Are you ready for the future of tax in financial services?

The tax compliance burden in financial services (FS) is getting more complex. But there is no quick fix. We’re on a multi-year transformation journey.

The tendency might be to focus on what’s happening in tax today, but what’s happening tomorrow is already being shaped by regulation and legislation. How well your tax function performs will determine how well your FS organisation positions itself in a world where it will be judged for its transparency, sustainability, digital competency and all sorts of other measures that barely figured a decade ago.

Every tax change that hits FS – and there are many – requires engagement with stakeholders in the wider business. It means reassigned budgets, data management, investment in technology and remodelling to fit a new operating template. Current challenges include:

• BEPS 2.0 consolidates unilateral tax regimes into a global consensus position to reduce the risk of double taxation and ensure fair payment of tax wherever you operate.
• Corporation tax rate relative to other developed economies, is becoming increasingly important in the UK.
  
• Working from anywhere comes with international tax and transfer pricing implications. Organisations were given breathing space by tax authorities during and after the COVID-19 pandemic. Now, tax teams and HR functions must address the new working model.
  
• IFRS 17 which relates to the insurance sector, along with BEPS 2.0, expose the need for specialists with understanding of deferred tax accounting principles.
  
• Environmental, social and corporate governance (ESG) demands greater tax transparency. It builds stakeholder trust, drives better behaviours and enables peer-to-peer comparisons. And it supports investment in greener assets and strengthens the UK’s lead towards sustainable finance.
• Digital assets sit in uncharted territory. How do you value land in the metaverse, or work out remuneration for a shared blockchain platform or manage an IPO in a digital landscape? Some of the skills to unravel the complexities of digital assets lie beyond the conventional tax talent pool. 

Within the next three to five years, expect big changes in the way your tax function looks and performs. The learning curve is steep. 

Technology and data skills will be sought by tax functions. This is a mark of both the changing FS environment and heightened tax authority expectations.

It is no longer enough to be a tax law specialist able to fathom developments in financial transaction taxes. You now need to understand, in detail and at a systems level, how tax law changes can be implemented. And for that, a deep understanding of technology infrastructure is essential.

As the activities of the institution evolve – perhaps a shift into digital banking or ‘as a service’ offerings – so too do the pressures on the tax function and compliance. And as ESG climbs the business agenda, expect the tax function to step outside its conventional numbers-based space to understand how it can add value on alternative measures.

In addition to keeping the organisation on the right side of its legal and regulatory obligations, the tax function will guard it against increased costs and other risks. It will anticipate changes coming down the line, engage with the business and provide counsel at board level.

In December 2022, KPMG’s CEO Outlook reported that 77 per cent of CEOs felt increased pressure to publicly report their global tax contributions, even though compliance with schemes was voluntary. This is, to a large extent, driven by the ESG agenda.

It won’t be long before schemes converge and become mandatory. Effective as of June 2024, the EU Public Country-by-Country Reporting Directive will require all large multinational enterprises to report on global allocation of income, profit, taxes paid and economic activity in the jurisdictions in which they operate. Many FS institutions will be hit. Some are considering issuing total tax contribution statements now.

The direction of travel is towards greater transparency. Tax functions must determine how to articulate the organisation’s tax contribution to the market and, possibly, restructure operations to address tax pressure points.

Tax authorities have deep pockets and invest heavily in technology. In 2022, the Organisation for Economic Cooperation and Development (OECD) assessed the technology capabilities of 58 tax administrations (between them covering more than per cent of the world’s GDP). It found that more than 80 per cent use big data capabilities for analysis. A significant proportion use artificial intelligence, machine learning and real-time analytics.

Within five years, the OECD expects a significant majority of all tax administrations to have executed a digital transformation strategy. In reply, tax functions must up their game. Up against these powerful technology capabilities, they must be able to interrogate their institutions’ data and ensure compliance with regulations. Or face the consequences.

Expect group tax to partner more closely with key business functions. Responsibilities must be shared, and accountabilities defined:

• Compliance: Determine parameters on acceptable tax behaviour for your organisation and your clients.
• Legal: Understand where responsibilities lie for economic substance reporting and how to support the legal entity in fulfilling its obligations.
• Corporate affairs: Ensure protocols are in place for matters that might present reputational risk and require dialogue with the market.
• Operations: Maintain a close relationship for managing transaction-based taxes and transfer pricing.

In a recent survey of Bank CEOs, tax risk ranked as the second most important risk factor. The earlier that tax can engage with the board, using a relatable narrative, the better the outcomes. Future focus areas might include:

• Governance excellence: Maintain high standards of tax governance to mitigate the risk of operational failures.
• Manage transparency: Help the board to meet demands for greater transparency. Steer the conversation on voluntary disclosures of total global tax contributions.
• Guardians of behaviour: Participate in discussions about culture and conduct. And guard against contagion by considering the behaviour of clients too.
• ESG: Consider how ESG impacts both your own organisation and your supply chain, as well as employee mobility policies. A KPMG survey of 150 tax leaders in FS in March 2023 reveals that just over 1 in 5 are fully embedded in their boardroom’s ESG strategy, with a further nearly 3 in 5 regularly inputting into it.
• Business initiatives: Collaborate early and articulate the value that tax can bring to activities, such as mergers and acquisitions or new product development.
• Tax law: Engage on changes in tax law and any operational adjustments needed for compliance. Create value by horizon scanning for issues coming down the line.

The regulatory environment that governs financial services is growing in scope and complexity.

Far from operating as an adjunct to the FS organisation, tax must begin to play a more integral and value-adding role. Technology will be part of the remedy. But it must be supported by sufficient budget, headcount and training to ensure that tax can deliver on its extended remit and, in turn, secure a more resilient future for FS.

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Find out how KPMG tax leaders can help your tax team to adjust to all the compliance changes coming its way. Explore our tailored learning programmes, delivered by our tax academy, to understand how you can raise the profile of your tax function and its contribution within the wider FS business.