Listen to this article

The makeup of a corporate tax department has significantly changed over the past 25 years, driven by the influx of technology platforms, the popularity of offshoring responsibilities, constraints imposed by the tax talent gap, and, most notably, the ever-changing corporate tax landscape. Listed below are samples of technical changes in corporate tax that have landed on the C-Suite’s radar as priorities for any tax function:

While much has been written about the confluence of each on the impact of a future state tax function, the specific, practical understanding of what is needed today to meet the expectations of its current roles and responsibilities has not drawn as much attention. There are an abundance of articles, presentations, panel discussions, and surveys on defining a tax function based on what it “should” look like, but not much on what it “needs” to meet its day-to-day responsibilities. Before we begin to appreciate the “needs” of a tax function, we must first define it.

In contrast, a tax department is the cost center organized to execute the tasks of a tax function. While tax departments are not all structured similarly, the duties of the tax function are typically consistent across companies, industries, and regions unless otherwise determined by the C-Suite. Of course, the volume, scope, and complexity could be vastly different, but the responsibilities typically include each of the following:

• Reporting & Forecasting
  • Collecting, analyzing, calculating, and estimating tax data as presented on financial statements, C-Suite dashboards, FP&A projections, etc.
• Regulatory Monitoring & Compliance
  • Understanding the changing global landscape of tax rules, regulations, court cases, other technical interpretations, and the timely filing of required tax returns and payment of appropriate tax liabilities.
• Strategic Planning & Analysis
  • Finding opportunities that meet the tax goals of the business by focusing on the business’s strategy, operations, structure, and reporting profile.
• Advisory & Modeling
  • Providing strategic guidance and quantitative analysis to support operational, legal, treasury, and regulatory changes so each business unit can make informed, data-driven decisions.
• Controversy & Risk Management
  • Managing tax risk to avoid unexpected tax exposures while also understanding the risk profile of the business, the regulatory requirements, the quality of the documentation, the cleanliness of the data, and ensuring tax filings are accurately and timely filed.
• Talent Management & Development
  • Aligning the right skills (to deliver the tax goals of the business), with the right roles (to meet the needs of the tax function), with the right people (to execute on a daily basis), whether such people are internal or external.
• Education & Collaboration
  • Educating business leaders on the complexities and uncertainties of the tax rules, the risk of getting it wrong from a tax reporting perspective, and the importance of proactively engaging the tax function on a real-time basis as decisions are being made.

By fully understanding the roles and responsibilities of the tax function, the C-Suite can determine how to fulfill them and make conceptual decisions that will shape the direction of the overall tax execution strategy. However, such decisions need to be made methodically and thoughtfully with collaboration and buy-in from all stakeholders. As such, the below outlines 5 different decision points for the C-Suite, in order of priority, that need to be made to align expectations of the tax function.

#1 Strategy: What is the strategic tilt of the tax function?

The strategy tilt is more about defining goals and objectives than the roles and responsibilities of the tax function. Many business executives view them as one and the same, but there are key differences between the two. The C-Suite needs to decide on the strategic direction(s) or priority focus areas of the tax function, then align every decision thereafter with that strategic direction in mind. Otherwise, there will be a misalignment of expectations. For example, a Grant Thornton 2023 CFO survey found that 37% of CFOs said their tax function is either compliance-only or only slightly strategic.¹ Was the strategy tilt aligned from the start, or did expectations become misaligned over time?

Examples of high-level strategic or priority focus areas are:

• Managing global tax risk to reduce unnecessary tax exposure
• Being a strategic partner for all business units by supporting key business decisions
• Ensuring all regulatory compliance requirements are timely and accurately met
• Stabilizing the cash tax liability and/or the effective tax rate
• Optimizing the legal entity structure to maximize value and minimize tax burdens
• Consistently introducing proactive tax strategies

#2 Governance: How will the tax function be governed?

Governance doesn’t refer to who will execute the tax roles and responsibilities, but rather the need to understand the ground rules of the tax function. For example,

• How will the tax function align with the overall business objectives?
• What executive leaders are ultimately responsible for the tax function?
• How will tax decisions be made, and who will be accountable?
• Who will define the roles and responsibilities of the tax function and how they will align with the strategic tilt?
• How often should we reassess the goals and objectives of the tax function?
• Who decides on the path forward when there is a risk/reward conundrum?
• What business units and/or cost centers will need to collaborate with the tax function?

This is a decision point that is typically not fully considered and is often overlooked. Most business executives make assumptions based on historical trends or job titles rather than implementing a thoughtful decision-making process. Unfortunately, a lack of governance often causes significant problems for the tax function and ultimately for the entire business, including a material weakness or material misstatement in its financial statements, a large, unexpected tax liability upon the conclusion of a regulatory audit, or a required tax escrow based on an uncertain tax position discovered during due diligence.

#3 Integration: What other business functions will need to collaborate with tax on a consistent and regular basis?

The overall strategy for the tax function will guide the answer to this question. At its most basic level, the tax function will need to collaborate with the accounting/finance team to timely file the required tax returns and pay the appropriate liabilities. Unfortunately, in many organizations, the collaboration ends there. In BDO’s 2024 CFO Outlook Summary, 78% of CFOs believe that the tax function offers strategic value to the business², yet in their 2024 Tax Strategist Survey, only 10% of tax leaders indicated that they were sufficiently involved when business decisions were being made.³ Based on my experience, this dichotomy is likely a misalignment of expectations. Any additional collaboration amongst business functions should be outlined in the strategy and governance plans.

#4 Technology: How will technology, including artificial intelligence (“AI”), impact the tax function?

Automation has been a buzzword for years regarding tax processes. There is no question that technology has made tax data cleaner, easier to analyze, and quicker to calculate. However, many tax functions are still slow to adopt new data management tools, collaboration technologies, and software platforms. As the less technology-savvy generation retires, the use of automation will be a priority for any tax function going forward. Yet, questions remain on the overall impact of new technologies, including AI, on the tax function. Notably, only 5% of respondents chose tax as the area where generative AI (GenAI) will have the most significant impact within the finance function, according to a recent KPMG Pulse Survey of 100 CFOs.⁴ It is clearly too early to understand the impact of AI on the tax function, but automation, process improvements, and data wrangling techniques will continue to change the landscape, with AI only further influencing these changes. As a result, the C-Suite needs to consider how to leverage technology to achieve its tax function’s goals and objectives.

#5 Staffing: How should the tax function be staffed?

The final decision point in aligning the tax function’s expectations is determining who will be responsible for meeting the goals and objectives set by the C-Suite. While each decision point is imperative, staffing is the most important aspect in appropriately executing the tax function. In the past, most companies focused on insourcing or outsourcing their tax function (or a combination of both), whereas today there is a viable third option: co-sourcing (a hybrid service model in which an external service provider partners with in-house personnel to jointly execute the work). Implementing the chosen staffing option is based on the culmination of the prior decision points.

While there is no right answer, stating the tax function’s strategic direction, defining priorities, and appropriately considering each decision point will make the staffing approach clear.

In summary, by defining the precise roles and responsibilities of a tax function and making critical, strategic decisions about its path forward, the C-Suite will begin to build a foundation for understanding the “needs” of a tax function. Of course, there is a lot of nuance in building an effective and efficient tax function, but appreciating how the tax function aligns with the overall business strategy, risk profile, and regulatory requirements is a valuable start.

To follow the series and get each new article as it’s published, visit our website to subscribe to the Aligning the Corporate Tax Function series and be sure to follow GTM on LinkedIn for the latest updates.

Footnotes:

¹ Grant Thornton LLP, CFOs take the plunge for growth, January 8, 2024

² BDO USA, 2024 CFO Outlook Survey, Middle Market Prioritizes Stability

³ BDO USA, 2024 BDO Tax Strategist Survey, Navigating Growing Demands with Fewer Resources

⁴ KPMG LLP, CFO views on the value of tax in an AI-enabled future, Chief Financial Survey