Nobody puts operational tax in the corner

17 May 2016

PwC’s annual asset management tax conference, held in London in May, discussed the future for asset management in a challenging period of regulatory change and market development – and, in particular, what the role of the asset management tax function will look like in that future.

It is four years since PwC first surveyed global asset managers in order to assess the effectiveness of their operational tax risk management – and found much of the industry taking a reactive, ad hoc approach to management, exposing their operational tax funds to the risk of errors. Happily, our latest survey suggests many asset managers have made significant strides since then; and while there is more work to do – hence our research sub-title, “A job half done” – delegates to our annual Asset Management Tax conference set out a clear vision of how their roles and functions are likely to evolve in the next three years.

Above all, operational tax professionals are set to play a much more central and visible role in asset management firms, responding to a mounting C-suite boardroom focus on this area of risk, communicating more effectively with every part of the business, and striving to deliver ‘tax alpha’ – the improvement of portfolio returns created by sound tax management – alongside the traditional compliance role. As one of our conference participants put it: “Operational tax used to be an area for introverted specialists, but we’re no longer hiding in the corner”.

That will require tax professionals to develop new skills, particularly as they communicate and collaborate with colleagues from across the business. They must learn how to deliver key insights to the C-suite, educating senior leaders about risk management in succinct terms that do not get bogged down in undue technicality; they must be able to facilitate the commercial ambitions of colleagues in other functions, focusing on tax efficiency as well as compliance as the business moves forward; and they must develop much deeper relationships with third parties such as custodians, building consensus and understanding about where the responsibilities lie.

Asset managers’ tax professionals must also expect to be held to account on these skills and in future should expect to be judged in more nuanced terms, with Key Performance Indicators that reflect themes such as compliance performance and reputational risk management – but also their ability to generate tax alpha.

This is not to suggest there will be a one-size-fits-all solution to the challenges facing asset managers on tax in the years ahead: the industry is too diverse for that. Larger asset managers are likely to devote additional resources to operational tax, but not necessarily within the tax function – we expect to see operational tax become increasingly embedded across the business. Other firms may move towards an outsourcing model, directing their own operational tax specialists towards a role of oversight of third party actions.

For alternative investment managers, in particular, such choices are pressing. Our research suggests many alternatives managers lag behind traditional managers on operational tax risk management, reflecting their often relatively small size and the bespoke nature of their activities. Confronted by the ever-increasing regulatory burden, as well as their own evolution into new markets and asset classes, they must now catch up quickly; an outsourced model may represent their best chance of doing so, though all such arrangements will require robust governance.

Investment in technology may be part of the solution for many alternatives managers – whether alone or in joint ventures with new players such as FinTech firms – just as it will be for traditional asset management firms. One important challenge, for example, is that asset managers must make better use of their data – already growing exponentially quickly, the information managers generate will also expand to meet the demands of regulation such as MiFID II. This creates new compliance risk, but also a real opportunity to deliver that elusive tax alpha.

“We have to keep evolving with our businesses, ensuring that our many years of experience remain relevant,” said one conference participant. “We’ll always be valued for keeping our colleagues out of scrapes, but we need a new vocabulary with which to converse with the business.”

The road to 2020, in other words, has the potential to be exciting and fulfilling for asset management tax functions – having done the heavy lifting of prioritising risk management over the past four years, tax professionals must not freeze as the spotlight now falls upon them. Greater flexibility, transparency and proactivity will be required, as well as a broader ability to take a step back from the day-to-day fray in order to assess the bigger picture. Those tax functions that pull off this trick represent a new source of added value to their organisations – they’ll never put you in the corner again.

Teresa S Owusu-Adjei

PwC | Partner
T: +44 (0) 207 213 3302



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