Financial institutions are constantly being confronted with greater scrutiny, increasing tax audits and regulatory changes. The requirement to find more efficient and effective ways of conducting global tax information reporting, including but not limited to the Foreign Account Tax Compliance Act and the Common Reporting Standard, has become a vital business need.
In the past, and unfortunately still to this day, financial institutions have overcome onerous compliance requirements by using an abundance of resources – including both human capital and laggard activities plagued by manual activities. Tax departments are under constant pressure to do more with less, often facing tighter turnaround times compounded by volumes of both regulatory and management ad hoc requests.
Additionally, South Africa’s larger financial institutions are faced with deep data legacy issues, as well as severe resourcing pressures, posing senior compliance executives many tough questions. Executives are now turning to technology and digital solutions for answers.
Spanning across all industries and departments, businesses are looking to digitally disrupt the way things are being done, especially operational processes. All businesses in some shape or form are seeking to join or should be a part of the Fourth Industrial Revolution (4IR), using data as their competitive advantage. Financial institutions are no different, with numerous 4IR buzz words incorporated into key planning and strategy.
Global taxation is no exception.
Much like business, global taxation aspires towards a digital operating model including, but not limited to, better tax compliance, increased efficiency in reporting, and deeper analysis capabilities. Financial institutions are exploring the implementation of robotic process automation and powerful reporting and analytics tools, with the goal of turning their material data volumes into a potential source of intelligence.
Due to automation’s focus on rule-based processes and data, global tax compliance processes are suitable candidates for increased digitisation and automation. Success in this area can allow financial institutions to use legacy data issues as a means of improving compliance processes, with the ability to yield projections and insights that influence the direction of the institution through smart, data-based reporting.
However, even if the correct decisions are made and the right digital strategies are pursued, implementation is either poorly executed or, at best, premature. Urgency should be focussed on understanding an institution’s compliance maturity model, rather than hastily adopting new technologies for the sake of it. When automation and other forms of digital adoption are attempted prior to understanding an institution’s compliance maturity model, in essence, you are asking an aspiring student to do a graduate’s job.
In such cases, premature design and optimisation – where such programmes fail due to insufficient preparation – can create long-term, negative consequences for how the institution views future innovation within global tax and other functions. Building, or even buying compliance software without getting the basics right around core compliance pillars – such as architecture, implementation, and effectiveness – will result in inaccurate reporting, non-compliance, and managerial frustration and in certain cases, penalties.
Your maturity level will dictate how compliance is viewed
Institutions can be categorised into six potential compliance maturity levels, each requiring varying levels of attention for digital objectives:
- Non-existent compliance – Zero awareness of regulatory requirements
- Minimal levels of compliance – Compliance is viewed as a cost of doing business, with the associated compliance failures
- Reactive compliance – Bare minimum being done by compliance function to avoid associated risks and penalties
- Evolving compliance – Compliance benefits are understood, and resources are utilised to develop suitable capabilities
- Proactive compliance – Proactive management of current and emerging compliance risk
- Optimised compliance – High performance compliance function and culture, leveraging the benefits of compliance
In order to assess compliance maturity, a thorough functional assessment is required, focussed on investigating eight institutional compliance elements, ranging from risk appetite and strategy, to reporting. The results of such an assessment will assist an institution in identifying their relevant level of compliance maturity, and better understand what digital (and other) compliance objectives are realistic and required to progress to a higher level.
Each level is categorised by varying compliance focus areas and associated levels of digital appetite. Organisations should not be focussed on attaining digital benefits applicable to an optimised compliance state when they are currently reactive in nature. It is just not feasible.
Due to the changing nature of financial services, and its competitive pressures, executives regularly set ambitious digital goals for their respective teams. Global tax will need to ensure that these goals are pragmatic, as mistakes could result in compliance, reputational, and financial risk.
Compliance maturity varies from one institution to another, and even one department to another. The ability to codify and segment your tax compliance into a specific level will assist the function to better understand its focus areas and setting better compliance and digital objectives that are more achievable, and sustainable.
Global tax needs to spend the time, upfront, to assess compliance maturity and provide it with a realistic view of how far it can push the digital envelope.
To find out more how your organisation can stay abreast of changes within the compliance and governance space, , contact our Governance, Risk and Compliance team at GRC@letsema.co.za, or connect with our staff on LinkedIn.