5 Steps To Establish A Robust Tax Function In A Startup

In startups, the tax function is important, just like other parts of the business, but it often gets ignored because of the fast growth and new ideas. People usually think of it as just following rules, but it’s more than that. 

Sometimes, it becomes a big deal in important meetings. It’s essential to connect tax with the rest of the business and change how people see it. Both tax and business leaders need to think differently about it. This helps create a better understanding between them and makes sure everyone is on the same page.

Here are key insights on establishing an effective and robust tax function within a startup:

Alignment With Business Priorities

Establishing a symbiotic relationship between the tax function and business operations is paramount. The tax leaders must immerse themselves in the business, and understand its intricacies, growth trajectories, and upcoming initiatives. 

Instead of prescribing tax-only solutions, they should focus on creating tax strategies that naturally integrate business and tax considerations. This collaborative approach is a way of life in startup and not a one-off handshake and is meant to foster a sense of partnership between tax and business.

Navigating Hypergrowth Challenges

Startups experiencing rapid expansion, both into domestic and international markets encounter multifaceted tax complexities. From entity structures to setting up of supply chain structure with transfer pricing policy for inter-company transactions, and intellectual property management with legal and economic IP ownership rights, addressing international tax matters becomes imperative. 

These strategic activities are not one-time projects but quite iterative with the changing business and organisation needs in startups and hence more complexity. The tax function should proactively strategise on these aspects, considering compliance, transparency, structural ability to raise capital, and mitigating tax risks associated with global operations.

Tailored Tax Operating Model

Determining the tax function’s operational structure is pivotal. A flexible approach is recommended, starting with a centralised tax function and transitioning to decentralised models with the expansion in business as well as considering the market complexities. 

Leveraging shared service centres for routine compliance tasks in a Center of Excellence framework can optimise resources in the larger finance infrastructure. 

Mixes of in-house, outsourced, or managed services can be adapted based on strategic priorities and stage of operations in a country. This helps in optimising the cost, resources, and tax risk when the business is operating at a nascent stage.

Technological Integration And Prioritisation

Historically, tax has found a way to do the best with what they can get when tax resources are consumed to manually collate and validate the data from different sources with the least focus on data quality and analytics.

Tax functions have responded to technology adoption more reactively and that too on regulatory demands, but there’s a growing need for innovative technological integration. Automation liberates tax professionals from routine tasks, enabling a shift towards strategic tax planning and growth-focused consultancy. 

Aligning tech priorities with and for the tax function is crucial. The tax leader should advocate for tech allocation by emphasising the business impact (negative publicity, heavy financial penalties, delayed regulatory approvals, etc.) of compliance delays or errors.

Proactive Engagement With Regulators

For startups, staying ahead of changing regulations is vital. By actively talking to policymakers, businesses can explain how certain grey areas in rules affect their operations and suggest practical solutions. 

This not only helps avoid legal issues but also supports job creation, economic growth, and overall stability. Pushing for clearer regulations creates a more stable and favourable environment for business growth.

In summary, the tax function in a startup must evolve from a compliance-driven role to a proactive, integrated strategic partner. 

By closely aligning with business objectives, leveraging technology, and engaging with regulators, the tax function can contribute significantly to the sustainable growth and success of startups in a dynamic business environment.

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