• Efficiency and effectiveness
Managing tax cost
A core responsibility of Tax will always be to minimise the financial statement tax impact on an organisation, within applicable laws, placing much attention on the corporate income tax provision. While critical, there are also significant tax costs associated with other direct and indirect taxes such as value added tax (particularly in the financial services sector), employment taxes and stamp duties. Two KPIs stand out to measure how to effectively manage tax cost:
• Effective Tax rate (ETR) - This tried and tested measure remains the primary metric used by the Tax function. Organisations should measure ETR against a benchmark for their industry as standards differ.
• Cash taxes - In recent years there has been a trend to not only evaluate financial statements tax impact, but to also consider the actual cash tax expenditures that affect an organisation's cash position. This measure should include indirect tax costs in addition to direct tax expenditure.
Managing tax risk
While financial risk remains a critical measure for tax, reputational risk is becoming increasingly important. Negative press or any public mention of an organisation's tax positions may cause damage to brand with financial consequences for the business. In addition, the public's focus on 'tax morality' and whether organisations are paying their fair share of tax is growing.
Measures of financial and reputational risk could include:
• Increase or decrease in reserve for uncertain tax positions
• Frequency and magnitude of audit adjustments
• The number of public statements /concerns pertaining to an organisation's tax positions
• Measures of Total Tax Contribution (total direct and indirect taxes paid and other contributions to society) by country or globally
Managing efficiency and effectiveness
Artificial Intelligence and machine learning are already impacting today's Tax functions through capabilities such as Robotic Process Automation (RPA). In addition to the more traditional metrics, KPIs should assess whether technology, processes and people are working efficiently to deliver the desired results.
Measures of process efficiency in Tax and Tax's use of technology to improve efficiency include:
• Time spent on compliance and financial reporting versus strategic activities
• Total operating cost relative to other enterprise functions and budget
• Adoption levels of existing enterprise technology for Tax
• Frequency of process and technology enhancements in Tax
• Levels of technology training
Once proper KPIs are identified and measured, the final form of measurement becomes how consistently those key milestones are reached. It takes time and energy to monitor KPIs and make operational adjustments. Our approach to measuring sustainability is to set longer term objectives (ranging from three to five years) and measure sustainability over the defined period. The following KPIs work well for longer term measures of sustainability:
• Effective Tax Rate (ability to sustain the targeted rate over time)
• Risk (number of audits closed and significance of assessments over time)
• Technology (ability to deliver planned technology innovation)
• Efficiency/cost (ability to sustain targeted cost reductions)
• Job satisfaction/engagement (ability to sustain targeted improvements over time)
No matter which new and traditional metrics your team decides to measure, adapting to change is essential to success in today's Tax environment. The best KPIs track and measure the numbers, trends and insights that count the most. As those measures shift from historical analysis to predictive insights, Tax teams will provide an even greater value to their organisations.
Link to report: www.pwc.com/taxfunctionofthefuture