How CFOs can realize the full benefit of COVID-19 tax measures

How is COVID-19 affecting tax-related activities?

Tax relief measures play an important role as part of the broad-based initiatives that governments are undertaking to counteract the economic impact of the COVID-19 crisis. In the US alone, new business tax breaks are expected to total $650 billion in 2020 and 2021. These modifications are available broadly to companies meeting specified criteria and are designed to generate cash quickly.

Companies may, for example, receive tax credits for paying employees not to work; postpone some payroll taxes from 2020 to 2021; or offset past losses and receive tax refunds immediately. Similarly, in over 100 countries with Value Added Tax (VAT) regimes, companies may benefit from reduced rates.

Specific measures vary widely from country to country. Italy, for example, is providing a temporary 60 percent tax credit on commercial rent, while qualifying businesses in Japan may delay consumption, corporation and income taxes for one year.

In addition to responding to new tax measures, CFOs and their tax functions are still active in preparing returns, issuing VAT and other tax invoices, reconciling tax obligations with internal and external financial statements, and advising business lines on the tax implications of doing business in specific sectors and/or geographies. The new COVID-19 related measures add an additional layer of complexity to what for many companies is an already intricate system for meeting tax obligations in multiple jurisdictions.

Tax relief can help companies maintain liquidity and conserve cash for vital needs such as meeting payroll, buying goods and services and paying rent. To take full advantage of the tax measures that have been enacted, however, companies need certain elements in place, including:

• High quality data. Data should be accurate but also sufficiently granular to support both new and existing filing processes; depending on the company, its industry and the geographies in which it operates, this data may document business partners, goods and services bought or sold, cash and accruals, assets subject to depreciation or a wide range of other items.
• Tax technology. Innovative technology automates basic processes and reduces the need for manual intervention while providing a level of accuracy that limits audit exposure; in our experience, the corporate tax function has under-invested in technology and still relies upon spreadsheets and other manual processes to a greater extent than other finance functions. Using technology such as AI, for example, companies can better identify opportunities for exemptions and exclusions embedded in thousands upon thousands of pages of ever-changing tax codes.
• The right people doing the right things. Automation, coupled with process redesign, can free up resources that can be devoted to productive activities, including tax planning and working with customers to improve the quality and efficiency of tax-related activity.

The pandemic has stretched resources at many companies with teams often working from home, coping with adverse and unusual circumstances. However, there are actions that CFOs and Finance can take to manage tax cash flow while taking full advantage of measures aimed at helping their companies survive and recover from pandemic-related disruption.

Actions – now

1. Form a tax task force. A dedicated tax task force should focus on identifying all applicable tax relief measures and quantifying their impact on tax cash flow. The task force should also take responsibility for ensuring that systems are in place to enable on-time submissions to appropriate authorities.
2. Establish benchmarks. The task force should determine current levels of productivity and effectiveness (using metrics such as the number of spreadsheets in use; error rates on taxes charged by vendors; or levels of audit activity) and set targets for improvement to be reached through better data, enhanced processes and greater use of technology.
3. Adopt new data quality standards. While data quality can be a problem, inconsistency in terms of format and completeness can also hamper efforts to adopt technology to automate and integrate processes and to develop insights useful for planning. Data quality standards should support analysis and reporting for current tax expenses, deferred tax assets (DTAs) and deferred tax liabilities (DTLs).

Actions – next

1. Assess current tax technology capabilities. Tax technology capabilities should provide the functionality and flexibility to address COVID-19 related tax measures in different geographies and different lines of business. Such capabilities, however, should not be adopted as a temporary fix; rather, technology should also support ongoing efforts to reduce complexity, increase understanding of global tax codes, lower error rates and improve overall tax cash flow. AI, for example, can enable more accurate tax forecasting, freeing up cash reserves for revenue-generating activities.
2. Implement a global electronic invoicing and reporting system. We are anticipating a worldwide pause in the implementation of new electronic invoicing and reporting tax initiatives, making the next few months an ideal time to develop a cost-effective and global approach to existing and upcoming systems. Many companies have implemented point solutions on a country by country and process by process basis. Meanwhile, leading global tax technology vendors have developed solutions that cover the majority of country-specific electronic invoicing and reporting requirements which will reduce the cost and complexity of these important tax requirements.
3. Develop digital self-audit capabilities. To adjust to the faster pace and broader scope of the companies they deal with, many tax administrators have gone digital, requesting data, conducting audits and handling filings and payments electronically. Companies should keep pace by developing their own digital internal audit capabilities, working within transaction source and enterprise resource planning (ERP) systems. Better data supporting AI and predictive analytics can help companies identify issues with underlying data and transaction processes impacting tax outcomes prior to these errors creating audit issues.

Outmaneuvering tax uncertainty

Taxes may be a certainty, but tax regimes will continue to change even after the temporary measures put in place to help companies through the COVID-19 crisis are no longer in effect. As more companies do business electronically–crossing virtual borders but incurring real obligations–they will encounter increasing tax-related complexity. Steps taken now to improve data quality, adopt innovative technology and make people more productive can generate immediate returns but can also help companies meet their reporting and financial requirements more efficiently in the years to come.