How Tax Can Strengthen its Inflation-Response Reflexes

The U.S. inflation rate reached a four-decade high (7.9%) when I spoke to tax leaders about the impacts of inflation, and supply chain disruption at the Tax Executive Institute’s (TEI’s) annual mid-year conference. Two weeks later, the U.S. inflation rate reached 8.5%.

The good news is that tax leaders’ interest in inflation is also soaring. This was made abundantly clear to me and my co-panelists – highly esteemed legal and tax experts from Baker & McKenzie, Kostelanetz & Fink, and Alvarez & Marsal Taxand – at the event, where we fielded many questions following our “Tax Practice in a Perfect Storm” presentation.

Tax leaders are not alone on that count. A new McKinsey Quarterly article reports that some executive teams have created “inflation nerve centers to manage the potential downside of inflationary pressures by breaking down silos, enhancing transparency between functions, and concentrating on the crucial leadership skills and organizational capabilities required to get ahead of events rather than react to them.” 

McKinsey consultants encourage CEOs to ask themselves and senior leaders of critical operational areas, a shortlist of questions about inflation. Several of these questions veer into the tax group’s responsibilities and activities, including: 

• What is the fastest way to stabilize and redesign stretched and, in some cases, broken supply chains?
• What direction should I give to help procurement leaders create value? 
• What can I do to attract and retain employees in today’s shifting labor market?

Tax leaders can play a valuable role in helping their companies address supply chain disruptions. In response to pandemic-driven disruptions, we’ve seen leading tax groups equipped with advanced tax automation quickly and easily adapt to new tax compliance requirements after their companies pivot from a key supplier in one country to a replacement supplier in another region. Leading tax groups also tend to nurture healthy collaborations and tight technology integrations with their procurement partners, which helps procurement groups invest less time in transactional work and more energy and creativity in value-generating activities. 

The tight labor market is a far-reaching challenge that affects every part of the organization, including tax. Getting the right tax automation in place can help with this challenge. According to my colleague, Vertex Vice President of Tax Content and Chief Tax Officer Michael Bernard: “In-demand tax professionals are more likely to accept a role in which they spend less time on repetitive, transactional tasks and more time honing their strategic contributions,” Mike explains here. “The opportunity to develop and sharpen skills and expertise related to current business systems and advanced tools also offers recruiting and retention benefits.”

Besides addressing inflation-related questions from their CEOs, tax leaders can also brush up on the many ways taxes and inflation influence each other. It’s useful to keep in mind, for example, that tax increases and tax base adjustments commonly occur during periods of high inflation. For a deeper look at what tax executives should keep in mind about inflation, check out my recent Tax Notes Federal article, Not Your Parents ‘Taxflation:’ What Tax Execs Need to Know (subscription required).