FIs Need to Automate to Meet Tax Reporting Obligations – Report

As tax reporting requirements grow increasingly complex, automation is making compliance cheaper, quicker and more efficient, says a new report from Regulation Asia and BearingPoint.

The need for tax transparency across jurisdictions has prompted the adoption of new technology solutions to automate tax reporting processes, but not all financial institutions are fully leveraging these new capabilities to enhance service offerings for clients, according to a new report from Regulation Asia and BearingPoint.

Tax reporting obligations used to not demand a great deal of attention until it got close to submission deadlines. But this has all changed, the report says.

“The concept of a global economy is now well embedded in how business groups and individuals look at the world and, as a consequence, their reporting obligations to an increasing number of tax authorities and regulators have become more complex.”

In response, multinational businesses – including financial institutions – are considering what processes and systems are needed to comply with the current tax and regulatory requirements, such as those imposed by FATCA (the Foreign Account Tax Compliance Act), the QI (Qualified Intermediary) regime and CRS (the Common Reporting Standard), which enable international frameworks for the exchange of tax information between national authorities.

“No sector has felt the impact of increased tax reporting requirements more than banks and financial services institutions,” the report says, noting a trend of increased automation to manage the increasingly complex tax and regulatory landscape.

“These are tools that are must-have,” the report says, citing benefits that include reductions in manual processes, erroneous inputs and missed deadlines.

“The automation of tax reporting […] raises some fundamental questions for a business group, the main one being whether they develop a set of proprietary tools or they buy the technology they need from a specialist service provider,” it says. The answer to this will depend on the depth and breadth of the group’s tax reporting obligations, and a cost-benefit analysis.

“But the trend is in the direction of buying in from outside,” one reason being that the cost of maintaining in-house tools – when taking into consideration overall cost and time required to keep up with substantive rule changes – can vary widely and often be far too expense.

“[Financial institutions] decide instead that it is better instead to bring in a specialist technology provider and rest, hopefully secure, in the knowledge that this will relieve the burden of running their own tax reporting systems.”

The report also notes that the biggest financial institutions have been centralising their collection and storage of data in so-called ‘data hubs’, while also adopting a similar approach to managing tax reporting processes.

“Previously where financial institutions housed their QI, FATCA and CRS data processing and tax reporting in the appropriate section of the business, they are now bringing them together in a single reporting unit,” it says.

A spin-off from improvements in tax reporting technology and processes is an increased demand from clients to have their financial institutions help them with their own obligations. This can entail requests for income, capital gains and wealth information, which clients can use in tax submissions around the world.

“While this demand is growing, not all financial institutions are willing, or equipped, to satisfy it, as most of them do not offer tax advisory services,” the report says.

“The growth in tax transparency worldwide combined with clients’ focus on after-tax performance will challenge financial institutions to expand the tax reporting services they offer.”

A copy of the full report is available here.

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