Tax departments are always looking for ways to streamline their processes and procedures, and provide greater value-added services to management. Tax analytics and automation technologies present new opportunities to corporate tax departments, and the benefits will trickle down to small and medium-sized businesses as the technologies diffuse. The authors surveyed larger companies on the deployment of tax analytics and automation, and the lessons learned in the process.
As the tax law becomes more complicated, corporate tax departments need to provide more detailed disclosures about a company’s economic activities. Tax analytics and automation (TAA) technologies are transforming the tax processes in corporate tax departments. The needed data is not always easy to obtain, so tax departments require new technologies to free up resources from time-consuming tasks (see “Transforming the tax function through technology,” KPMG, 2018). The use of TAA technologies to handle rule-based, repeatable tasks allows tax accountants to focus on value-added tasks that share their insights with business process managers and, thus, enrich their perceived value within the organization.
The corporate tax department is a microcosm of a company’s overall financial operations. It is responsible for the correct calculation of one of the largest items on a company’s income statement, in addition to being responsible for all of its tax filings. Given the complex and dynamic nature of taxation, process and procedure are extremely important to the day-to-day operations of a corporate tax department. The relatively small size of the department also provides a unique opportunity to evaluate the assimilation of analytics and automation technologies.
The authors’ goal was to further our understanding of the current state of assimilation of TAA technologies in Fortune 1000 companies. To accomplish this, the authors surveyed tax executives to gain an understanding of the factors that increase or challenge the degree to which TAA technologies are used as an integral part of a tax department’s processes. Companies find themselves gaining a growing suite of TAA technology tools that enable them to align their tax practices with long-term business strategies by streamlining tax preparation, reducing rework, and boosting their employee value proposition to focus on interacting with management on strategic issues and planning.
Although the following survey focused on Fortune 1000 companies, consulting companies are now using artificial intelligence and data analytics to help small and medium-sized businesses (SMB) address business challenges, including COVID-19 (“Powering SMB Resiliency in a COVID-19 World,” Accenture, 2020). Grove indicates that SMBs can also benefit from tax automation. “Automating tax processing enables small businesses to improve accuracy and quickly project and report their … tax liabilities, all while increasing productivity” (“10 Benefits of Tax Automation for SMBs, smallbizdaily, 2021).
The Tax Executive Institute (TEI) disseminates technology information to support the TAA transformation process across large companies and SMBs. In addition, TEI builds a network for tax professionals to capitalize on the TAA transformation experience and lessons learned through seminars, conferences, and journal articles, including:
- Collaboration between IT, finance, and tax to integrate TAA technologies to meet corporate and finance governance goals
- Development of a tax data matrix to identify and analyze all the sources and uses of tax data, building a tax-sensitized chart of accounts
- Development of technology road maps for TAA initiation and funding
- Adoption of low-cost application programming interfaces (APIs). See TEI Roundtable 30, “Tax and Tax Technology Meeting customer needs—now and in the future” (September 10, 2020).
Technology innovation goes through a multi-stage process suggested by Cooper and Zmud (“Information technology implementation research: A technological diffusion approach,” Management Science, 1990), involving initiation, adoption, and deployment (routinization). Generally, Fortune 1000 companies have already gone through the initiation and adoption stages of technology innovation, so the focus here is on the deployment stage. To investigate how tax analytics and automation have been deployed, the authors examined the following questions:
- What were the potential benefits of TAA technologies when companies considered using them in their corporate tax departments?
- How have these companies deployed TAA technologies?
- How integrated have the TAA technologies been used in the corporate tax department of companies—specifically, tax compliance, tax provision, tax planning, tax strategy?
- What are the key factors influencing the corporate tax department’s ability to conduct tax analytics and automation?
The survey questions are based on existing literature related to technology diffusion (Zhu, Kraemer, and Xu, “The process of innovation assimilation by firms in different countries: A technology diffusion perspective on e-business,” Management Science, 2006) and, in particular, TAA technology diffusion in U.S. corporate tax departments. Survey participants were tax executives employed as of September 2019, and they were invited to participate in the online survey via a recruitment letter and reminders. The survey period lasted approximately three months. Participation was voluntary and confidential, and the data was analyzed in aggregate without disclosing confidential information. In total, 68 responses from 1,000 companies were returned, with the response rate of 6.8%.
A large majority (93%) of the respondents worked in companies with at least 1,000 employees (i.e., large companies). Survey respondents were vice presidents of tax (31% of respondents), chief tax officers (3%), and—most commonly—tax directors and managers (49%). Several even have specific TAA relevant titles, including tax technology VP, director, or manager (10%). They appear to be the individuals in each entity best qualified to speak about the company’s overall tax analytics and automation activities. The positions of the respondents suggest the excellent quality of the data source.
Benefits of TAA Technologies
Question 1 in the online survey asked respondents to rate (on a 5-point scale ranging from “not significant” to “very significant”) how significant each of the following potential benefits was when their organization was considering using TAA technologies in its corporate tax department:
- To reduce cost in the tax department
- To enter new tax services
- To improve coordination of the tax department with other departments
- To analyze large data sets
- To expand tax services
- To enhance tax reporting.
Exhibit 1 shows what potential benefits incentivized the companies to venture into TAA technologies. As the results indicate, a large majority of respondents felt that TAA technologies were especially beneficial for companies to enhance tax reporting, enter new tax services, and analyze large data sets. At least one-half of respondents felt that all benefits were at least fairly significant. Their responses indicate that these companies have leveraged TAA technologies to focus their resources on improving tax reporting compliance and reducing risks, thereby protecting the firm’s reputation. They also have applied TAA technologies to expand tax services and coordinate with other departments to create value-creating strategies beyond cost-cutting.
Applications of TAA Technologies
Question 2 in the online survey asked respondents to check the box identifying the applications of TAA technologies in their corporate tax department processes. The applications included the following:
- Automating of repetitive or rules-based tasks currently performed by tax professionals (e.g., state apportionment, tax treatment of travel expenses, like-kind exchange matching, tax depreciation classifications)
- Data mining and the process of finding previously unknown relationships and patterns (e.g., tax data exploration, fraud detection)
- Leveraging advanced statistical or computer science tools to mimic human decision making in tax (e.g., artificial intelligence)
- Other (please describe).
Exhibit 2 shows that more than half of survey respondents have engaged in automating high-volume, low-value tasks of finding, extracting, transforming, and loading data (i.e., the ETL process), which is a straightforward application of TAA technology. Survey respondents offered comments, including leveraging workflows across different tax disciplines using various licensed tools to better analyze large data sets (Power BI, Alteryx), review tax returns (e.g., tax adjustments, wording of line descriptions, and comparison to prior year), improve data analysis of tax data warehouse to drive efficiency, adopt dashboard reporting of decision quality analytics, and financial modeling.
Automating the repeatable tax work-flow process improves accuracy and efficiency. More importantly, automation allows a company to deploy corporate tax professionals on strategic issues, such as working on tax-optimizing opportunities. Less than 25% of global tax department professionals, however, have employed advanced TAA technologies, for example, to discover and prevent fraud. Companies appear to struggle with gathering business intelligence through data mining and AI tools, including analyzing data from different data sources, managing data quality, converting data into insights, and encouraging company-wide adoption.
Integration of TAA Technologies
Question 3 in the online survey asked respondents that used TAA in the corporate tax department to estimate how integrated (based on a 5-point scale ranging from “not integrated” to “very integrated”) TAA technology was found in the following tax processes:
- Tax compliance
- Tax provision
- Tax planning
- Tax strategy
Exhibit 3 shows how the survey companies integrated TAA technologies in their tax processes. Many companies deploying TAA technologies reported that they have applied the technologies in the tax compliance (41%) and tax provision (34%) processes. Tax departments took advantage of automating proper and timely reporting and filing corporate tax returns to achieve their compliance objectives. In addition, TAA technologies enable tax departments to calculate the estimated tax owed by helping entities navigate the ever-increasing complexity of tax law and reconcile different regulatory reporting requirements.
The results for the remaining two processes, tax planning (4%) and tax strategy (11%), indicate the lack of proper tools or competency in harnessing TAA technologies in these significant areas. Tax planning and tax strategy require effort and experience to find the right tools to transform tax data into strategic information assets by facilitating efficient data sharing, visualizing critical trends, detecting anomalies with drill-down capabilities, and simulating tax optimization strategies.
Obstacles to Conducting TAA
Question 4 in the online survey asked respondents to rate how significant (based on a 5-point scale ranging from “not significant” to “very significant”) the following obstacles are to their corporate tax department’s ability to conduct tax analytics and automation:
- Making needed organizational changes for TAA implementation
- Integrating TAA into your overall tax strategy and business process
- Lacking staff with TAA expertise.
Exhibit 4 summarizes the managerial obstacles encountered in implementing TAA technologies among the survey companies.
The lag in TAA technology application in advance tax planning and tax strategy from Question 3 may result from significant managerial obstacles that hinder a tax department’s ability to integrate TAA technologies. The results in Exhibit 4 show that TAA deployment is lower among companies experiencing more difficulty making organizational changes and integrating TAA technology into the overall strategy and business processes. Respondents ranked making needed organizational changes for TAA the highest (50% very significant or very significant), followed by lacking staff with TAA expertise and challenges of integrating TAA into overall tax strategy and business process.
The following list summarizes the comments offered by respondents about their experience with managerial obstacles:
- Lacking senior management support for the business value case
- Making needed changes at other business partners within the organization
- The organization is more focused on technology and updating their systems
- Getting staff on board with automation
Technology and data obstacles:
- Getting proper data and technology infrastructure
- Finding the proper fit of IT tools with tax culture (need for “self-service” based tools)
- IT is evaluating enterprise-wide tools and preventing us from moving forward on our own
- Prioritizing by IT
- Source data is not in one place and often requires additional cleansing before the tax process begins
- The complexity of the enterprise IT environment
- Manual research required
- Lacking funding/budget
- Cost and rapid IT change
- Competing projects.
Tax Regulatory Environment and TAA
Question 5 in the online survey asked respondents to rate the degree to which they agreed with the following statements about the tax regulatory environment:
- Governments are utilizing tax analytics and automation
- Governments require the use of tax analytics and automation for tax compliance
- Tax laws support the use of tax analytics and automation
- There is adequate legal protection for the use of tax analytics and automation information.
Exhibit 5 summarizes respondents’ views about the tax regulatory environment. Frequent tax law changes impose an enormous compliance burden on companies. For example, multinational companies monitor and analyze changes in indirect taxes, including sales and use taxes, value-added taxes, and goods and services taxes. Tax executives increasingly embrace TAA technologies to understand and manage these transaction taxes.
Tax authorities worldwide are harnessing technologies to improve tax administration, counter fraud, and facilitate taxpayer compliance. For example, tax authorities deploy tax technologies to engage early and move compliance upstream through products such as benchmarking, cooperative compliance, sharing of risk profiles, and pre-lodgement compliance reviews (see Veit, “Swimming upstream: leveraging data and analytics for taxpayer engagement—an Australian and international perspective,” eJournal of Tax Research, 2019). Most survey respondents anticipate tax authorities will continue using TAA technologies to promote taxpayer engagement and compliance (46%). More than one-third expect that tax authorities will require companies to adopt technology for tax compliance. However, most tax executives do not believe the current tax law sufficiently supports the use of TAA technologies, leaving them to doubt if there is adequate protection to protect them in using TAA information (84%).
Adapting the technology diffusion research model from Zhu, Kraemer, and Xu (2006), the authors found that a supportive regulatory environment is positively related to TAA routinization. These results support the belief that a favorable regulatory environment necessitates a higher degree of routinization of TAA in tax processes.
Global corporate tax departments have embraced TAA technologies and leveraged them for exploring value-creating opportunities. They value TAA technologies as opportunities to capitalize on their data, expand their tax services, and integrate TAA technologies into strategy and business processes. This survey shows the following:
- Companies have started leveraging advanced TAA technologies such as data mining and AI in combination with automating repetitive or rule-based tasks. Some have created tax technology positions and functions to deliver TAA solutions in various tax areas and to lead the implementation and upgrade of TAA technologies.
- Companies have integrated TAA technologies into their tax compliance and tax provision processes, but have only begun introducing them into their tax planning and strategy processes.
Although this article documents the organic adoption of TAA technologies among large global companies, SMBs should find this article demystifies adopting TAA technologies. Respondents working in the 14 smallest Fortune 1000 companies (those with less than 5000 employees) viewed the benefits of TAA and obstacles to conducting TAA similarly to larger respondents, and they have adopted TAA technologies and integrated TAA in business processes to the same extent as larger respondents.
These survey results should be of interest to corporate tax departments and tax authorities. Companies must overcome challenges in TAA technology routinization by providing flexibility in evaluating organizational changes that impact the integration into their overall tax strategy and business processes. In addition, tax authorities should create a favorable regulatory environment that accelerates TAA technology deployment that will enable them to pivot the digital transformation to improve transparency, counter fraud, and facilitate compliance.