Building Dimension II of your tax governance framework: tax operations

What is the tax operations dimension about?

While we cannot emphasise enough that there’s no single “right” model of how a tax function should operate, at this point of your tax governance journey more or less the same concept will apply regardless of what model you choose: it makes sense to draw up a set of operational tax principles and procedures describing the service delivery model for your tax function. The idea is to answer three fundamental questions: Who are we? What do we deliver? How do we deliver? 

Who are we?

The mandate of the tax function

The answer to this question of who you are lies in the mandate the tax department has which is part of your tax strategy that we discussed in our previous post. This mandate clearly defines the role of the tax function and what it’s accountable and responsible for. It could start with something along the lines of “The tax function has been mandated by our Board to manage tax affairs in the group.” The mandate should then go on to also indicate the exact scope of application in terms of types of taxes, entities and other constraints. It should also specify what is meant by “manage” all along the spectrum from administrative management – mainly focused on satisfying: (i) compliance and reporting obligations and (ii) tax management, which is aimed at adding additional value to business through providing tax advisory services. 

The tax target operating model

The way taxes are managed is defined in your tax target operating model. There are multiple options, from an in-house function to managed services, with multiple variations in-between, including models based on loan staff, a shared service centre, co-sourcing, and partial or full outsourcing. The difference lies in the reliance on third-party providers. If you adopt an in-house model, you decide to do it all on your own. If you opt for managed services, the external provider takes on the entire role of the tax function, including coping with all the relevant compliance obligations and additionally supports you in bringing value to the business.

The character of the tax function

It’s not just the operating model of the tax function that varies. There are also different styles or approaches to this role. We like to make a slightly tongue-in-cheek distinction between the “compliance master” and the “front seat driver”. 

The compliance master has more of a passive role, where the function mainly addresses your tax compliance obligations. The front seat driver is more active – it has to be, because the lack of tax awareness within many organisations means that the tax function sometimes has to fight to be involved in business matters. In addition to taking care of the entire range of compliance duties, it also sees advising and supporting the business as part of its job. Handling the extra work involved may mean hiring more people and or automating certain processes and/or outsourcing (partly or fully) the compliance obligations. The front seat driver-style tax function takes a proactive role in looking for solutions, also outside the organisation. This can extend to things such as lobbying and taking part in industry-related tax forums.

How do we deliver?

Now that you’ve answered the question of who you are and touched on the topic of your tax target operating model, it’s essential to set down principles and procedures for your tax operations. 

Certain guiding principles have to be in place. In fact, it is essential to determine how to deliver the obligations granted with the mandate. Here again there are various models available. The name for those likely vary in companies: RACI (Responsible, Accountable, Consulted, Informed), DARE (Deciders, Advisors, Recommenders and Execution stakeholders) or RATSI (Responsible, Authority, Task, Support, Informed) to name just a few of the many terms used. They’re all basically variations on “one person has to prepare, the other has to review and approve”, possibly with other layers added in, such as someone is informed, someone contributes, or someone is consulted. The model you adopt will also define the number of reports produced and the reporting lines.

You then replicate the above for your written procedures and frameworks. Typically, the main assumptions for the procedures and frameworks are set down in your tax governance framework; on the basis of these assumptions, you create specific processes for certain taxes or activities. 

Again, there’s no hard and fast rule here. Depending on the circumstances of the organisation, solutions lie along a spectrum from full in-house to outsourced or even managed services models. In the in-house model, all tasks (including compliance tasks) are performed by the tax function and its employees. In sourced models such as shared service centres, certain jobs (often in compliance-related areas) are outsourced. In managed services models, the external advisor operates like an in-house function, additionally striving to identify value-adds for the client. It must be however noted that regardless of the model applied, the core of the Group Tax Function must remain within the organisation. The reason for that is clear – there must be a responsible who makes decisions and links tax with business and management.

Answering the question of how you deliver also involves defining the use of technology and tools. Here companies often struggle to decide who owns the tool – tax, finance or another function – and who should maintain it, what kind of upskilling plan to adopt, and how to implement this plan. One of the hot topics to address at this stage of the journey is automation. 

What do we deliver? 

In simple terms, this is where you define what the tax function does; in other words, what activities it performs in relation to tax governance, advisory, compliance, accounting and reporting (tax service catalogue).

To help clients define how time is allocated and identify areas that could be made more efficient, we, at PwC have developed a Tax Service Catalogue of more than 200 activities typically performed by a tax function. The activities are divided into four categories: tax governance, tax advisory, tax compliance, and tax accounting and reporting.

The Tax Service Catalogue was developed by PwC in order to help our clients in determining the current state of their tax function. There are many benefits:

• Clear view of the activities performed by your tax function and its components (grades and teams).
• Picture of the cost drivers in your tax function so you can identify areas where more investment is required, or savings can be made.
• Identification of inefficiencies (duplications, time consuming activities, possible technology improvements etc.) and ideas for consideration of alternative scenarios.
• Better preparation for conversations with business stakeholders and other control functions about tax, its role in the business, and budgeting.
• Identification of gaps and mitigation of the risk of no adherence.
• Comparison of the current state of your tax function with the market practice. 
• Identification of capabilities and resources available to address new challenges, e.g. Pillar 2.

Why should you even consider developing your tax operations further?

Tax operations is a very broad topic, and in this blog post we’ve only touched on the main points. The discussion on tax operations is often triggered by pressure to reduce costs and being more efficient or caused by major legislative changes like Pillar 2. But it’s not only about responding to pressure. A discussion about how the tax function operates can help find solutions, for example, to the frustrations that tax function employees encounter every day. Resolving issues of this sort leads to more satisfied and motivated people who will perform better and add more value. It will ultimately put you in a better position to retain and attract talented people.

What is the role of people? 

While we’re on the subject of people, it’s important to remember their fundamental importance in terms of tax operations. We’re entering a new era of tax. On the one hand, people are having to adapt rapidly to new technological requirements. On the other hand, this new era brings unparalleled opportunities for people to develop. We see it very clearly at our clients: their employees want to develop and perform meaningful work rather than boring and repetitive tasks. They’re keen to add value to the company. At PwC, we shaped it into the New Equation by bringing a human-led, tech-powered approach!

Is there one perfect way to operate your tax function?

As we said at the beginning of this post, there’s no one right answer or one way to operate a tax function that fits all companies. The solution should be found by analysing on a case-by-case basis what is fit for purpose for this particular industry (financial services institutions and manufacturing companies have very different obligations), company (with its business vision and tax appetite) and tax function (and its people, capabilities, budget and aspirations).