The new tax landscape and challenges of compliance



The world has changed significantly over the past few decades and continues to change today. On the other hand tax systems have remained largely static and only now playing catch-up. What does the journey ahead hold for tax authorities, taxpayers and professionals?

State of the nation and taxation
Nigeria is currently experiencing a declining growth rate. The National Bureau of Statistics recently reported a fall in Nigeria’s GDP for the second quarter of 2015 at 2.35% down from 3.96% in the first quarter. In the same period last year it was 6.21% and 6.54% respectively. The Central Bank of Nigeria has recently warned that the economy may slip into recession if the current trend continues. A closer look at the latest GDP figures actually shows that critical sectors such as manufacturing/industries are already in recession with two consecutive quarters of negative growth rates.

In the same period, the Federal Inland Revenue Service (FIRS) generated N1.97 trillion compared to a targeted collection of N2.28 trillion and set to collect about N4.57 trillion for the year. Ironically, as businesses and individuals are going through various economic challenges, government wants to raise more revenue through taxation to bridge the gap in revenue from crude oil which is currently trading below USD50 per bbl compared to USD53 per bbl used for the 2015 Budget.
Overall, this renewed focus on taxation will not only increase the tax cost for taxpayers but also the compliance burden as the tax landscape changes.

What is driving change?

Beyond the need to raise tax revenue by government, enhanced transparency and disclosure of tax-relevant information are the subject of much debate globally and becoming the new standards for business. The demand for greater transparency is reflected in the agendas and action plans of the Organisation for Economic Cooperation and Development (OECD), the G20, the European Union, and the United Nations. In the PwC’s thought leadership series, Tax Function of the Future, we explore predictions relating to global tax legislation and regulation, as well as risk management and how legislative and regulatory changes will mandate transformation. The report covers six main areas:

Global legislative and regulatory landscape
Global tax information reporting requirements e.g. Country-by-Country Reporting and similar transparency initiatives will grow exponentially and will have a material impact on the operations and related budget allocations within the tax function. Regulators will demand transparency regarding global taxation, necessitating clear and thoughtful communications with public stakeholders about corporate contributions to the communities in which they do business. Information sharing will be commonplace among taxing jurisdictions, and taxing authorities will have the capability to mine data and conduct global audits, resulting in increased disputes.

Tax function’s role in risk management and governance
Many jurisdictions will legally require the adoption of a tax control framework which follows guidelines similar to Sarbanes-Oxley and COSO (Committee of Sponsoring Organisations of the Treadway Commission). Enhanced stakeholder scrutiny and reputational risk will force companies to continuously re-evaluate their tax decisions. Strategic focus on jurisdictional reporting and documentation of business activities, including transfer pricing, will be critical to managing the increased tax controversy resulting from transparency initiatives.

Data flow into the tax function
The majority of tax functions will receive all information in a ‘tax-ready format’ from either their enterprise-wide financial systems or a dedicated tax data hub. Dedicated tax data hubs will become mainstream and be developed internally, licensed from a third-party vendor, and/or accessed through an accounting firm as part of a co-sourcing arrangement. Data security will be high on the agenda of tax functions due to concerns over confidential information being inadvertently released or shared publicly.

Technology automation for tax function analytical tasks
More companies will use their enterprise-wide financial systems to prepare tax calculations (e.g. income tax accounting and indirect taxes), thereby replacing spreadsheets and/or traditional tax technology solutions. The vast majority of tax functions will rely on professional data analysis tools to assist in the decision-making process in areas such as detection of risk, opportunity identification, projections and scenario planning, and overall business support.

Tax function roles and processes
Most global tax preparatory compliance and reporting activities, including data collection and reconciliations, will be performed within the company’s shared service centre or will be co-sourced with a third party. Tax functions will use real-time collaboration tools to automate their workflow, document management, calendaring, and internal controls.

The tax professional of the future
A successful tax professional of the future will be highly proficient in data analysis, statistics, and technology, as well as process improvement and change management. Tax functions will employ dedicated tax IT, data and project management specialists who will develop, champion, and execute the tax technology and transformation strategies.

The way forward
The most immediate and sweeping initiative faced by tax functions globally is the Country-by-Country Reporting (CbCR) recommendation and template. CbCR will have a significant impact on the tax function and how it must engage with the wider organisation to be ready for initial compliance, as well as meeting recurring annual obligations. Nigeria’s Federal Inland Revenue Service has already indicated their interest in adopting CbCR. When fully implemented, one cannot rule out the possibility of tax authorities in Nigeria, inspired by CbCR, requesting companies operating in different states across the country to produce “State-by-State Reporting (SbSR)” especially with respect to employee taxes, VAT and withholding tax.

We expect base-line tax administration and other compliance burdens to expand, audits to increase, and there to be enhanced controversy creating the potential for increased and double taxation. More pressure will be placed on tax functions to better manage tax and related risks by strengthening the control environment that governs reporting processes. Overall, the tax function will need to expand its core capabilities relating to data, people, and technology. In addition, due to the potential business and reputational risks associated with many transparency initiatives, the tax function will need to be more engaged with the C-suite stakeholders about such issues.

Companies should think creatively and strategically to address these risks while proactively engaging with their broader stakeholders. Now is the time for companies to create a multi-year plan to expand their tax function capabilities, integrate new reporting requirements, and provide the business case for operational investments. While risk and compliance obligations may be the main drivers for change, there may be several positive benefits to reap along the way such as management having greater real-time insight due to enhanced access to information.

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