How will GenAI shape tax and finance transformation?

Lyn Bird, Corporate Vice President of Industry Solutions Delivery at Microsoft Corp., says tax departments will continue to be leaders for most organizations as they move quickly along the maturity curve.

For example, businesses are already using GenAI to make indirect tax returns more accurate at the time of filing, eliminating the need to seek refunds years later. Smarter chatbots are also helping payroll departments provide better, more customized answers to worker queries. And GenAI is being used to compare different kinds of data sets to identify tax deductions and credits that previously were hard to detect.

“Tax is setting the standard in many businesses for using GenAI,” Bird says. “It presents a huge opportunity for tax executives to lead.”

Tax professionals are starting to use GenAI for more advanced tasks like quickly analyzing and building data solutions, performing predictive analytics and horizon scanning, and benchmarking with real-time data. New skills such as prompt engineering, which is the ability to chat with an AI system using natural language, are increasingly being coupled with enterprise data to analyze complex tax documents and data at scale.

GenAI requires significant investment. Harnessing the transformative impacts of GenAI — and advancing along the maturity curve — will require a thoughtful plan and the ability to overcome a broad, costly range of obstacles. These obstacles include a lack of accessible, high-quality and reliable data, and insufficient talent to build, deploy, maintain and govern the technology. Respondents also voiced concerns about data security and privacy while others cited uncertainty regarding regulatory compliance and legislation.

“GenAI is creating huge opportunities for every aspect of the tax function,” says Dave Helmer, EY Global Tax and Finance Operate Leader. “Most companies are early on the maturity curve and need a plan to realize the benefits of GenAI.”

Pillar Two global minimum taxes

Businesses also face challenges complying with evolving global minimum tax obligations.

Specifically, 83% of respondents say they must make “moderate” to “significant” adjustments to their source data to develop tax-ready information to comply with BEPS 2.0.

These reporting requirements are largely attributable to complying with the implementation in jurisdictions around the world of the Pillar Two global minimum tax. Pillar Two is a set of interlocking rules designed to ensure that businesses with global revenues of €750 million or more are subject to an effective tax rate of at least 15% on their income regardless of where it is earned.

More than 140 jurisdictions have agreed in principle to the Pillar Two global minimum tax, and jurisdictions are moving at different speeds to implement these rules through local legislation. As of September 2024, 39 jurisdictions have final legislation, 14 have draft legislation and nine have announced their intention to legislate, according to the EY BEPS 2.0 – Pillar Two Developments Tracker. This adds complexity to an already rapidly changing tax legislative environment by requiring affected businesses to calculate whether they might owe top-up taxes in any of the jurisdictions where they operate.

An earlier OECD initiative, so-called Country-by-Country Reporting (CbCR), is also putting stress on businesses’ attempts to access, analyze and use their data productively. These reports, first called for in Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) project nearly a decade ago, require a breakdown of the amount of revenue, profit before income tax, and income tax paid and accrued by jurisdiction. They also include information about capital, accumulated earnings, number of employees and tangible assets for each tax jurisdiction in which the group operates. (Action 13 also established the requirement for master and local transfer pricing files, another milestone in tax transparency mandated by tax authorities over the last decade.)

These reports, like other filings with tax authorities, are confidential, but a growing number of jurisdictions, including EU Member States, have instituted or are considering new requirements to make CbCR information available to the public. The prospect of public disclosure is creating new stress on businesses’ data systems; some 34% say they face a “significant” number of adjustments to source data to deal with CbCR, while another 47% say they face a “moderate” number of adjustments. 

Perhaps due to the prospect of mandatory public disclosure requirements in some jurisdictions, some 56% of respondents say they anticipate publishing details about the total amount of taxes they pay around the world, up from 38% in 2023.

GenAI is also affecting tax administration. Nearly one-third (32%) say it has “moderately” or “significantly” decreased their organization’s tax risk profile, while 40% say it’s “moderately” or “significantly” reduced their tax controversy. Forty-nine percent say it’s “moderately” or “significantly” increased how quickly tax authorities assess returns.

Consolidating providers may provide additional opportunities

The survey finds respondents are looking to consolidate their tax co-sourcing providers and many of them are now using one Big Four firm. This trend has emerged as businesses look to reuse their data more efficiently for compliance and reporting activities, such as corporate income tax, BEPS, indirect tax and statutory accounting.

This combination of the business data and provider’s deep knowledge may present a strategic opportunity to co-source some of the remaining workload respondents say they currently perform in-house.

But it’s not just about headcount. Tax and finance functions continue to seek a new breed of professional who understands data and technology as well as, if not better than, tax and finance rules. Increasingly, acumen using GenAI will be prized as well.

“Tax functions need to shape their future talent model to be sure they have the right people with the right skills, including the ability to work with GenAI,” Helmer says. “This probably involves some combination of improving in-house training and co-sourcing with a provider to free up your own people to work on projects that align with their advanced skills.”

The talent crisis is so acute that tax functions are getting more creative about whom they recruit. Sixty-two percent say tax and finance employees without a university degree are “very” or “moderately” important to their talent strategy. Moreover, 77% say hiring data scientists is either “very” or “moderately” important. 

“Agility is key for a modern tax function when it comes to talent,” says Aaron Konnick, Senior Vice President and Global Head of Tax at UPS. “Working with a provider allows us to scale up and down our team and tap into specialists when needed.”

Tax functions are under more pressure than ever to deliver more value to their organizations with fewer resources. The proportion of companies saying they want their people to focus twice as much time on more value-added tasks and do less remedial work.

For example, survey respondents say they spend 45% of their time on routine compliance activities such as data cleansing and tax return compliance and reconciliation. Another 35% is spent on core activities such as reviewing and signing corporate tax returns, managing tax advisory work, managing risk and communicating with stakeholders. They spend only 20% of their time on high-value activities, such as cross-border tax analysis and complex controversy matters. Ideally, those time proportions would flip, with respondents spending 42% of their time on strategic work and 25% on routine activities. 

GenAI potentially offers many solutions to the talent crunch. Beyond the 39% who say activities performed by GenAI will deliver “moderate” to “significant” advantages to the tax function, for example, 41% say GenAI is “moderately” or “significantly” increasing their ability to hire and/or retain talent. The ability of GenAI to perform more of the rudimentary and repetitive tasks, clearing the way for them to focus on higher-value, more fulfilling tasks, will appeal to prospective workers. Yet even with AI efficiencies, six in 10 respondents expect their headcounts to remain the same or increase.

Most tax and finance functions must contend with compounding budget pressures before they can focus on embracing a GenAI-enabled future. Respondents say they’re expecting an average of a 3.3% reduction in tax and finance function budgets in the next two years; 13% said they anticipate a freeze. That’s on top of the EY surveys since 2018 – totaling nearly 8,000 responses – that reported an average two-year cost reduction ranging from 4% to 9%. These cuts, combined with a period of high inflation, have shrunk the purchasing power for nearly all.

At the same time respondents say they continue to do a significant amount of tax compliance work with internal resources. As they look to save money, they may wish to explore co-sourcing more of these activities, especially BEPS reporting and direct tax compliance.

Harnessing GenAI adds a new dynamic to these budget pressures. Just as companies must analyze which activities to perform internally and which to co-source, they face a similar build versus buy decision in terms of GenAI tools and capabilities. Building these capabilities might meet the business’ needs, but it is challenging and expensive to do so. Buying some or all of the needed tools and services may provide a quicker transformation and better value.

Summary

Eighty-seven percent of respondents to the EY Tax and Finance Operations survey say integrating GenAI will make their operations more effective. This will become a critical factor as they contend with cost pressures and talent shortages in the coming years. Co-sourcing more activities with a single provider that standardizes data can best position businesses to operationalize AI and realize its transformational potential.