Tax teams move to centre stage

Canada’s senior and boardroom executives are changing the very way they think about tax, an Ernst & Young survey suggests

By Greg Sherloski, Mike Wilson and Danielle Laramée

*This is an expanded version of a summary that originally appeared in the March 2009 issue of CAmagazine.

These are challenging times for tax and financial executives. Tax departments have spent the past few years coming to terms with a rash of regulatory and legal changes, from new tax laws and regulations to new accounting standards and reporting requirements. Global economic challenges are clearly adding new pressure to which these executives must respond. Are they up to it? The recent Ernst & Young report — Responding to Change: 2008 Canadian Tax Executive Survey — suggests they are.

The survey, which polled 128 tax and financial executives at public and private companies in Canada, found they and their tax teams are responding well to increasing demands and changes. In fact, the evolving tax landscape is actually providing the tax function with significant business opportunities, and greater profile with senior management. Tax departments that can continue to adapt, evolve and respond effectively to the shifting tax landscape should be better positioned to succeed in 2009 and in the years ahead.

The first signs of this important shift are coming from the C-suite. The survey indicated that Canada’s senior and boardroom executives are changing the very way they think about tax. Forty-nine percent of financial executives and 44% of audit committees expect to increase the time they spend on tax-related matters over the next three years.

As well, after years of being seen primarily as a cost centre, senior leadership increasingly views the tax function as a key strategic business partner capable of creating value. Fifty-three percent of respondents expected the tax department budget to increase next year, with an average expected increase of 21%.

Not surprisingly, 37% of respondents said they spend most of their time on tax compliance, and the least amount of time on tax controversy. Forty-two percent of respondents indicated they expect to spend more time on tax planning over the next three years. This is particularly relevant in an economic slowdown, when the need for cash generation through tax savings is more critical for some businesses.

Today’s environment also makes it increasingly important to pay close attention to transparency and risk: 89% of tax directors indicated that ensuring the accuracy of tax accounts and disclosures is a priority, and 72% also named tax risk management as another priority. However, as important as tax risk management is to tax directors, only 46% said they are satisfied with the frequency of guidance they receive from senior management or the audit committee on acceptable levels of risk.

To address the challenges and issues they face, 77% of respondents said they would use a combination of internal resources and external service providers. We expect that the extent to which companies rely on outside advisors for help will depend on their internal resources and expertise as much as their budgets.

So what do these findings mean? We’re now living in an increasingly risk-adverse and complex business environment. To succeed in this fast-paced and constantly evolving market, tax executives need to look at issues using an integrated model — a “tax lifecycle” that integrates the key interdependent processes of tax planning, provision, compliance and controversy.

And then there’s IFRS. The tax departments of Canadian public companies will need to generate their first IFRS-compliant tax provision for the first fiscal quarter of 2010.

Sixty-three percent of survey respondents believe IFRS conversion will have a significant or very significant impact on their tax departments. Fifty-two percent see conversion as an opportunity to improve tax procedures, data gathering and the quality of the tax accounting process.

And while we believe that tax departments should be involved in all phases of IFRS implementation, almost half (44%) of our survey respondents indicated that their tax department was not yet involved in the overall planning for IFRS conversion.

Canada’s tax executives have been dealing with unprecedented change and scrutiny in recent years, and significant challenges still lie ahead — as do many opportunities. In our view, tax executives are well positioned to partner with senior management to drive stakeholder value, help successfully convert to IFRS, and respond to the current economic challenges.

Greg Sherloski, Mike Wilsonand Danielle Laramée are partners at Ernst & Young