Our current survey conducted in late 2012 – which included 450 respondents from France, Germany, Italy, the Netherlands, Russia, Spain, South Africa, Switzerland and the UK (collectively, ‘EMA’) – shows that their tax departments are in step with their global counterparts in adopting leading practices – but still have work to do to optimise the value they bring to their broader business.
KPMG’s body of research shows that leading tax departments – those that add the most value to their businesses – also put high priority on three key areas of good tax management:
- ensuring clarity of accountabilities
- driving standardisation and efficiency
- promoting connectivity with their colleagues across the business.
This article highlights how tax departments in the EMA region have changed since our last survey in 2009. Current results reveal that tax departments in the EMA region still devote much of their time to core compliance work at the expense of more strategic, value-adding activities. They are interacting more with boards and senior executives, but have yet to fully integrate with the broader business.
Tax governance and board engagement
Survey results show that boards and corporate leadership of business in the EMA region are becoming more focused on the management of tax. Ninety-three per cent of survey respondents in the region say they have a department strategy that is consistent with their overall business strategy. This is up from 88 per cent in 2009. While more respondents say their board and/or corporate leadership are directly involved in providing guidance on the tax strategy (65 per cent versus 43 per cent in 2009), this involvement is below the global average of 73 per cent. However, 70 per cent of respondents in the EMA region report that their board has approved the tax strategy. Further, businesses based in the EMA region are responding to heightened tax audit and controversy activity. Many governments are taking risk-based approaches to tax audits and directing their attention to how tax is governed in larger businesses.
Driving efficiency – pursuing tax process & control improvements
Our previous research identified a focus on standardisation and efficiency as a key characteristic of leading tax departments. While the majority of EMA-based respondents rate their tax controls, policies and procedures as ‘standardised’ or ‘very standardised’, these levels are lower than the global average. Responsibilities and accountabilities of tax personnel are the most standardised areas for EMA respondents, followed by tax controls and policies and procedures. Promoting connectivity – compliance focus takes precedence As in other regions, tax departments of EMA-based businesses put more emphasis on compliance-related activities than they do on improving interaction with other parts of the business. In the next 12 months, EMA-based businesses expect financial reporting and tax return compliance to occupy 21 per cent and 19 per cent of their tax departments time respectively. Managing tax authority audits is expected to occupy 11 per cent. However, only 7 per cent is expected to be spent on integration with business groups and early indication of non-routine transactions. Other strategic activities of optimising the effective tax rate and cash tax planning/tax deferral are only allocated 12 and 10 per cent respectively.
Currently, 62 per cent of respondents in EMA are involved in some form of tax controversy:
- 38 per cent are involved in disputes over corporate income tax
- 31 per cent are involved in indirect tax (sales/use or VAT/GST) controversy.
In light of expected rising tax audit scrutiny and controversy in most markets, it seems likely that EMA-based tax departments will have to devote even more time to compliance and managing tax audits in the future. As a result, they could soon have even less time and resources devoted to more strategic pursuits.
However, as with businesses in other regions, most EMA respondents appear satisfied with the current situation: 80 per cent of them believe their administrative budget is sufficient.
Only 14 per cent of EMA respondents expect their tax department structure to change in the near future. The most common reasons for the change are increasing/improving controls (57 per cent) and improving and enhancing tax risk management (55 per cent).
Only 40 per cent of EMA respondents name improving alignment of the tax department with the business or finance function as a reason for the expected change.
For EMA businesses seeking to derive the most value from their tax departments, this satisfaction with the status quo appears to be misplaced. Without additional investment in tax process improvements and automation, there will be increasing challenges for tax departments as rising tax complexity, tax controversy and pressure to reduce costs continue to mount.
As a result, EMA tax departments may find themselves constrained in their ability to provide effective, real-time support to business activity and influence the bottom line. By investing in additional standardisation, process improvement and tax technology, EMA companies will be better able to boost efficiency, keep up with their compliance demands, while improving the ability of their tax teams to collaborate with the peers in other departments and add greater value.