Understanding the Tax Operating Model.

In today’s rapidly evolving business landscape, taxation’s impact on businesses is growing more complex, influenced by both internal and external factors. These include evolving business models, frequent changes in tax regulations, and new initiatives from tax authorities. For business and tax leaders, this presents a significant challenge: how can the tax operating model stay ahead in this ever-changing environment and consistently deliver value to all stakeholders?

To navigate these changes, the tax operating model and tax function must transition from a traditional operating model to a more dynamic approach, focusing on optimizing tax functions through the adoption of modern tax strategies . As Susie Cooke, Global Tax Transformation Services Leader at KPMG, notes: “Tax teams and Heads of Tax are increasingly finding that the status quo just can’t continue to meet every single demand and requirement, while at the same time delivering value to stakeholders.”

The tax operating model is crucial as it encompasses how the tax function adds value to the business. It covers everything from tax strategy development to integrating processes, people, culture, and technology. This model defines how an organization optimizes its mix of people, processes, data, Tax Technology Integration, and sourcing strategies within the tax function. Having the right Tax Governance Framework is essential, enabling organizations to navigate the complex and dynamic tax landscape with agility and efficiency.

According to a leading professional services firm, tax departments can reduce their overall costs by 23% to 31% through better employee utilization, process efficiencies, Tax Technology Integration, and consolidation of operations with a single service partner.

The Key: Customizing Your Tax Operating Model

There is no one-size-fits-all tax operating model. Each organization is unique, so its approach to tax operations must be as well. The optimal model depends on various factors such as industry trends, the scale of operations, cost structures, talent retention, and the level of technology maturity. Therefore, organizations must design a bespoke tax operating model tailored to their specific needs.

For example, a multinational corporation may require a more sophisticated model that integrates advanced technologies and a global tax strategy. In contrast, a smaller company might focus on streamlining processes and improving compliance efficiency. Regardless of size, the ability to adapt the tax operating model to specific circumstances is vital for achieving success.

Governance: The Foundation of Tax Strategy

Effective tax governance is the cornerstone of a successful tax operating model. It begins with the management team—typically the board of directors or C-suite—who must take ultimate responsibility for the organization’s tax affairs. This includes setting the tax vision, approving tax strategies and policies, and ensuring ongoing oversight.

The level of management involvement will vary depending on the organization’s size and structure. In smaller companies, senior management might be more directly involved in day-to-day tax decisions. In contrast, larger organizations might rely on a dedicated tax team with strong oversight from the board. Regardless of the structure, governance must be robust, with clear roles and responsibilities.

Moreover, effective governance relies heavily on the personnel and technology used within the tax function. This ensures that tax strategies align with overall business objectives and that risks are effectively managed. Regular reviews and updates to governance frameworks are necessary to keep pace with regulatory changes and evolving business needs.

The Role of People in Tax Function Success

The success of the tax function hinges on having the right number of skilled personnel. This workforce must be equipped to handle the complexity of modern tax environments. The number of required staff will depend on several factors, including compliance demands, tax authority activities, technology adoption, and the preferred sourcing model.

Organizations must also invest in continuous training and development to ensure their teams remain up-to-date with the latest tax regulations and technologies. For instance, as tax authorities increasingly use real-time data extraction technologies, tax professionals must be proficient in data analytics and digital tools. This knowledge is crucial for providing valuable insights and proactively managing tax risks.

In addition to skills, the tax function must have a strong culture of collaboration and communication. Teams should work closely with other departments, such as finance and legal, to ensure a cohesive approach to tax strategy. Furthermore, the tax function should be aligned with the organization’s overall goals, ensuring that tax decisions support broader business objectives.

The Importance of Data in Modern Taxation

Data plays a critical role in the modern tax function, especially as tax authorities are increasingly using real-time data extraction technologies. To keep pace, the tax function must have access to relevant, digitized data equipped with analytics capabilities. Regular interaction with this data is crucial for providing valuable insights and proactively managing tax risks.

Moreover, the ability to analyze and interpret data enables the tax function to identify trends, spot potential issues early, and make informed decisions. For example, by analyzing transaction data, a tax team can ensure compliance with local regulations and identify opportunities for tax optimization. This proactive approach helps organizations avoid costly penalties and maximize their tax efficiency.

However, to fully leverage data, the tax function must also invest in the right technology and tools. This includes implementing data management systems, analytics platforms, and reporting tools that can handle large volumes of data and provide real-time insights. The integration of these technologies into the tax operating model is essential for maintaining agility and efficiency in a complex tax landscape.

Embracing Technology for Enhanced Efficiency

Technology is transforming the tax function, offering new opportunities for efficiency and effectiveness. Emerging technologies such as data analytics,robotic process automation (RPA), and artificial intelligence (AI) can significantly enhance the tax function. For instance, RPA can automate repetitive tasks, freeing up tax professionals to focus on more strategic activities.

Similarly, AI can help with complex tax calculations, risk assessments, and even predicting future tax liabilities. The technology maturity of the tax function should match that of the overall organization, requiring automation and tools like workflow systems. As a result, tax departments can operate more efficiently, reduce errors, and respond more quickly to regulatory changes.

However, adopting new technologies also requires careful planning and implementation. Organizations must ensure that their technology infrastructure is robust enough to support these innovations. Additionally, staff must be trained to use new tools effectively. By taking a strategic approach to technology adoption, organizations can enhance their tax function’s capabilities and better meet the demands of a rapidly changing tax environment.

Optimizing Tax Processes for Greater Efficiency

Efficiency in tax processes is essential for managing the increasing complexity of tax regulations and business operations. It involves establishing controls and optimizing workflows to ensure that tax tasks are completed accurately and on time. Low-value, repetitive tasks should be automated or outsourced, allowing the tax team to focus on more complex and high-value activities.

For example, automating the preparation of tax returns can reduce the time and effort required, while also minimizing the risk of errors. Additionally, organizations should evaluate their tax processes regularly to identify areas for improvement. This might involve streamlining workflows, improving communication between departments, or adopting new technologies.

The appropriate mix of processes will depend on factors such as business size, tax staff utilization, and technology maturity. Smaller companies might focus on simplifying processes, while larger organizations may require more sophisticated systems to manage their complex tax obligations. Regardless of the approach, the goal should be to create a tax function that is both efficient and responsive to the organization’s needs.

Choosing the Right Sourcing Model

The sourcing model is a critical decision for any tax function, as it determines how tax processes are executed. Organizations must decide whether to insource, outsource, or co-source their tax activities based on factors such as the number and quality of personnel, technology maturity, and management’s tax assurance policies.

In-sourcing involves the internal tax or finance team handling all tax-related tasks, allowing for better integration with the organization’s overall strategy. This approach offers greater control but requires a significant investment in resources and technology.

Outsourcing involves a specialized service provider handling specific tax activities, freeing up internal resources for core business functions. This model can be more cost-effective, especially for smaller companies, but it may result in less control over tax operations. Interestingly, a KPMG survey predicts an increase in outsourcing tax compliance and technology transformation services in the coming years.

Co-sourcing is a hybrid model that involves collaboration between the service provider and the organization’s internal employees. This approach offers the benefits of both in-sourcing and outsourcing, providing flexibility while maintaining some level of control. It’s particularly useful for organizations with limited resources but still wanting to retain strategic oversight of their tax function.

Performance Measurement: The Key to Continuous Improvement

Setting the right performance measures (KPIs) is essential to drive desired outcomes within the tax function. As the saying goes, “What gets measured gets managed.” Proper KPIs will help guide the tax function toward achieving its goals across the other pillars.

Key performance indicators might include metrics such as total tax savings, compliance rates, and process efficiency. By tracking these metrics, organizations can identify areas for improvement and make data-driven decisions to enhance their tax function.

Moreover, performance measurement should be an ongoing process. Regular reviews of KPIs allow organizations to adapt to changes in the tax landscape and ensure that their tax function continues to deliver value. This continuous improvement approach is crucial for maintaining a high-performing tax function in an increasingly complex environment.

Conclusion: Aligning the Tax Operating Model with Business Goals

As organizations evaluate their tax operating model, they must carefully consider the pillars discussed above. Business leaders should identify and implement practical steps to adapt to the evolving tax landscape. Some quick wins on this journey include:

• Reviewing and updating the organization’s tax governance framework, including developing a clear tax strategy and approving relevant policies.
• Conducting a gap assessment focused on people, skills, data, and technology to identify necessary changes within the tax function.
• Evaluating existing technology solutions to ensure they are optimized for use in the tax function, with a focus on automation for greater efficiency.
• Revamping the performance measurement system by introducing quantitative KPIs, such as total tax savings, to drive desired results.

Ultimately, it is crucial that the tax operating model aligns with the organization’s overall operating model and that of the finance function. By doing so, organizations can navigate the complexities of

the tax landscape more effectively, ensuring that their tax function not only meets regulatory requirements but also contributes to the overall success of the business. In a world where tax regulations and business environments are constantly evolving, staying agile and proactive is key to sustaining long-term value creation through efficient tax management.