futureproofing your tax function for continuous compliance

Futureproofing your tax function for continuous compliance during COVID-19 and beyond

July 2020

Below, Tiffani Pierson, EY Americas Business Tax Compliance Leader, answers questions about what businesses can do to plan for the short term (now), the medium term (next) and the long term (beyond), to evolve along with the tax landscape and futureproof their tax functions.

Just as business taxpayers were working to address compliance challenges related to the Tax Cuts and Jobs Act (TCJA), the emergence of COVID-19 has taken those challenges to an unprecedented level. Urgent cash flow and liquidity needs, employee retention and supply chain issues are front and center for many businesses. At the same time, they’re working to understand economic and tax relief measures that continue to evolve. With so much in flux, companies need to equip their tax function to address both the immediate concerns and also the longer-term challenges.

Tiffani PiersonEY Americas Business Tax

Compliance Leader

1 | Futureproofing your tax function for continuous compliance during COVID-19 and beyond 2July 2020 |

The CARES Act included a technical correction to the TCJA that taxpayers also may be able to use to increase liquidity. The TCJA generally extended the 100% bonus depreciation deduction through 2026 and allows taxpayers to claim 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, with the amount phasing down for qualified property placed in service from 2023. The CARES Act fixed an oversight in the TCJA by amending IRC Section 168(e)(3)(E) to retroactively include qualified improvement property (QIP) placed in service after December 31, 2017, as property to which a 15-year recovery period applies. Because of the CARES Act’s technical amendments, taxpayers that make or have made improvements meeting the definition of QIP may now take appropriate steps, including automatic method changes or amended returns to claim the 100% bonus depreciation, to correct recovery periods consistent with the CARES Act revisions.

Decisions about obtaining refunds should be made after careful consideration, and many businesses will need to file for extensions. While some will be able to file for an expedited refund on Form 1139, others will need to instead use a Form 1120X, and the rules and requirements are new and evolving. These and other relief measures require modeling and planning as there can be trade-offs between tax decisions made now and those made in prior years.

Additionally, some of these new tax relief options involve very specific and potentially complicated tax filing requirements. Working with preparers who are familiar with amended return procedures can help companies navigate filing complexities and can reduce rejections and processing delays.

What kinds of short-term challenges have arisen out of the current COVID-19 pandemic? Many businesses face an immediate need for cash to cover ongoing and unexpected costs while they also experience revenue declines and workforce constraints. At the same time, meeting tax filing deadlines — even those that have been delayed — has become more challenging, and even confusing, due to reductions and reallocations of resources and the limitations of virtual working environments, as well as frequent IRS and state taxing authority filing updates.

Congress has enacted legislation that includes some tax relief. What do businesses need to consider from a compliance standpoint as they weigh the available options? The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included a variety of economic relief measures for those affected by the pandemic. These include rollbacks of some parts of the TCJA that can increase businesses’ liquidity by allowing them to quickly monetize current year losses by carrying them back to past tax years and to receive refunds for taxes previously paid.

For example, net operating losses (NOLs) from 2018, 2019 or 2020 can now be carried back five years. Taxable income limitations have been temporarily removed to allow an NOL to fully offset income. This is a significant change as refunds from NOL carrybacks can provide immediate liquidity, which can be enhanced in situations where 21% tax-rate losses are carried back into years when income was taxed at 35%.

Another taxpayer-favorable CARES Act provision made changes to the rules governing the corporate alternative minimum tax credit (AMT). The TCJA had repealed the corporate AMT and allowed corporate taxpayers with unused AMT credit carryforwards to fully offset a regular tax liability with available AMT credits through 2021. Any remaining AMT credit amount became refundable incrementally from 2018 through 2021. The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim the remaining credits as a refund in full in either 2018 or 2019. Taxpayers wishing to accelerate an AMT credit refund for 2018 may use a quick refund procedure to claim these credits.

Changes seem to be happening quickly — how can businesses keep pace?One of the challenges that has become evident is that companies and technology providers alike have struggled to keep pace with late-breaking guidance. An example can be seen with TCJA guidance in the international area, as some calculations were not able to be included in the tax filing software due to timing constraints. For example, the global intangible low-taxed income calculation feature was released later in the season by software providers, without automation for populating forms. This led to additional challenges as companies worked to find solutions before the filing deadlines.

As the pace of change accelerates, adjusting to shifts in laws and policies in real time will be critical, both from technology and skills standpoints. That means monitoring and tracking legislative, administrative and policy developments will be more important than ever.

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Any advice for companies about how to make their data work for them?

This is especially true for companies that operate in multiple tax jurisdictions and with several entities and structures. Companies will need to be able to pull data from their financial systems, perform necessary analytics, and enable visibility not just within one tax jurisdiction but across all entities and multiple jurisdictions — and in real time.

To do this, companies will need to manage their data efficiently and coordinate among different business functions to make sure data is consistent, whether it is being used to report to the chief financial officer, to the Securities and Exchange Commission, or to US and non-US tax authorities.

Planning is vital, as is communication. Each arm of the process needs to know when calculations will be completed and have visibility to maintain consistency among the various calculations. That means having supporting documentation and tracking changes as they occur. Version control is critical, as is keeping an organized record of what data was used at which point in time so documentation and workpapers are tax-audit ready.

During a survey of executives taken during a recent webcast, nearly 80% of respondents indicated they were only somewhat prepared, unprepared or unsure about how to deal with potential tax controversy.

What role does technology play?Technology can support efficient data management and save time by reducing the need for data manipulation in multiple spreadsheets, thereby reducing the risk of version control, formula or input errors. Tax functions that have input into their financial system requirements and design will obtain better quality data up front and will spend much less time gathering, cleansing, and manipulating data for tax accounting and compliance purposes later.

Modeling technology can be particularly helpful to many companies that are now trying to determine whether they might benefit from some of the tax relief measures being offered. For example, an analysis of NOL carrybacks involves examining several tax years that could be affected, with many interrelated tax provisions. Modeling technology, whether internally built or externally provided, can provide analytics and alternative scenarios and assessments to help navigate the complexity.

Beyond the core financial systems, other technologies such as specialized tax software, advanced analytics and visualization tools, shared data environments, automated and complex data capture, and cloud platforms can all help support the evolving compliance needs of the tax function.

The global pandemic has shined even more light on the value of a tax technology infrastructure that can enable remote and continuous operation of the tax function, even in the midst of significant disruption. The further along a company was in the tax technology transformation process, the better equipped it has been to continue operations and maintain interaction with its teams, still providing all the visibility and access to information and data necessary to get through events such as quarter-end processing — even while they were working from multiple locations, 100% remotely. In a recent survey in advance of an EY Tax Technology and Transformation virtual event, 58% of the respondents indicated that remote tax function operations and the technologies that support them would become key elements in their long-term tax operating strategy.

Businesses will have to determine what tools and technologies will work best given their specific situations and budget considerations.

How can businesses prepare for the next round of compliance challenges?

As companies continue to evaluate how to meet current and future tax obligations, a few considerations should be top of mind. These include planning for tax year-end and additional opportunities for NOL carrybacks and credits in light of the CARES Act. Modeling out CARES Act tax impacts and undertaking scenario planning will be a key part of this process.

Businesses need to have detailed supporting documentation and data, as well as the capability to analyze it. They should be prepared to share documentation with taxing authorities, particularly if the interpretation of the law changes or new measures are enacted.

78%of companies responding to an April 10, 2020, EY survey expected to carry back NOLs available under the CARES Act, almost half of them (45%) needing to complete NOL modeling to determine the most advantageous position.

80%of respondents to a December 4, 2019 EY survey indicated they were only somewhat prepared, unprepared or unsure about how to deal with potential tax controversy.

Companies need to approach data holistically and be proactive about data management, storage and coordination across functions.

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BeyondConclusion

What does an intelligent tax function look like?Future-focused companies are testing new business models to prepare them for a more challenging compliance environment. In fact, nearly all of the respondents to the TFO survey said they are taking action to transform their tax and finance function operating model, to keep pace with change and better manage their statutory filing and tax compliance processes.

From what we’ve seen, businesses tend to approach their tax function transformation needs in one of three ways:

Internally controlled transformation. The company transforms its existing tax and finance function. This may include building a new digital platform and hiring or training people who understand both tax and new data requirements — and reporting and digital filing tools. This option may cause the least organizational disruption and offer the greatest control, but it can also be expensive and requires consistent focus on staying current as the landscape and technologies change.

Third-party transformation. The company involves a third party in its company’s tax and finance activities. This approach can shift some of the IT costs and risk to the vendor, which has already invested in technology platforms and skilled employees. This may mean significant change for the organization and requires a willingness to give up some control and adopt new management and governance models.

Hybrid approach. The third option is a mix of the two approaches, or a “co-sourcing” approach. The key here is to find the right balance for the organization — deciding which activities the company wants to own and maintain internally, and which it would prefer to “buy” through an external provider. This is a popular option.

Given tightening budgets, how can companies address their future technology and talent needs in a world of continuous compliance?Tax reform and economic shifts due to COVID-19 impacts have accelerated the evolution in skills needed within the tax function and have required businesses to rethink their tax approach and its implications for the broader business, including finance, treasury, legal and information technology (IT) functions.

Today’s tax executives often find themselves in the midst of finance and business transformation initiatives due to the criticality of tax considerations and compliance requirements, both above the line for indirect taxes and below the line for income taxes. And they don’t always have talent with the right skills (or bandwidth) to manage the volume of work. Being able to analyze a spreadsheet and input information into compliance software is no longer enough. Proficiency with advanced real-time analytic and data-gathering tools is now a key part of the tax function. In fact, 83% of respondents to EY’s 2020 Tax and Finance Operate (TFO) global survey said their tax and finance personnel will shift from a technical focus to data, process and technology skills over the next three years.

As the broader business world evolves, driven by technology advances, it is clear that tomorrow’s tax professionals will need to add process and technology skills to their core competencies. Businesses need to be thinking longer-term about the skill sets that tax professionals will need to provide data-driven insights and to use technology, data management, digital analysis and process improvement to enhance compliance efforts. In addition to analytics and workflow automation, advanced capabilities such as machine learning and artificial intelligence will likely also become more integrated into the tax function in the years ahead.

The COVID-19 pandemic, coming so soon after TCJA’s tax year 2018 filing challenges, has brought into sharp focus the need for companies to reimagine their tax functions, building in both agility and resilience.

Keeping pace with change is no longer enough. In the era of continuous compliance, leading tax professionals need to get out in front of issues while also anticipating what may be next and planning for what lies beyond. This may involve rethinking existing priorities, encouraging greater collaboration between tax and other functions within the organization and possibly looking outward for value creation opportunities.

73%of respondents to a 2020 EY Tax and Finance Operate (TFO) survey said they are more likely than not to co-source some critical activities in the next 24 months in order to add value, reduce risk and decrease cost.

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This material has been prepared for general informational purposes only and is not intended to be relied

upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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Ernst & Young LLP contacts

Tiffani PiersonEY Americas Business Tax Compliance Leader+1 312 879 [email protected]

Joe HoganEY Americas Leader, Global Compliance and Reporting+1 408 947 [email protected]

Jill SchwietermanEY Americas Leader, Tax and Finance Operate+1 312 879 [email protected]

Kurt NeidhardtEY Global Co-Leader and EY Americas Leader, Tax Technology and Transformation+1 212 773 [email protected]

futureproofing your tax function for continuous compliance

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