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.
Tax changes coming down the line
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.
Fast forward on tax
Within the next three to five years, expect big changes in the way your tax function looks and performs. The learning curve is steep.
New skills for a new-look tax team
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.
Transparency becomes the new normal
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.