Using technology to keep track of finance & tax when “working-from-anywhere”
There have been drastic changes in the workplace environment and the ways in which companies have tried to retain talent and drive productivity. With the impact of the Great Resignation, coupled with the accelerated adoption of “working-from-home” or even “working-from-anywhere,” companies find themselves in the challenging position of trying to attract and keep top employees.
One certainty for the professional workforce is that going to the office Monday through Friday, once a standard practice, is now considered an outdated view on employee performance monitoring, which has transferred to the hybrid work models we see today. This major change not only requires companies to build and facilitate two functional workplaces per employee, but also requires a change in approach and processes from nearly every department in an organization to support this hybrid working model efficiently—HR, Finance, Operations, IT, Marketing, Sales, and the leadership team.
While it is relatively easy to satisfy the day-to-day needs of employees working in hybrid situations, the challenges of managing the finance and tax aspects of such work environments are often underestimated or even overlooked. Using technology to analyze data and combine different data sources may significantly keep the extra workload manageable and processes controlled.
How to drive the required change from a finance and tax perspective
Obviously, it isn’t only about allocating budget or putting in place the required IT tools, every department has to evaluate this major change and deploy the required adjustments across business processes and infrastructure.
Looking at the financial and tax arena, we can recognize several major changes stemming from the hybrid working model.
- Decentralized purchasing initiated by individual employees is becoming a larger and more important purchasing stream.
- Employee-driven individual spend streams are less controlled and data is more unstructured than the regular P2P AP streams.
- Employee expenses are processed more and more, almost fully automatically, to improve the employee experience. Yet, these expense systems are well designed from an employee expense reimbursement perspective and not from a financial and tax compliance perspective, where hybrid working is adding even more to the tax complexity of the expenses processed.
- Current tax implication validations on employee-reimbursed expenses are heavily relying on what the employee declared within the possibilities the expense system allows as qualifications (e.g., expense types) for the expenses. Yet, these qualifications are usually too high-level for a proper wage tax qualification.
- Current travel expense solutions and manual sample check-based audit reviews will only look at a fraction of the actual invoice images to validate these and ensure they are aligned with the claimed expenses and system expense qualifiers used.
- In many countries, authorities are receiving an increasingly detailed level of transactional data due to SAF-T alike and statutory e-invoicing processes. This level of detail is in many cases not used by the employers to analyze data for employee benefits, yet the authorities can perform these audits even without the involvement of the employer.
- The employee’s remote working location (whether it is a different state or even a different country) may impact the employer’s wage tax liabilities, although the exact work location may not even be known to the employer.
- Current manual (sampling) processes are confronted with an increase of new relevant expenses to audit, and more statutory requirements may need to be considered. And in times of headcount efficiencies, the workforce may no longer even be available to perform this task.
- Taxation rules and government policies are changing due to special circumstances such as COVID-19, but also to support climate initiatives, better parental leave programs, lifetime employee education and development, part-time working, early retirement, internships, empowering a disabled workforce, state budget deficits, inflation, jurisprudence, audit efficiency and many other factors. Keeping those responsible for being aware of these changes as their geographical locations expand is not only hard to manage but may be cost prohibitive and a process risk in times of high staff turnover.
- Companies’ priorities on systems and tool deployment have to be revisited since the level of audit, control and risk are changing as well.
Why employee expenses and its benefits tax are increasingly relevant for the tax and finance processes
As social-economic conditions change and the younger workforce prioritizes a work-life balance, the way the entire workforce is directly and indirectly remunerated is also impacted. Because indirect remunerations are taking a greater stake in the total remuneration package of the employee, inevitably Taxable Employee Benefits (TEB), otherwise known as fringe benefits, come into play.
While laws and legislation have become more complex and dynamic to cater more to an individual-focused society, the challenge for globally operating companies is to, firstly, understand the differences between all these jurisdictions and, secondly, keep track of legal changes.
Further, authorities are facing an aging workforce and an increasing number of retirements. While competing with the labor market for new tax inspectors, budgetary constraints force them to work more efficiently and collect the same or even more tax income for the State. In addition to using technology, authorities are moving towards cooperative compliance models in which taxpayers who can show that they have implemented well-controlled tax processes will benefit from a more cooperative working relationship with the authorities rather than being taken by surprise thorough tax audits. To be able to benefit from this cooperative approach, companies will need to improve their internal processes and controls. Whether that is as part of a tax control framework or during a regular tax audit, a more basic sample-driven audit process is simply not enough anymore.
Compliance is a complicated endeavor
The challenge, as always, starts from the data. Running a sufficient TEB recognition and calculation requires complete and validated transactional data including a level of contextual meaning. Since employee-driven-spend data entry is done by non-financial people, (i.e., the employee reporting their expenses as quickly as they can with limited attention to the data entry), the available data is often missing pieces such as vendor information, subcategories, labeling, keywords, and other attributes required for a proper benefit validation for tax purposes. Without collecting and validating these mandatory transactional data and putting the meaning into context, having proper tax rules running on incomplete or partial data will generate the wrong output.
Since being able to ask employees to complete the missing information may not be realistic, or the expense system may not even allow for it, finance teams will have to deal with this challenge using internal sources, technology, or outsource it to service providers.
As taxable employee benefits are further complicated by rules changing from year to year and country to country, the rules may also differ by the nature of the business. On top of that, for calculating the actual taxable benefit, in some cases one needs to apply a statutory monetary threshold, a percentage, a specific allowance ceiling, or reliefs such as disaster reliefs; or one must come up with an acceptable and defendable calculation to split business usage from personal usage.
Why a technology-first approach is best
Handling the initial but mandatory challenge of loading a massive number of transactions into a data validation and integrity process while each transaction holds a relatively low value makes a manual audit process financially unrealistic. Yet the benefits of a technological solution still must be assessed to understand whether it will bring both the required efficiency to the process as well as the aimed-for level of tax compliance to ensure the company is not unnecessarily exposed.
One of the key controls to warrant this is that the tax decisions that are made based on the data rely on consistent and up-to-date taxation rules. Having a manual workforce performing the audit always leaves a gap in ensuring that everyone is applying the tax rules correctly and to the latest changes.
Technology allows for the implementation of a centrally controlled and managed process that assesses every transaction on its own merits, yet still objectively. This does not mean your current audit workforce will be made completely redundant; instead, you can have them perform a much more sophisticated job by putting their time and knowledge into following up on transactions flagged by the system and fine-tuning the audit rules to your business needs. In the current process, a large amount of time is lost on reviewing transactions that are not relevant for taxation.
8 key questions to ask when reviewing your TEB audit process for employee-driven spend
When assessing your current audit process for spend incurred by employees, which is reimbursed through the expense platform, or looking for a technology or other type of outsourced solution, ask yourself the following questions:
- Are we ready for a full-scale mode?
- Is it up to date with the latest legal changes?
- Is it validating all transactions or only a sample set of data?
- Is it looking at all invoice images available or only a sample set of invoices?
- Am I leveraging the comparative advantages of my financial team today or are they spending time searching, finding and auditing items that in the end are not relevant? Thus, could I use their capabilities better?
- Will my current process pass the test of having a controlled process for cooperative compliance with the authorities or fit to a Tax Control Framework at the level my business size demands?
- Can I ensure that there is an acceptable level of “I don’t know what I don’t know”?
- Do we leverage technology today to address these new challenges?
Written by Isaac Saft. Have you read?
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