In the aftermath of, and as a response to the financial crisis, banks and investment managers are subject to increased regulatory and tax compliance burden.  Luckily, at the same time, digital transformation is enabling change and creating new channels to the market. Historically, tax practice in general and tax reporting in particular have been a low-tech /paper-based business. But now, things are changing and they are changing at a high pace. An area of the tax field where banks and investment managers can clearly benefit from technology is the area of operational tax compliance. Operational tax broadly covers withholding taxes (“WHT”), transactional taxes and compliance obligations (due diligence and tax/investor reporting). In particular, compliance officers could rely on Regulatory Technologies (“RegTechs”). RegTechs refer to a set of companies and solutions that marry innovative technology and regulation to address regulatory requirements across industries, including financial services. There are three types of RegTechs:

- Quantitative RegTechs are those kind of technologies that enable financial institutions to deal with a large set of data. This is, for instance, useful when fulfilling periodic reporting obligations imposed by the tax authorities with respect to investors or account holders.
- Process centric RegTechs are used to improve or redefine a particular process. In the area of operational tax compliance, there are, for instance, many RegTechs being used to enhance client on-boarding process or solidify the internal controls or governance frameworks.
- Pure regulatory RegTechs do not focus on data or on process but rather on identifying new regulations and monitoring changes. With the increasing number of regulations and the pace of change of existing regulations, having such automated tracking system is certainly not a luxury.

As outline in my previous blog[1], mainly large banking institutions have adopted IT solutions that can handle a huge volume of transactions to meet their local or international tax compliance challenges. In the future, however, all financial institutions regardless of size and number of transactions will need to adopt some form of IT tool to meet prescribed requirements. Digitalization is unquestionably creating new opportunities and challenges for the banking and investment management sectors. In this context, a broad range of IT enabled compliance tools are emerging. Examples include:

• Healthchecks or standardized review of compliance using proprietary e-tools;
• Reporting engines for automated creation of XML files for the tax authorities;
• E-Learning modules or online training covering documentation, withholding and reporting requirements;
• Entity classification tools based on a set of tax technical questions and industry guidelines to determine the most appropriate FATCA/CRS status;
• AEoI Trackers to help regulatory monitoring and provide FATCA/CRS status in multiple jurisdictions with regard to deadlines, reporting formats, submission portals, etc; and
• WHT validation tools that can be used pre or post-investment to assess whether the rates applied by custodians are correct given the characteristics of the investor or income.

In a nutshell, to remain relevant in the long run, financial organizations should gradually embrace digital transformation and study today the tools of tomorrow.