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Financial institutions must navigate a complex and constantly evolving environment of securities and transaction taxes that differ not just for each region, country, and asset class but also with client type, trading frequency and channels. Institutions are under obligation to comply with tax regimes such as FATCA, Financial Transaction Taxes (FTTs), Security Transaction Taxes (STTs) to name a few.
These taxes are not new and are implemented by various countries globally. In 2011 there were 40 countries that had some form of transaction taxation in operation, raising US $38 billion and in the past decade many more countries have joined the league, recent examples include EU member states Hungary, Portugal and Spain. Each jurisdiction has its own tax regime which has different rules and regulations like Transfer Tax (Belgium, Poland, Philippines), Security Transaction Tax (India, South Africa, South Korea, Taiwan, etc.), Financial Transaction Tax (Finland, France, Italy, Brazil, Venezuela, etc.), Stamp Duty (Ireland, Switzerland, United Kingdom, China, Singapore, Hongkong).
It is therefore not a surprise that a number of financial institutions are still developing and using spreadsheet-based tools and deploying specialist resources to meet country-specific tax rules. This approach is difficult to scale up to cope with the volume growth, evolving regulatory requirements and complying with new tax regimes. Even large and sophisticated financial institutions struggle to effectively navigate a multitude of options that best leverage available resources, both human and in technology, as there is no “one-size-fits-all” operating model or a commonly-adopted, market-leading digital platform for the tax function in the industry.
Although the capital markets industry is diverse, its participants face similar challenges in their tax functions which are driven by operational inefficiency, technical debt and the absence of robust data management framework:
Tax Function Operating Model
Tax Function Technology & Infrastructure
Tax Function Data Management
These challenges result in raising operating and infrastructure costs and an inability to meet increasing client expectations of services provided by the capital markets firms. This additional cost burden needs to either be compensated through higher or ‘tiered’ pricing, where some markets or asset classes attract higher pricing due to their added complexity, or offset through higher efficiency. This underpins the client profitability work which most financial services firms have still not solved for.
Profitability concerns drive the need for a fundamental change in the business model and many capital markets firms are seeking to understand the steps that can be taken to streamline tax processes and improve efficiency for their tax function to alleviate the pressure to contain costs. This may involve implementing new technology solutions, improving data management, consolidating tax functions, and establishing clear policies and procedures. If the situation demands, this may even lead to completely re-thinking the tax function operating model and a myriad of options to choose from: from hiring specialists to outsourcing the tax function to a 3rd party managed services provider; from in-house development to COTS products; from deploying an on-premises solution to using a SaaS product; Etc.
While the list can be long, there are a few key considerations to bear in mind for tax function transformation.
Optimisation of tax operating model would require a comprehensive understanding of the firm’s business strategy, its priorities, and challenges. It is important to think beyond just meeting regulatory requirements to create a future tax function operating model that also supports business objectives. A tax function operating model needs to align with more digitally-enabled business operations and focus on how processes and technology could be made more scalable and sustainable. It also needs to respond to the pressure to contain costs, operate more efficiently and meet growing expectations for the tax team to contribute more strategic value to the organization.
As part of the operating model transformation to best leverage technology and digital solutions, firms can look at various approaches and their respective pros and cons:
A well-designed tax platform can provide significant benefits for data management:
Overall, as tax regimes are continuously evolving, the challenge of managing tax operations is expected to increase. Hence, to deal with the growing challenges, financial institutions would need to streamline the processes and leverage digital solutions for tax functions. Digital technologies like cloud computing and SAAS can offer many benefits by enhancing efficiency, accuracy, and transparency in tax operations; it is vital for financial institutions to recognize the need for innovation and invest in digital solutions now to stay ahead of the competition. With the right technology and approach, it is possible to establish efficient tax operations and meet growing expectations for the tax team to contribute more strategic value to the organization.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Prashant Bhardwaj Innovation Manager at Crif
05 December
Tachat Igityan Founder and CFO at destream
03 December
Ritesh Jain Founder at Infynit / Former COO HSBC
Erica Andersen Marketing at smartR AI
02 December
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