Transforming the Tax Department: 6 Strategies to Elevate Your Team’s Impact

Within the Office of the CFO, the demands on today’s corporate tax function continue to increase at a rapid pace. Tax department leaders and corporate tax professionals face constant changes in domestic and global tax legislation, increased compliance obligations, and additional SEC scrutiny. Some of the regulatory changes that are top of mind for tax professionals include: navigating the new Pillar Two global minimum tax requirements (for many companies with a multinational presence); considering tax impacts during a business combination such as an acquisition; managing compliance related to the complexities around capitalized research and development costs under Section 174; and more. Plus, tax teams are often constrained in keeping up with the latest regulatory expertise while tackling their day-to-day responsibilities because of ever-changing workforce trends.

Now more than ever, in response to these heightened challenges, corporate tax functions are working to identify and implement efficiencies across their processes.

For tax department leaders, there are many advantages of optimizing the tax function. An effective tax optimization involves finding the right equilibrium between insourcing, outsourcing, and automation. These improvements to the tax function can drive efficiency, compliance, and strategic decision-making within a company.

1. Appointing the right team for enhanced compliance and risk management: One of the primary benefits of optimizing a company’s tax function is enhanced compliance efficiencies in response to ever-changing tax regulations. Keeping abreast of tax laws (such as the Pillar Two global minimum tax, corporate alternative minimum tax, and capitalized research and development costs) and ensuring adherence to them is a complex task. The composition of a tax function will greatly impact the success of a company’s tax compliance and ability to manage risks, and tax department leaders should consider how to best mobilize both internal team members and external tax advisory experts. By insourcing key tax activities, a company can maintain direct control over its compliance processes. Simultaneously, outsourcing specific tasks to specialized third-party tax experts can bring in fresh expertise and an outside perspective, which helps in navigating complex regulatory landscapes. This can be helpful in tailoring tax regulations to a specific organization. For example, a company might be facing challenges relating to enacting internal transfer pricing procedures while working toward general tax compliance needs. By bringing in third-party experts to assist, the company can continue to concentrate on its daily tax compliance goals while delegating the heightened focus on transfer pricing planning, documentation, and implementation to a third-party expert who will work in tandem with the internal team.

Combining a focused internal team with specialized external support as needed is a well-rounded approach that helps mitigate the risk of non-compliance.

2. Addressing mundane tax department work to achieve cost efficiency and flexibility: Routine and standardized tasks, such as data entry and basic calculations, can be outsourced to shared-service centers, for example, to reduce operational costs.

Here are a few key examples of tax-related tasks that are helpful for companies to outsource:

• Data Entry and Form Completion: Imagine Sarah, a tax associate, meticulously transferring numbers from invoices into a spreadsheet for calculating depreciation expense. This can be a time-consuming and error-prone process. Outsourcing data entry and form completion to qualified professionals frees Sarah’s time to focus instead on analyzing depreciation schedules and identifying potential tax optimization strategies.
• Foreign Tax Credit Research: Tax professionals like Michael spend hours researching foreign tax credit opportunities for the company’s overseas subsidiaries. While understanding foreign tax laws is essential, the initial research can be a tedious task. Outsourcing this function allows Michael to dedicate more time to analyzing the impact of these credits on the company’s overall tax liability and advising on effective tax planning strategies.
• State and Local Tax Compliance Filing: Every state has its own unique tax filing requirements. For a company with operations across the country, tax professionals like Lisa can be overwhelmed by the sheer volume of state and local tax filings. Outsourcing this task ensures accurate and timely filings, while freeing Lisa to focus on more strategic tasks, such as identifying potential state tax incentives (such as Maryland’s job creation tax credit) and analyzing the impact of state and local tax laws on business decisions.
• Basic Bookkeeping Tasks: Tax professionals sometimes find themselves double-checking basic bookkeeping entries, a task often handled by junior staff. Outsourcing these basic bookkeeping functions allows senior tax professionals to focus on complex tax calculations, reviewing financial statements for tax implications, and providing strategic tax advice to the Office of the CFO.

By outsourcing these repetitive tasks, corporate tax departments can empower their professionals to focus on what they do best – strategic tax planning, analysis, and providing impactful advice that supports the overall financial objectives of the company. This, in turn, strengthens the Office of the CFO’s position when making critical financial decisions.

With the right outsourcing mechanisms in place, retaining strategic and decision-making functions in-house allows for better control over costs associated with sensitive financial matters.  By balancing routine work through outsourcing and redirecting in-house tax professionals’ focus on more strategic initiatives, companies will enjoy greater flexibility to address changing business needs and ability to monitor and adapt to the evolving regulatory environment.

3. Employing outsourcing for scalability and global reach: Outsourcing offers scalability, making it easier for companies to adjust their tax function according to business needs. Whether expanding operations or facing a temporary surge in workload, outsourcing allows for a flexible and scalable approach. For instance, a company expanding its reach into new state jurisdictions may not have the technical acumen to determine if it has sales and use tax filing requirements. Outsourcing a state nexus study to determine filing requirements will alleviate the need to have that specific skill set within the internal tax function. Additionally, outsourcing can facilitate a global reach, ensuring compliance with tax regulations in different jurisdictions. This could include Pillar Two global minimum tax requirements, which are increasingly important matters for US-based businesses with a presence in various foreign jurisdictions.
4. Reducing workload and increasing tax department efficiency through automation: Automation plays a pivotal role in optimizing the tax function. Repetitive and rule-based tasks, such as data entry and basic calculations, can be automated to reduce the workload on human resources. This not only enhances efficiency but also minimizes the risk of human error. Advanced technologies, such as artificial intelligence and machine learning, can be applied to analyze vast datasets and identify patterns for more accurate tax estimates.

5. Improving decision-making with data analytics: Automation not only streamlines routine tasks but also empowers companies with data analytics. Analyzing large volumes of financial data can reveal valuable insights for strategic decision-making. With automated tools, companies can perform in-depth analyses, identify trends, and make data-driven decisions, contributing to overall business success.

When transforming a company’s data analytics capabilities (whether the data is tax-related other otherwise), the initiative is usually a cross-functional effort that extends beyond the tax department, pulling in financial planning and analysis (FP&A) experts, technology specialists, and other professionals within the office of the CFO.

6. Honing customization and control with insourcing: While outsourcing brings in external perspectives and supplemental expertise, insourcing allows for customization and control over processes. Critical decisions regarding tax planning and strategy can be kept in-house, aligning with the company’s unique goals and objectives.

These critical focus areas might include industry-specific tax credits, tax audits and examinations, tax cash-flow management, and internal audit processes.

Insourcing also ensures a direct line of communication and collaboration among internal teams, fostering a cohesive approach to tax management.

Ensuring strategic alignment while transforming the tax function

Many of the benefits of tax department transformation involve a careful balance of internal and external resources. And this balancing act requires effective communication and collaboration between internal teams and external service providers. This collaboration enhances the overall efficiency of the tax function. Regular communication ensures that both internal and external teams are aligned with the company’s objectives and compliance standards.

Optimization of the tax function, through a well-balanced approach, enables companies to engage in strategic tax planning. This involves not only meeting current tax obligations but also planning for and communicating future tax obligations with management. By combining insourcing, outsourcing, and automation, companies can create a comprehensive and forward-looking tax strategy that aligns with their long-term business objectives.

Companies that successfully navigate tax department optimization are better positioned to adapt to changing regulatory environments, drive financial success, and achieve long-term sustainability.