two data points can help ensure consistency and accuracy in tax calculations and allow for the increased level of detail. Automating tax pack consolidation improves efficiency and reduces the risk of error.

Many organisations focus now on selecting and implementing a Pillar Two solution to be ready for the 2025 year-end. This might be developed in-house, licensed from an external vendor, or the process may instead be outsourced to a service provider. The choice is complex and needs to consider the specific requirements and priorities of the organisation from a structural and technical perspective. The decision should consider the potential to integrate a tax provisioning solution either simultaneously or incrementally and the tax provision process target operating model should be included in the planning phase of the Pillar Two implementation project. Whether within the same tool or in a linked solution, being able to pull data from one to the other and utilise synergies in the processes will save valuable time and can enable far reaching benefits across the organisation.

The tool can become a single source of truth for tax data and enhanced features such as scenario modelling can highlight the effects of any changes to current or deferred taxes on the Pillar Two calculations. This ensures that any tax efficiency gains do not land you on a chute, resulting in an unintended increase in Top-Up Taxes owed. Being able to see the impact that a change has elsewhere on the tax figures will be crucial for making informed decisions.

Chutes and setbacks

The increased interconnectedness of taxes faced by global organisations necessitates a collaborative approach between Local and Group Tax, Finance and with service providers. Corporate income tax return calculations, deferred tax provisions, return-to-provision adjustments, and Pillar Two Top-Up Taxes interact so closely with each other that dealing with these in silos can cost time and increase risk.

Assuming a chosen software will work out-of-the-box within a short timeframe can cause frustration and missed deadlines. Tax teams that do not have the IT team integrated from the beginning often find themselves falling down this chute.

Process optimisation can focus too strongly on the technology aspects. Technology is only as good as the data it receives and the users who operate it. If end-users are not included in the planning and implementation of a new system, or are not provided with adequate training and documentation, they are unlikely to buy-in.

Winning the game

Pillar Two can be used as a catalyst for improvement and if you manage to successfully navigate the gameboard by avoiding chutes and benefitting from ladders, you can future-proof your Tax function and relieve the strain. Will 2025 be the year you fix that painful provision process?

If this blog resonated with you and you are considering implementing a tax accounting solution, please consider joining our Tax Accounting Software Showcase event on Tuesday, 15 April in Zurich.

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Should you require assistance in navigating the gameboard, or if you would like to discuss more on this topic, please do reach out to our key contacts below.

First published in Bloomberg - Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) www.bloombergindustry.com. Reproduced with permission

Authors

• Brandi Caruso - Partner, Tax Accounting
• Sarah Rathgeb - Senior Manager, Tax Technology Consulting
• Robert Junge - Senior Consultant, Tax Technology Consulting