Whatever the ESG concerns that emerge, both say, they are among an already full plate of work for corporate tax teams in 2023.

Readiness to take on ESG responsibilities

The extent to which corporate tax functions will be prepared to take on upcoming regulatory requirements around ESG will be a key factor in 2023. At the same time, tax leaders don’t seem too worried. The infrastructure upon which most tax teams can lean are the processes and governance already in place to meet current financial disclosure requirements, explains Sturgis. Indeed, corporate tax functions have solid protocols and procedures in place to comply with existing regulations, and they already have experience with calculating how much the company contributes to local economies in which the company operates.

Sturgis offers these essential actions that can help determine if the current process framework is adequate to absorb ESG requirements:

• • • Make sure tax leaders are able to articulate how the tax function is reducing risk.
    • Evaluate how the tax function is grasping the company’s current tax liabilities, which includes income tax, payroll tax, personal property tax, and value-added tax. In addition, a detailed understanding of those liabilities from state, local, federal, and international perspectives also is important.
    • Assess the tax compliance process and conduct a gap analysis against best-in-class practices.
    • Review processes to understand how new tax laws are being identified and evaluated.
    • Analyze how adding technology to processes might help reduce that risk.

Evaluation of IRA tax incentive opportunities

The full implementation of the IRA could reduce the domestic greenhouse gas footprint in the U.S. by as much as 40%, given that there is more than $300 billion of climate-related and clean energy investment incentives from solar wind energy storage, hydrogen, carbon sequestration, clean aviation fuel, and charging stations for electric vehicles, says Hall. Because of the expansive incentives related to the IRA, any corporate tax function can be a vital and valuable contributor to a company’s ESG strategy execution around climate and the environment in 2023.

What is interesting about the IRA is its supercharge tax credits, which actually have been on the books for years. In addition, the law also offers extensive opportunities to enhance social initiatives — the “S” in ESG — which include: i) a low-income area provision that allows a company to leverage additional incentives if a company’s energy project is in a low-income community that is below or near the poverty line; and ii) an “energy community” special rule that encourages investment in communities that have historically been negatively impact by fossil fuel industries, while at the same time, are in need of economic revitalization.

ESG-infused cross-border tax regulations

In addition to the issues on the horizon around tax in the U.S., there are tax concerns related to ESG in other jurisdictions. Two notable ones, according to Sturgis and Hall, are the potential for a carbon border tax and IRA-like legislation in other countries. Indeed, they could increase the difficulty of the work by corporate tax teams, if passed.

For example, the implications of the European Union (EU) enacting a carbon border tax could be significant, notes Sturgis. The EU is already taxing carbon, but the carbon-based border tax complicates the incentives to keep the production of goods sourced and manufactured within national borders because these goods would be at a price disadvantage. Also, more jurisdictions passing their own IRA-type legislation to incentivize domestic investments would also have an impact. “A headwind on the IRA legislation in the U.S. is that our friends over in Europe were not too happy about it,” Hall says.

ESG here to stay in 2023

Political and financial headwinds are likely to slow progress around ESG in 2023. Sturgis and Hall point to the divided U.S. Congress and the high cost of capital that are likely to both slow companies’ efforts to take advantage of IRA incentives.

However, both anticipate progress over the long term because of ongoing rulemaking and the staying power of the importance of ESG among the public, investors, employees, consumers, and other stakeholders. As a result, corporate tax teams as well as their outside tax & accounting firms are likely to stay busy in 2023.

“Whenever [ESG] rules come out, they need to be implemented via controls and audited,” Hall states. “As accountants and CPAs, that is where we can help.”

A tax department operating efficiently can go beyond providing compliance work and instead make the shift to being a proactive business unit that provides the company with tax and business guidance to mitigate risk and improve profitability. However, leaders and department heads must first understand where their department stands before thinking or wishing to become proactive.

For example, how does a corporate tax department leader know whether the department is proactive or reactive?

Being proactive — creating or controlling a situation by causing something to happen, rather than simply responding to situations after they have happened — means that the department should be organized in such a way that even though all external factors cannot be controlled, the mechanism in place can help plan for the unknown or the out-of-left-field happenstance.

The nature of the types of work done by the corporate tax department and how that work gets done is under almost constant change — the recent local, national, and international regulatory changes is just the latest example. The use of technology also has collapsed borders, allowing individuals and companies alike to traverse with ease. Like the individual, many companies can stretch into parts of the world that would have been only accessible by a few large corporations in the past.

Yet, along with this ease of crossing borders, there is a complexity in navigating it, especially for doing business. Companies can grow by reaching customers across the globe, but the cost of doing business brings challenges, such as having to work within the legal and financial systems in which the customer is located.

Corporate tax department leaders must not only navigate the tax laws of a nation, state, and local government but now increasingly must deal with multi-nation rules, especially if their companies have customers around the globe.

Some corporate tax departments might find it hard to believe that they are not proactive simply because part of the nature of this department is to predict their company’s tax liability and ensure it remains tax compliant while paying the necessary amounts of tax.

Of course, there are some telltale signs that a tax department is not operating efficiently and therefore isn’t proactive. Taking a look at these four areas can help department leaders make a proper assessment.

1. Process management

Departments that use a systematic approach to ensure adequate and efficient business processes are in place are engaging in proper process management to better align business processes with strategic goals. For corporate tax departments, there may be different ways in which data is collected, reports filed, analysis provided, and feedback given back to the business that all may seem to work. However, if they rely primarily on manual work and are multi-stepped (to the point that it takes weeks and months to complete), it may be worth asking some questions of the department’s process management.

Indeed, does process management even exist within the department? Can it be articulated clearly, shown to work repeatedly, and stand on its own? Does it only work for the individuals that helped create it, or can someone new step in and have it work the same way? If the answer to these questions is no, proper process management isn’t in place.

2. Data management

How does the department gather data? Does it feel like a version of the Hunger Games that requires seeking, finding, negotiating, and trying not to step on a land mind? Is this a manual process, collecting various spreadsheets from around the business and then entering the information into the department’s management systems? Or, can the tax department software be integrated to extract data from other part of the business? Is it seamless? Manually processing data significantly increases the chances of error, makes it challenging to verify data sources, potentially creates a tax risk, and is time-consuming.

And yet, even when technology is employed, it’s only as good as its users. Leaders should assess whether current technologies are efficient or actually are creating more work or processes for the department. Often staff — whether incorrectly trained or simply preferring to use their own methods — utilize just certain parts of a software program and rely on manual labor to do other tasks.

In these cases, workers time is not being used efficiently. Further, not having proper data management systems in place also causes bottlenecks in the work flow of department as employees wait for pieces of data in order to move forward. These inefficiencies can create a potential opportunity for risk, such as missing or incorrect data that leads to erroneous results.

3. Compliance & reporting

How long does this process take? Quite often, reporting is the final step in the process and as such, can be significantly impacted by how well or how poorly the previous process were conducted. Again, if there are many manual steps here, it will likely result in wasted time and resources while increasing the chance of risky mistakes.

4. Analysis

Corporate tax departments have always been an advisory to the business by the very nature of their role in providing tax planning. However, this role has increased as departments are now expected to provide insights into tax implications related to deal-making, mergers, business divestitures, and environmental, social & governance (ESG) initiatives to name a few. For departments that aren’t functioning optimally, leaders will find that they cannot provide useful or beneficial advice to the larger businesses because departments themselves lack the bandwidth and resources needed.

Tax departments and their leaders should strive to manage processes and data efficiently and effectively. By utilizing automation and having a clear mindset about the role of the tax department within the organization, a leader can improve the department’s work process, relieve the stress on overworked employees, and provide invaluable information to the business to make it more profitable.

Indeed, this kind of transformation within corporate tax departments has happened, led by leaders who have recognized and adjusted to the new realities of the business and taken advantage of improved technology and process management techniques.

Indeed, as global economies moved away from the worst of the pandemic, it seemed early on that 2022 could provide a sense of normalcy, if not a return to traditional business practices. However, the rocky shoals of the war and global economic turmoil soon put an end to that sunny thinking. Yet many professional service firms and their corporate counterparts in the US and around the world found ways to remain profitable, resilient, and forward-thinking enough to allow some positive direction as we all head into 2023.

The Thomson Reuters Institute, through its blog posts, podcasts, market reports, and in-depth analysis, has chronicled many of the changes that swept through the last year, offering insights into how many organizations are adapting and what solutions are being successfully utilized.

If there were trends to discern in this very busy year, it was that twin issues of talent and technology implementation were impacting corporate departments and professional service firms to a greater degree as the year went on. And some of the most-read pieces on the blog site reflected that. For example, one piece that was very widely received described the different power skills that allow employees to flourish in new hybrid work environments; also, the changing regulatory stance toward the practice of law, especially around whether non-lawyers can own law firms, was of keen interest to our readers.

Further, many law firms, government agencies, tax & accounting firms, and corporate departments were beginning to grasp that the technology needed to meet the growing demands of the digital economy was of paramount importance. Indeed, as we moved toward the end of 2022, it was clear that technology adoption and maximizing its use simultaneously was among the biggest challenges and most promising opportunities that organizations are facing going forward.

Key market reports & in-depth podcasts

Throughout the year, it was the goal of the Thomson Reuters Institute to bring together people from across the legal, corporate, tax & accounting, and government communities and ignite conversation and debate in order to shed some insight on the newest industry developments and the most critical opportunities and challenges market participants are experiencing.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

We did this in part by providing coverage of these topics on the Thomson Reuters Institute blog site — such as podcasts, videos, and key market reports — and by hosting world-class events, which kicked off in Amelia Island at our 29th Annual Marketing Partner Forum, which brought together global law firm leaders and the best strategic thinkers from around the world to discuss the steep challenges facing firms in the legal market; and continued in New York City with our 21st Annual Law Firm COO & CFO Forum, along with many more in-person and virtual events throughout 2022.

As our reach expanded over the year — the Thomson Reuters Institute blog site reached more than 1 million annual page views this year for the first time in its history — our coverage expanded as well. We created two new resource centers on the site, to accompany those dedicated to covering the legal, tax & accounting, corporate, and government areas. Our new resource centers — Environmental, Social & Governance (ESG) and Technology & Innovation — allow us to offer readers dedicated content and insight into those areas.

Throughout the year, the blog site offered a steady stream of analysis and market insight reports that shed light on what participants in the legal, tax & accounting, and corporate fields were experiencing in their respective marketplaces in today’s economy. For example, in the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, including a hot market for legal talent that has driven up costs. Even so, the report showed that many law firms have managed the difficult market with a good level of success last year.

On the other side of the table, our reports on corporate law departments and corporate tax departments shed further light on the immense pressure these departments were under from their corporations to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the pandemic, it appears the dramatic changes undertaken by corporations during that time — especially around talent management and adopting new technology — may only be the beginning.

Also, our series of twice-monthly Insights podcasts offered in-depth discussions throughout the year on topics ranging from the viability of the new cryptocurrency economy to the most common misconceptions in the legal industry around artificial intelligence, and from how financial institutions were managing Russian sanctions to how organizations can benefit from client feedback programs.

Now, as we move into 2023, the Thomson Reuters Institute will continue offering insight into the latest events and trends, bringing leaders together, and mapping out the opportunities and challenges facing corporations and professional service firms going forward.

To that end, the Thomson Reuters Institute, along with key market partners, have published a series of in-depth State of the Markets reports over the last year that examine several different aspects of these markets and offer insights into how many organizations are adapting and what solutions are being successfully utilized. The idea behind these State of the Markets reports was to provide readers with an understanding of how their peers in law firms and corporations are implementing transformational change within their own organizations, suggesting ways that other firms and department leaders could innovate in order to best prepare for the future.

Legal

In the legal market, our flagship Report on the State of the Legal Market, published each January in partnership with the Center on Ethics and the Legal Profession at Georgetown University Law Center reviews the performance of U.S. law firms, breaks down the factors that drive firms to take a longer-range, more strategic view of their market positions. In the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, such as a hot market for legal talent that has driven up costs.

Yet, the report showed that many law firms have managed the difficult market with a good level of success last year. For example, demand for legal services soared in 2021, and even exceeded pre-pandemic demand levels in some practice areas. Law firms also sought to boost profitability by raising their billing rates aggressively, which helped to secure another year of strong profits for many law firms.

When we break the legal market down, either by size or region, we can offer readers even more valuable insights into how many law firms are managing their challenges.

Our 2022 Report on the State of the Midsize Legal Market, for example, detailed how the midsize law firm segment, while not immune to the volatility experienced broadly in the overall legal market over the past several years, seemed to have staked a position going into the latter half of 2022 that finds them better positioned relative to the rest of the market, including their larger competitors.

One way they’ve been able to fare better — especially in terms of talent retention — was by leveraging their firms as being a desirable place for attorneys to work, even if the pay scale is less than at larger firms. The strategy paid off, and attorney attrition in midsize firms was less than in other sectors, demonstrating that, at least for some lawyers, a good working environment is about more than just money.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

Similarly, in the small law firm and solo practitioner segment, leaders voiced a general sense of optimism and expectations of future growth, despite an uneasy economic picture, according to the 2022 Report on the State of US Small Law Firms, published this month.

Interestingly, when we looked at other legal markets around the globe, we saw many of the same trends and challenges as in the U.S. market, but with a different emphasis. For example, the State of the UK Legal Market 2022, published in April, detailed how strong client-driven pressure was forcing law firms there to address issues ranging from demonstrating their value to offering tech-savvy solutions. And in the Australian legal market, the 2022 Australia: State of the Legal Market Report illustrated that some of the same downward pressure on legal demand experienced there was now being felt in the U.S. market in the latter part of this year.

Corporates

The Thomson Reuters Institute State of the Markets reports also look at the other side of the table, examining what corporations are doing to better manage their internal law and tax departments.

We found both departments facing immense pressure from their parent company to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the COVID-19 pandemic, it appears the dramatic shifts in workflow processes that corporations undertook during that time – especially in working environments – may only be the beginning.

For instance, in the 2022 State of Corporate Law Departments Report we looked at how the dramatic shifts that law departments endured during the pandemic could kick off a larger transformation. The corporate response to the COVID-19 pandemic of embracing to a large degree what they saw as unavoidable change has left companies with a desire to capitalize on those changes and make them a permanent part of their daily business.

In the report, corporate law department leaders surveyed looked to be getting the message, ranking conducting operations efficiently and delivering legal work more effectively among their top priorities going forward. The report showed that the most successful law departments will be those that leverage the momentum of the change forced on them over the past two years, both in how they integrate and operate within their organization.

Similarly, the 2022 State of the Corporate Tax Department Report showed how the twin trends of technology and the war for talent are impacting how corporate tax departments are operating. Specifically, the report examined the strong tension between corporate tax departments seeking greater effectiveness and efficiency through technology, and tax professionals in those departments who are constantly being asked to do more, while working faster and with fewer resources.

Corporate tax departments were far from alone in facing this challenge. Many law firms and corporate law departments began to grasp that the technology needed to meet the growing demands of the digital economy is pulling them in several directions at once, making technology adoption and its use simultaneously one of the biggest challenges and most promising opportunities organizations are facing.

Corporations’ contributions to the communities in which they serve is one of the biggest proactive drivers of a company decision to create and implement an ESG strategy. Indeed, one of the biggest, yet least visible, ways companies achieve this objective is through the payment of taxes to local communities in which they operate.

There are many tax related ESG credits and incentives to reward positive corporate behavior, as well as taxes to disincentivize negative ones. Corporate tax functions are critical to practices that best serve company objectives through the financial support of the communities they serve.

Surprising to many tax novices, there are many elements of an effective ESG policy that can factor into a company’s tax strategy. For the environment, these include water efficiency and curbing emissions; social goals include ensuring human rights, promoting diversity, equity & inclusion (DEI) policies; and governance includes strong business ethics and anti-corruption policies.

Encouraging changes in behavior by taxation and incentives is increasingly common in the environmental area, for example. Across the world, many countries are encouraging movement away from products and practices that cause environmental damage through tax incentives or disincentives. Such taxes can address carbon and other pollutants, plastics, landfill waste,water pollution, and certain chemicals. As a result, there has been a rapidly evolving landscape of new taxes involving carbon, waste, water, plastic packaging, and chemicals. Thus, as governments enhance their focus on measurable improvement in the environment, companies simultaneously are able to take advantage of many credits and incentives in the environmental area.

Under the social category, corporate transparency on how income taxes are paid on a country-by-country basis can demonstrate that corporations are not avoiding, evading, or artificially reducing taxes in any particular geography.

Further, obtaining tax credits and incentives for diversity and corporate giving are common social tax initiatives and can include:

• • • Hiring & retaining a diverse workforce — For example, the Work Opportunity Tax Credit allows tax breaks for employing targeted segments of the workforce such as those receiving government assistance and individuals who have been unemployed long-term or have a felony conviction. And Opportunity Zone credits incentivize moving a business to a government-designated area that qualifies for renewal efforts.
    • Charitable contributions — Tax deductions incentivize corporations to give back to the communities in which they operate by providing funds, community service hours, or donations-in-kind.

Shifts in the regulatory landscape across geographies also are important to determine a corporate tax function’s role in a company’s ESG strategy. Corporate income taxes are one of the most foundational components of the governance strategy, starting with the “tone at the top” and including a strong tax risk management policy.

“A robust tax risk management policy, in line with the board and C-suite’s overall governance strategy for an organization, guides how the tax piece of the organization operates by outlining how decisions are made,” explains Grant Thornton’s Little. When addressing governance strategies, such policies target core investments that an enterprise makes, such as deciding where to locate a facility and finding tax planning opportunities, “while still ensuring that the company is paying the right amount of tax globally,” she adds.

The “tone at the top,” according to Little, guides how tax decisions are made, particularly those that have ESG implications. For example, a company may choose to enter into a transfer pricing arrangement to shift profits from one jurisdiction to another, which is a decision that may be perfectly allowable within the transfer pricing guidelines for the two different jurisdictions. However, to align with governance goals, the tax risk management policy may help steer the company to determine its portion of the global tax base to both jurisdictions rather than minimizing the overall tax.

Typically, tax risk management policies are more detailed and robust in Europe because they are required for public companies across the European Union and in the United Kingdom. “Companies operating in those geographies generally have to post these policies on their website or make them publicly available,” Little says.

Involving tax at the beginning

A company’s ESG journey generally starts with a decision by a company executive to move forward in the ESG space. This declaration is typically followed by a benchmarking exercise to understand what industry peers are doing; a materiality assessment to determine which ESG issues matter most to the company’s stakeholders; and a determination of what data is available for reporting and how to measure progress.

During the ESG strategy formulation, there are important implications for tax. For example, the tax function can help to minimize taxes incurred along the supply chain and increase return on investment by identifying credits and incentives. This is especially important for companies with operations in the EU and UK because these geographies dictate a tax framework for disclosure in that ESG landscape.

The tax function then helps conduct scenario-planning around accounting methods, such as performing a cost segregation study to enhance or accelerate deductions from a tax perspective. To maximize the value of the deduction, depreciation methods can be changed to accelerate or defer a deduction.

Detailed tax decisions such as these that align with a company’s ESG strategy can have a sizable effect on a company’s ability to achieve its twin goals of generating profit and acting responsibly as a corporate citizen.

To get started, recent research shows that forward-looking tax department leaders have already started to uncover their total picture, developing a strategy to embed ESG principles into tax policies and practices, communicate tax impacts as part of regular disclosures, and put governance mechanisms in place to ensure tax decisions are sustainable moving forward.

We had previously discussed how outside audit and accounting firms can help their corporate clients with ESG activities, now we examine how internal corporate auditing functions have a role to play as well.

Indeed, internal audit functions help both increase transparency because most companies self-define ESG program requirements on what information is disclosed publicly, and help directors perform their oversight duties through the audit committee interaction with the corporate board.

Role of internal audit

A company’s internal audit function can step in to help implement consistent sets of standards and establish an internal independent mechanism by leveraging ESG program governance as part of a company’s overall governance program. This is crucial because currently, the lack of transparency on what information is disclosed publicly increases the importance of this type of internal independent audit function.

The short term challenge for internal audit functions is getting up to speed on the company’s ESG efforts, but fortunately, ramping up knowledge is something with which these teams often have experienced. The first step is to understand the ESG landscape of the industry and sector of the organization. Benchmarking what the company’s competitors are doing, attending industry conferences, staying current on changes to government policy and legislation, and keeping tabs on the varying perspectives among internal and external stakeholders are all critical to effectively assessing and managing ESG risks while balancing those risks with other high-priority auditing requirements.

Similarly, it is equally important for internal audit teams to understand the current state of the company’s internal strategy, maturity, and risk appetite as it relates to ESG topics. Critically, internal auditors must: i) understand the organization’s appetite for ESG risks, ii) grasp how ESG is aligned with and integrated into the company core strategy; iii) identify which company teams own specific ESG processes; and iv) map out the current state of reporting to internal and external stakeholders.

The last two factors are of key importance, because the audit function needs its role to be explicitly valued by leaders of the company who direct, govern, and own a data or delivery function within the company’s ESG program.

Further, integrating ESG assurance into the annual audit plan, especially when the level of ESG knowledge within the team is low, is another key challenge to conquer. To overcome this, audit team leaders should analyze how ESG could be integrated within the existing risk assessment program, then focus on larger issues that will deliver quick wins to maximize the impact and value of assurance.

To assess the level of integration of sustainability within a company’s operations, the following questions — suggested by the Institute of Internal Auditors (IIA) — should be considered:

• • • How do internal audit teams work with external auditors on ESG assurance?
    • To what extent does internal audit provide assurance on structures, systems, and processes for decision-making and reporting?
    • What controls exist that outline how data is collected, analyzed, and reported?
    • What are the policies and processes that measure, monitor, and report on progress towards company commitments?
    • What role does internal audit play to influence a shift in mindset to integrate sustainability into governance and operations?

Internal audit’s role in the “G” of ESG

Perhaps the most important role for internal audit teams in ESG strategy is in governance and teams’ ability to perform its responsibilities around testing internal controls to better assure accuracy in ESG information and information integrity in ESG data disclosure and reporting.

Appropriate governance around ESG will involve the oversight group that creates and directs mechanisms to harmonize ESG into the strategic objectives of the organization. It also includes management’s outlining all of the financial and nonfinancial inputs and investments, as well as an assessment of materiality for adequate operational performance.

Finally, the independence of the audit function from the oversight and delivery functions is the most critical part of its role in governance and ESG assurance. For example, the IIA’s Three Lines Model demonstrates how internal audit teams fit into the varying responsibilities across the governing body. Importantly, the independence from the ESG governing body and the management allows for the audit function to: i) maintain a reliability of internal control over ESG data collection, analysis, and reporting; ii) determine how the various corporate functions involved with ESG data are interacting regularly; and iii) monitor the evolving regulatory framework in order to anticipate ESG disclosure regulations.

When a company’s level of maturity around ESG is in the beginning stages, one of the key challenges for internal audit is getting senior management on board, especially in understanding ESG risks and how internal audit can help alleviate those risks. A company’s internal audit function needs to be seen by partners as a trusted advisor with an obligation to highlight on-going, new, and emerging risks that are not being addressed. In this way, audit functions can have the most effective pathway to influence a positive outcome in a company’s ESG operations.

In addition, there is a ripple effect on all of these factors that could spur the downward spiral of all. For example, with no time available to invest in addressing technology and leadership gaps, corporate tax departments are making their lack of technology and leadership experience worse, which is causing a pronounced lack of commitment to succession planning to worsen as well. And while there is currently significant corporate investment in technology to increase the efficiency in workflow and output to better deal with the expanding multi-jurisdictional tax requirements, it is not enough.

Without proactive efforts by corporate tax managers to address the top three drivers of corporate tax employees’ decision to leave employers — feelings of under-appreciation, lack of career progression, and dissatisfaction with corporate culture, according to the report — problems will only get worse in the future. As the red warning light continues to flash on talent, corporate tax managers would be smart to take these actions to stem flight risk and address their tax teams biggest concerns.

Build a rewarding team micro-culture 

Creating a supportive and inclusive micro-culture at work is a critical step no matter if your team is currently working in the office, remotely, or hybrid mix of the two. Unhappiness with company culture is one of the top three reasons tax department employees cite as their motivation to seek another job. Yet, many corporate tax leaders and managers continue to view culture through a pre-pandemic lens that is attached to physical space and referred to as the articulated culture. However, lived culture — the daily occurrence of specific performance outcomes and implied behaviors that drive norms of what is rewarded, permissible, intentionally ignored, and penalized in a work environment — is much more important to many professionals. Moreover, a lived micro-culture exists in the hearts and minds of your team, and you, as the manager, have great influence over this micro-culture.

To build the best microculture for your team, it is critical to make monthly attempts to give the team more clarity on how their individual and collective roles fit into the overall organization’s strategy; and grant them autonomy by being open to work preferences in terms of when, where, and how they want to work within a sensible framework that makes sense for their life.

Find out each team member’s career goals

One of the simplest ways to lower the threat of attrition from valuable team members is to build connection, especially on a personal level with those who report to you. One way to do this is to ask the following questions monthly or at least quarterly:

• • • Do you know how you want to grow in this organization? Do you desire to lead it one day? Or would you prefer to remain a valuable individual contributor? And it is okay not to know yet.
    • If there is one way that you could grow your skill set this year in an ideal world, what would it be?
    • What can I do to better ensure you have a rewarding career here?

Say “thank you” often

Flight risk of those next in line for leadership (usually those between the ages of 41 and 50) is at 30%, while it averages 28% across all of corporate tax professionals, according to the report. Showing daily appreciation for the contributions of team members and for those who are consistently working hard to deliver for the company is the easiest way to reduce flight risk. Saying thank you doesn’t require extra time or resources — it simply requires intention and effort during your normal course of meetings and work.

To promote further engagement, ask one of the following questions consistently on a monthly basis in each of your one-on-one meetings with your team members:

• • • How are you really doing?
    • How is your workload?
    • How is the mix between being in the office and remote going?
    • What can I do today, next month, and next year to ensure you have a rewarding career here?

Ideally, keep track of when you ask each question during the first few months to ensure proper habit formation, better respond to employees’ feedback, and build a positive and appreciative micro-culture. Taking these actions won’t do much to address the fact that almost two-thirds (64%) of survey respondents said the biggest obstacle preventing them from achieving their professional development goals was “lack of time,” but it might reduce the chance that your flight risk indicator will be flashing red.

That in turn, may give you some breathing room to work on the medium-term challenges that your corporate tax team faces, while giving your most valuable team members a micro-culture that better shows their appreciation for the work they do.

In reality, there needs to be a wholesale shift in sustainability beyond making it a simple branding exercise, says Mark Grider, a partner at international law firm Brown Rudnick. Grider,  counsel Jessica Lu, and associate Honieh Udenka serve as ESG advisers to companies on legal issues. Corporations that wish to focus on sustainability need to shift their practices by embedding their values into their core business and corporate culture, the three say.

Indeed, even traditional compliance activities have led to values signaling when the public attention to ESG makes it necessary to “make sure that an ESG strategy is built in and not bolted on” during the implantation process, Udenka states, adding that this “bolted-on” strategy ultimately fails “because ESG values were only loosely coupled with business objectives and operations [and often] added on as an afterthought.”

Instead, Lu states, when sustainability is built in, commitments “go from a moral-value orientation to a value-derived orientation, which can drive the creation of business value.”

ESG’s tax factor

Many factors at play are driving this change, but there is one area that does not seem to be getting enough attention — corporate tax departments. Indeed, the role of sustainability cuts across a corporation as data sets containing ESG information sit in siloed databases across the organization’s finance, legal, and sustainability functions, among others.

However, corporate tax leaders too often are not part of these efforts. In fact, the 2022 BDO Tax Outlook Survey found that three-quarters of those responsible for tax matters were not currently involved in their organizations’ ESG strategy, despite the ongoing attention ESG is getting by cross-jurisdictional regulators.

What does tax have to do with ESG?

Tax incentives and requirements are often used as a financial tool to drive sustainability activities in businesses; for example:

• • • As part of the environmental part of ESG, carbon pricing in the form of environmental taxes has emerged as a popular way to send clear signals to organizations that they need to be aware of how their operations impact the areas in which they operate. In addition, governments have offered grants and credits to encourage the adoption of more green technology in corporations’ operations.
    • As part of ESG’s social aspect, taxes are often used as a key method by which companies can contribute to their local communities. In addition, more commonplace remote work scenarios also have tax implications concerning in which jurisdictions the work is being done and the employees live.
    • As it relates to the governance, a clear definition of tax strategy, process controls, and compliance are critical parts of corporate governance. Further, tax reporting around sustainability is important to comply with rating agency requirements. In fact, a rise in rating agency requirements around ESG indicates that tax matters will continue to be under scrutiny in the future and will have significant reputational impacts as well, according to a BDO report.

Given all this, forward-thinking executive leaders now have the opportunity to use tax reporting through an ESG lens to better share a holistic narrative about the organization’s purpose. This also demonstrates transparency and builds trust among a growing audience of stakeholders, including customers, investors, and the local community in which the company has operations.

The massive paradigm shift around sustainability by customers and employees, for example, increasingly requires tax reporting and disclosure to consider a wider audience. As a result, corporations — and more specifically, corporate tax leaders — have their work cut out for them, despite the already overwhelming and ever-expanding cross-jurisdictional tax requirements. Indeed, there is already more than 1,000 environmental taxes levied by the 38 member countries of the Organisation for Economic Co-operation and Development, according to a PwC report.

Define how your specific tax function fits into the corporate ESG strategy

To report accurately and with transparency on ESG, corporate tax leaders need to first understand the evolving landscape around ESG, the implications for tax departments and how tax reporting requires action beyond just publishing data. Then, leaders of corporate tax functions need to crystallize and communicate the purpose and values that guide their tax function and how that function contributes to ESG, according to BDO.

The narrative on how the tax strategy fits into ESG is important — and without a story around a tax strategy, negative assumptions can be easily made. For example, if a company takes advantage of a new tax incentive to invest in a climate-friendly technology solution, it could easily be accused of tax avoidance unless a strong narrative is offered. Likewise, efforts by corporate tax leaders need to be made to spell out the tax implications of corporate operations around ESG based on the analysis of what frameworks the organization will use to define the separate components of ESG.

Make efforts to fix fragmented systems now

Recently, corporate tax functions have received increased scrutiny from corporate stakeholders because of the need for transparency in ESG metrics and for greater accountability across a company’s tax practices.

However, the increased demand for tax transparency is a huge challenge. Nearly two-thirds (62%) of respondents in to the BDO Tax Outlook Survey said data collection and analysis is the biggest challenge their departments face in successfully leveraging this data, underscoring the need for increased investment in addressing data governance and fragmented systems among an organization’s various functions.

Clearly, ESG is not going away. Such initiatives and strategies strengthens the case that corporate tax leaders can make to their superiors for additional corporate investments in talent and technology.

Among the most pressing of these problems are:

• • • skill gaps in technology and leadership skills;
    • feelings of under appreciation and lack of career progression as drivers of decisions to leave current employers;
    • time constraints to invest in employee learning and development in the short term;
    • flight risk of the next generation of corporate tax leaders; and
    • a lack of succession planning.

These factors come on top of increased demands faced by corporate tax departments, which include managing increased regulatory requirements, supplying governments with tax data faster and more accurately than ever before, collecting and analyzing data across the enterprise, providing strategic intelligence, and finding new ways to extract value for the corporation.

The direct consequence of all of these additional demands is that the tax & accounting professionals doing the work in corporate tax departments are feeling squeezed — and this compounded by employees already being burnt out after the pandemic. Indeed, more than one-half of the responding tax professionals to this year’s survey said they did not have the resources they need to do their jobs. This could expedite trends already in progress, which include older employees retiring, mid-career professionals leaving their employers more frequently, and younger workers strongly indicating they want a better work/life balance.

All of this is a wake-up call for corporate tax departments and corporations across the board. They clearly need to find creative ways to retain existing staff longer and replenish their workforce with people who have the requisite skillsets to meet the variety of new challenges corporate tax departments are facing. Here again, technology is a major factor, but it will not be enough to solve all the industry’s talent problems and meet current and future needs.

Determinants constraining corporate tax talent

The “emergency button” is flashing red for many corporate tax departments, and leaders of these functions need to take action now to address additional constraints occurring in the near term. Among the most challenging problems they face are:

Flight risk — The threat of employee turnover looms throughout many corporate tax departments, while the power of the tight labor market remains in the hands of employees. This fact is even more acute for corporate tax functions. Flight risk sits at 28% on average across all corporate tax professionals, according to the report. Compounding this fact is that the flight risk of those next in line (between the ages of 41 to 50) to lead corporate tax functions is even higher, at 30%.

Without proactive efforts by corporate tax managers to address the top three drivers of employees’ decisions to leave employers —feelings of under-appreciation, lack of career progression, and dissatisfaction with corporate culture — the problem will only get worse in the future.

Skill gaps in technology and leadership — Some corporate tax departments are making investments in technology to increase efficiency. The challenge is, however, that current employees don’t feel they have the necessary skills to take advantage of such innovation. In fact, 43% of corporate tax professionals indicated that their current tax technology expertise is ill-equipped for success.

Time constraints to invest in learning and development — In addition, these same time and resource challenges for employees prevent them from having the necessary time available to invest in learning and development to close those skill gaps. Without exception and by a wide margin, “lack of time” was identified as the biggest obstacle to meaningful professional development, especially for under-resourced tax departments, where almost three-quarters (72%) of respondents said time constraints prevented them from improving their professional skills. Even more illuminating is that when companies had a better sourcing balance, more than half (55%) of respondents still said that finding the time for professional improvement was their primary challenge.

Investment in efforts to upskill requires a commitment of time and resources by management; and without that, the current state will only get worse unless corporate tax managers can proactively finding in ways to free up time beyond simply investing in technology for efficiency.

Lack of succession planning — Many tax departments are reluctant to develop a succession plan because would-be successors on staff don’t have the proper skillset. However, those who are next in line to lead corporate tax departments don’t have the time to develop the necessary skills — including leadership skills, technical expertise in global tax, and ability to communicate with senior executives — on their own. Interestingly, younger respondents — those under 40 years old — expressed interest in improving their leadership and people management skills.

Compounding the stark reality, however, is that the probable flight risk at companies without a succession plan is roughly 11-percentage points higher than at companies with a succession plan in place.

The constraints on corporate tax talent are currently large, but the challenges will only grow over time if efforts by management and at the corporate level are not made to fend off flight risk. The lack of time to meet current and future functional tasks, the lack of bandwidth to address skill gaps, and the already high flight risk poses a negative multiplier effect on talent within corporate tax departments. Without immediate attention, these leaders will soon fail at performing even their most foundational requirements.

In Thomson Reuters’ 2022 State of the Corporate Tax Department Report, 73% of respondents said that they expected significant government and regulatory changes over the next two years, a 16-percentage point increase compared to last year. While these regulatory impact may be substantial, most corporate tax departments feel unprepared for the changes they need to make in the people, processes, and technologies that they use.

In the latest podcast available on the Thomson Reuters Institute Market Insights channel, Duffy examines the third-annual report’s benchmarked data, unearthing top-of-mind concerns for survey respondents, mostly heads of corporate tax departments who represent 21 industries and 70% of whom have the title of Vice-President or Director of Tax.

You can access the latest Thomson Reuters Institute Market Insights podcast, featuring a discussion about the “State of the Corporate Tax Department Report”, here.

As the podcast discusses, while every industry has been experiencing challenges since the pandemic, those problems in the tax & accounting industry have been particularly acute. Due to the aging talent pool, tax & accounting organizations — whether corporate tax departments or outside accounting firms — were already heading into a talent crisis. The pandemic sped up some professionals’ exit from the industry, but of those remaining who aren’t in a leadership role, most felt there wasn’t a clear pathway to more senior positions. The primary reason for that, as Duffy illustrates, is that most departments feel under-resourced, and that has resulted in more than 60% of respondents saying that they had no time to work on their career development.

One surprise from this year’s report, Duffy notes, was that 30% of female respondents felt there was lack of mentorship opportunities, compared to just 7% of males. (The demographics of respondents were 45% female and 49% male).

Talent issues remain at the forefront

The American Institute of Certified Public Accountants (AICPA) had predicted that by 2020, 75% of tax & accounting professionals would be eligible to retire. To that end, survey respondents were asked about the current likelihood of them leaving their current jobs. As predicted, employees in the age group 51-plus were most likely to leave within the next 10 years, Duffy explains in the podcast. However, the group with the most significant flight risk — those ages 41 to 50 — are those who normally would or should be next in line for leadership roles in their departments.

As the podcast points out, the number one reason for many of those who are considering leaving is feeling underappreciated, with more than one-third (34%) citing this reason, followed by a lack of career progression in the current role, with 27% citing that.

Size matters, by the numbers

As Duffy explains, 57% of respondents felt their corporate tax department was under-resourced, up 10-percentage points from last year, even though the average headcount for corporate tax departments was 32 employees. Interestingly, departments with an average of 22 employees felt they had the right amount of people to work.

As discussed in the podcast, there are a few factors that may be inferred from these numbers. First, that employees had the right skills to perform the work and are leveraging technology to increase their efficiencies. When asked what skills were the most needed, more than 40% of department leaders indicated tax technology, followed by leadership (in order to advance their career).

In addition to all the concerns around talent in the report, the podcast delves into how departments are addressing their resource challenges. Most have indicated they’re embracing strategies that have them “planning to do more with automation and technology.”

“So, whether it’s bringing in new tools or improving the skills set, they’re also talking about streamlining processes so they can drive some efficiency within their tax departments,” says Duffy.

Episode transcript.