It’s the job of a CFO to be a strategic partner to the CEO, providing insight and analysis that helps your business succeed.
You may have seen a shift in your role, from a traditional focus on compliance to a more business advisory role, where you’re looking to balance and manage risk with increasing business growth.
Simply following regulations is no longer enough in today’s fast-paced world.
You must understand the connection between risk and reward, actively looking for ways to reduce risk while capitalising on chances to grow and thrive.
In this article, we outline some of the most common tax and compliance challenges you’ll face as a growing business, provide actionable tips on overcoming them and investigate areas where you can turn compliance into an opportunity.
Here’s what we cover:
- The world of finance is evolving
- 10 common tax and compliance challenges
- 5 tips on building an effective tax and compliance team
- Look at tax and compliance as an opportunity
- Embrace digital transformation and automation
- 10 steps for proactive tax planning and compliance
- Final thoughts on turning compliance into an opportunity
The world of finance is evolving
The world of finance is evolving rapidly, with compliance and technology driving significant change.
As compliance activities become increasingly centralised, CFOs are delving deeper into the associated costs, seeking ways to streamline and optimise these processes.
It’s not uncommon to see CFOs outsourcing tax reporting activities, allowing companies to focus on their core business while ensuring regulatory compliance.
Such a strategic approach could prove cost-effective, reducing the burden on internal resources.
Peter Boerhof, senior director of VAT at tax automation company Vertex, says: “Globalisation and centralisation are reshaping commerce and corporate functions.
“As the availability of performance data grows, CFOs gain unprecedented opportunities to benchmark and surpass industry norms.
“Yet, this transformation doesn’t alter your role, but rather empowers you to lead initiatives for cost and operational efficiency, elevating your organisations to new heights of excellence.”
10 common tax and compliance challenges
Here are some common tax and compliance challenges.
1. Risk management
Managing tax risk is an ongoing challenge.
You need to clearly understand your tax positions and correctly report your tax liabilities to avoid penalties and interest.
Peter Boerhof says non-compliance puts you at risk of:
- Reputational risk from massive tax claims
- Losing your reputation for reliability, which underpins your relationships with partners, customers, and vendors
- Tarnishing relationships with tax administrations
- Compromising organisational performance through a heightened audit risk.
You should also be aware that some nations impose personal liability on financial officers of non-compliant organisations.
2. Adapting to technology
Finance departments want more support for tax and compliance, so you should regularly meet with your chief information officers and the IT department.
You should target greater efficiency and accuracy in tax reporting, and you’ll certainly want to reduce costs and streamline compliance activities.
With technology, you could optimise compliance activities, reduce costs, and drive innovation in financial management.
3. Keeping up with changing regulations
You need to work closely with legal and compliance teams to get ahead of the latest developments and assess their impacts.
Reliable financial software could help by providing a centralised platform where your teams could access up-to-date information, analyse data, and assess the implications of regulatory change.
4. International rules and regulations
You need to navigate diverse tax laws and regulations, ensuring compliance with local requirements.
This can be challenging, especially in emerging markets with less developed regulatory environments.
Amy Spurling, CEO and founder of employee reimbursement platform Compt, and a former CFO, says: “Gone are the days when a company would consider global expansion years into its evolution.
“We see companies having a global employee presence as early as 10 or 15 employees. Knowing and complying with international tax and employment law is imperative.
“If you think the IRS is scary, wait until you meet some European regulatory groups. They do not mess around.”
In recent years, countries have been introducing legislation to pull non-established businesses’ taxability into their country. This attempts to ensure these businesses pay their fair share of tax globally.
As a result, you now need to deal with a growing number of local rules and reporting requirements.
Peter Boerhof says: “There is a global trend of reporting more data to tax administrations.
“This increased transparency puts more pressure on businesses to organise their tax affairs effectively. It also raises questions from shareholders, analysts, and organisations.”
5. Ensuring data security and privacy
Tax and compliance reporting requires collecting and processing sensitive financial and personal data. Ensure you protect your data from cyber threats and comply with privacy regulations.
6. Streamlining tax reporting and filing processes
You must implement effective processes and systems to streamline these activities and ensure compliance with reporting requirements.
It’ll pay to automate certain processes, such as data collection and reporting, to reduce the risk of errors and improve efficiency.
7. Sustainability and ESG compliance
With an increasing focus on environmental, social and governance (ESG) factors, you may have to integrate sustainable practices into your operations and demonstrate compliance with many sustainability regulations.
8. Indirect taxation
With e-commerce on the rise, companies face difficulties managing indirect taxes (such as VAT) due to different jurisdictions and varying rules.
Implementing tax software solutions could help automate and simplify the complexities of managing indirect taxes across different jurisdictions.
9. Maintaining compliance documentation
It’s crucial to keep proper documentation to prove compliance during audits. Many businesses struggle with organising, storing, and retrieving necessary documentation efficiently.
You may need a system that can help store, organise, and track all your business documents digitally, allowing easy retrieval of documents when needed.
10. Resource constraints
Many businesses, especially smaller ones, might struggle with human resources and budget constraints that limit their ability to manage tax and compliance issues effectively.
You may have to outsource your tax functions, use technology, or train existing staff to manage your compliance responsibilities.
5 tips on building your tax and compliance team
Managing tax and compliance can be complex and time-consuming. It’s not something that just one person can easily handle.
As your business grows, you may not want to outsource tax responsibilities, so building a team of skilled professionals who can effectively manage compliance challenges is essential.
By recruiting top talent, investing in training and development, and building a culture of compliance, you can ensure your business reduces risk, and can focus on achieving its financial goals.
Recruiting and retaining top talent is key to building a successful tax and compliance team. Here are some tips on doing just that:
- Look for individuals with strong tax law, accounting, and compliance backgrounds who have experience working with businesses like yours.
- Find knowledgeable people with good communication skills, as they will need to work closely with other departments and stakeholders.
- Provide regular training and opportunities for professional development to help your team stay informed and engaged. Tax laws and regulations are constantly changing, and it’s important to ensure that your team stays up to date on the latest developments.
- Create an environment where compliance is a top priority and everyone is committed to following the rules.
- Encourage open communication and collaboration between departments to ensure everyone is on the same page regarding compliance.
Look at tax and compliance as an opportunity
Tax and compliance management has always been a key focus for the CFO. Non-compliance can result in severe consequences, such as hefty penalties, reputational damage, and financial loss.
However, by actively focusing on tax and compliance management, you can prevent negative consequences and improve your company’s financial wellbeing.
Consider tax and compliance as an opportunity rather than a burden. You’ll be able to maintain integrity, safeguard your interests, and establish a strong basis for long-term success.
Amy Spurling says: “CFOs have always had tax and compliance as key focus areas.
“The evolution in recent years is to move beyond that compliance focus to balance risk management with business growth objectives.”
Embrace digital transformation and automation
Digital transformation and automation are becoming necessary for growing businesses that want to navigate tax and compliance challenges effectively and efficiently.
By automating manual processes and using tax technology solutions, you can streamline compliance activities and reduce the risk of errors.
Automating tax and compliance could help you:
- Increase efficiency: Automation can significantly reduce the time and resources you spend managing tax and compliance activities. Your finance team can then focus more on strategic priorities and value-added activities.
- Improve accuracy: Automation can reduce the risk of errors and improve the accuracy of tax and compliance reporting.
- Achieve greater visibility: Having greater visibility into your tax and compliance activities can help you identify potential issues and proactively manage compliance risks.
Automate your tax obligations
Technology is increasingly important in managing your tax and compliance obligations.
You could, for example, look at a tax engine for transaction tax—a software solution that automates the calculation and reporting of transaction taxes such as VAT and sales tax.
This technology enables businesses to block non-compliant transactions, standardise indirect tax processes, and sanitise tax data.
By automating these processes, you can reduce the risk of errors and ensure compliance with all relevant tax laws and regulations.
How you could use automation to manage your international trade
Advanced data analytics can provide valuable insights into business operations from a tax perspective, and automation can simplify complex manual processes.
Two key aspects of international trade are customs and transfer pricing.
- Customs rules govern the transportation of goods into and out of a country and typically involve taxes designed to protect local businesses and generate revenue.
- Transfer pricing involves setting prices for transactions between related companies, particularly those in different countries.
Both customs and transfer pricing can significantly impact a company’s tax liabilities, and there are rules in place to ensure these prices are fair and similar to those between unrelated companies.
Calculating customs duties and transfer pricing manually can be quite complex and challenging due to the following reasons:
- Significant risk of errors
- Complexity and variability of regulations across countries
- Intricate economic analysis requirements
- Extensive scale of global operations
- High volume of transactions
Financial management software could help you with these crucial international trade calculations by automating your processes. You could:
- Process large volumes of data
- Enhance accuracy and efficiency
- Simplify complex global regulations
- Provide real-time insights for strategic decision making
- Continually monitor compliance to pre-empt potential issues.
As Peter Boerhof says: “By analysing processes, cleaning data, and enhancing compliance, it’s reducing the amount of manual effort required.”
However, while technology can assist significantly, it’s important to remember that human oversight and understanding are still necessary, particularly given the complexity of international trade rules and the severe consequences of non-compliance.
10 steps for proactive tax planning and compliance
Developing a proactive approach to tax planning and compliance is essential for businesses of all sizes.
1. Stay ahead of regulatory changes and adjust strategies accordingly
Tax regulations constantly evolve, so how can you stay current with the latest changes?
Proactively approach tax planning and compliance, monitor regulatory changes, assess the impact, and adjust strategies accordingly.
Amy Spurling says: “Not only can global regulatory bodies stall you on product launches or limit your hiring ability, but they may impede potential growth.
“For instance, if your company is hoping to expand into China, it can take up to two years to have a legal entity in the country—and even then, it must be 50% owned by a Chinese national. It isn’t easy.
“Without understanding the process or approach, you may embark on a global strategy that will waste time and money.”
As we alluded to, we’re in an era of heightened transparency when it comes to tax.
For example, regulatory bodies are cracking down on practices such as Base Erosion and Profit Shifting (BEPS). This refers to tax planning strategies used by multinational corporations that exploit gaps and mismatches in tax rules to avoid paying their fair share.
Part of that is Country-by-Country reporting (CbC), which requires multinational companies to report certain indicators of economic activity for each country in which they do business.
The goal is to improve transparency and allow tax authorities to assess tax avoidance risks better.
Peter Boerhof says: “Via the rapid global spread of news via social media, a more proactive stance on compliance has become imperative.
“In the realm of transaction taxes like VAT, we’re witnessing a shift towards tax administrations gathering more detailed data through e-invoicing and digital reporting.”
2. Understand your business goals
A comprehensive tax strategy should align with your overall goals. You’ll need a deep understanding of your business model, operations, and strategic priorities.
3. Use tax automation
As mentioned, tax technology solutions can help streamline compliance activities and improve accuracy. Consider investing in tax automation software and other tools to simplify tax reporting and compliance.
4. Foster a culture of compliance
You lay a critical role in fostering a culture of compliance within the organisation. Lead by example. Promote the importance of tax and compliance to your people. Training, education and communication will be essential components in creating a culture of compliance.
Amy Spurling says this can be tough, especially as there is a common misperception that compliance is the antithesis of innovation and a blocker for growth.
She says: “I disagree with this, particularly in highly regulated industries.
“If you ignore compliance rules but want to build an insurance platform (for instance), you will not only violate laws. You are going to struggle to sell to customers who will require this.
“The way I’ve found to build this culture, though, is to be very pragmatic. You will lose credibility within an organisation if you are always the ‘no’ person because of some nearly non-existent edge case.
“Help the organisation understand how a little compliance in the foundation now can create speed later.”
However, although the tax function traditionally relied on human effort and knowledge for compliance, the game is changing.
Peter Boerhof says: “With tax reporting in real-time, the aim must be to eliminate manual interventions in tax processes as much as possible and automate whatever is possible.
“In such an environment, training and communication become less important as the bots take care of compliance.”
5. Collaborate with external experts
Working with external tax consultants or legal experts is beneficial even if you have an internal team. They bring fresh perspectives, broader industry experience, and specific expertise in international tax laws and transfer pricing regulations.
6. Create a tax risk management framework
Develop a comprehensive framework for managing tax risks, including mechanisms for identifying, measuring, and controlling such risks. Integrate this framework into your company’s broader risk management strategy.
7. Plan for audits
Be ready for tax audits by having a clear process and documentation in place.
Maintain accurate records, demonstrating compliance with all tax laws and prepare to justify your tax positions.
8. Use data analytics
Data analytics can be a powerful tool for gaining insights into your tax strategy. Use this to identify patterns, monitor changes, and make informed decisions.
9. Keep abreast of technological developments
The tax technology landscape is continually evolving.
Staying updated with the latest tools and technologies can help you streamline processes, improve compliance, and gain a competitive advantage.
10. Consider the Impact of business changes
Every significant business change, structural, operational, or strategic, has tax implications.
Proactively considering the tax impact of business decisions can help you avoid unforeseen tax liabilities and take advantage of potential tax benefits of compliance.
Peter Boerhof says: “Traditionally, CFOs think vertically in P&L and balance sheets; they need to start thinking more horizontally regarding transactions and processes.
“Make transaction taxes part of agendas when speaking with the head of tax, CIOs and controllers.”
Final thoughts on turning compliance into an opportunity
Amy Spurling says: “I feel like CFOs are well-versed in compliance and tax adherence.
“The adjustment is balancing that with the communication and growth strategy. The role of the CFO is now to find their path and apply a lot of creativity.
“It’s not easy. But focusing on what you must achieve rather than how is the way to go.”
The role of the modern CFO is challenging yet rewarding, necessitating strategic navigation through a complex maze of tax and compliance requirements.
Expertise and insight are important, but so is the power of digital transformation and automation.
Together with effective training and communication, you can help ensure compliance, mitigate risks, and drive business growth and success.
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