The Invisible Elephant in the Room

CFOs looking at cutting costs to deal with Covid-19 disruptions seem to be forgetting an obvious source — taxes.

To say that the Covid-19 pandemic has wrecked the global economy would be an understatement. In its Global Economic Outlook released in early June 2020, World Bank predicted that global GDP could contract by 5.2 per cent in 2020, the deepest global recession in decades. Should COVID-19 outbreaks persist, causing continued disruptions to economic activity, global growth could shrink by almost 8% in 2020, the report said.

Not surprisingly, Chief Financial Officers (CFOs) are worried about how this global contraction will affect their companies.  In a recent CFO Pulse Check by Boston Consulting Group (BCG), 87% of CFOs expected sales to decline, and 44% expected profits to fall by at least 20%. Interestingly, a vast majority (85%) saw the crisis as an opportunity, almost half of them believing this to be in terms of reducing costs.

To get a greater understanding about which areas CFOs are prioritizing in their cost reduction exercises, Thomson Reuters conducted a poll. According to the respondents, the key focus areas were People, Raw Materials, Infrastructure (land/building/plant & machinery), Finance and Travel & Entertainment.

This is a pretty standard playbook that CFOs have used in the past to deal with a crisis. Though, given the restrictions caused by Covid-19, perhaps they shouldn’t be worrying too much about travel and entertainment expenses!

Invisible Expense

What is surprising, however, is CFOs didn’t seem to notice the elephant in the room. If you combine all the levies paid by a global enterprise — Corporate Income Tax, Value-Added Tax (VAT) and local taxes – they total up to about 30-35% of a company’s annual revenues. For most businesses, this is, by far, the single biggest expense. What’s more, while legally mandatory, taxes are unproductive expenses, not adding to an enterprise’s value.

A study done some years ago had found that companies in their tax calculations have an average error rate of about 3%. This translates into about 1% of the total revenues. There are multiple ways such errors can creep in. A supplier can charge an incorrect (higher) tax rate that goes unnoticed. With e-commerce, vendors may be able to supply worldwide but may not necessarily have global tax expertise. Inventories from one jurisdiction may be shipped and given away as free samples in another, in which case local taxes need not apply, but are paid.

Invest to Save

If companies can correct this tax calculation errors, they can pare costs and cash flows painlessly. The obvious answer is to get the tax calculations right. But it is not easy if an enterprise’s tax department is not automated. This is why some of the biggest corporations in the world are investing in content-powered tax technology platforms that integrate with their ERP systems and consistently provide tax departments with increased accuracy, visibility, and transparency.

Such systems come with built-in repositories of information on compliance rules and regulations and data such as tax rates which are updated real-time. As a result, they enable companies to be compliant, streamline processes, increases transparency while allowing tax professionals – whether in-house or external consultants — collaborate globally.

Equally importantly, given the current tough times, these technology platforms, by increasing the accuracy of tax calculations can save precious dollars. At a time when the Covid-19 pandemic, more than any other global economic disruption, has underscored that “Cash is King,” such savings are more precious than gold dust.

What is needed is for CFOs to acknowledge the elephant in the room – taxes — and take pro-active steps to address it.

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