The tax department faces an increasingly difficult operational environment given today’s challenges. There is a broad effort underway at many companies to boost productivity, but it is not always easy to know where to start. Asked to do more with either flat or fewer resources, tax departments are looking for practical solutions. A tailored data management strategic plan that embraces technology and systems already in use can transform a high-pressure environment into an integrated ecosystem that drives improvements in productivity, quality, and risk.
There is a broad effort underway at many companies to increase productivity in the tax department. The ever-increasing regulatory burden — coupled with tight budgets, unprecedented collaboration among domestic and foreign taxing jurisdictions, and the unshakably high threshold to consistently produce timely and accurate tax accounting — have contributed to a difficult operational environment for the tax department. There is, however, an important and largely untapped opportunity that, if executed well, can significantly boost tax function productivity.
The keystone to this opportunity is a tailored data management strategic plan that embraces technology and systems already in use by the company, but not yet deployed in a way to support the requirements of the tax department. Insiders know that tax functions are not always top of mind when organizations design large-scale technology improvements and upgrades. Compounding the operational challenges are trends like having systems in place that are so disconnected, only tenured personnel know how things work, or maintaining a proliferation of spreadsheets that have become unnecessarily complex over the years. This can lead to an operation burdened with inefficiency, low productivity, and unnecessary risk. Investments in tax systems and process improvements are lagging behind those deployed for use by groups such as financial reporting, treasury, and financial planning and analysis in the face of an escalating regulatory agenda and increasingly, a complex global business environment — something has to give.
How Things Work Today
Tax departments are being asked to do more with either flat or fewer resources in an environment where there is no room for error. But error is precisely what happens when companies rely too much on commonly used ad hoc tools for data collection and information exchange, such as (1) email, (2) undocumented phone conversations, and (3) spreadsheets that, over time, grow in size and complexity. Information necessary for the tax function is typically decentralized and buried within systems tailored for financial and management reporting. This requires a significant effort to restructure the information for use by tax personnel — a task that often falls to tax personnel themselves.
Left to their own devices, tax departments leverage their extensive knowledge of and comfort with spreadsheets to build their own spreadsheet-based technology environment to drive automation. These mission-critical, complex spreadsheets, however, typically depend on a single user and lack an audit trail, as well as quality and version control. Such a fragile environment may be unsettling to companies trying to decide how and where to drive automation without breaking something — including this year’s budget. To complicate matters, the movement to new operating models, such as offshoring and shared service centers, is affecting the flow of information within an organization that requires a response from company tax leaders.
The “Efficiency Dividend”
Still, practical solutions exist for those willing to break away from the status quo and leverage technology already embedded in the broader finance organization. Automating tax operations by integrating well-established tax tools, such as compliance and tax accounting systems, with financial reporting source systems is, today, only a loosely pursued data management strategy, yet it may be the best way to realize the “efficiency dividend” by substantially reducing the effort to (1) collect, (2) manipulate, and (3) validate data.
Tax Systems Integration
When looking for existing technology assets, a good place to begin is within the company’s enterprise resource planning system (ERP) and related modules. Most finance departments have invested heavily in their ERP systems but frequently with little input from their tax colleagues, perhaps except for those responsible for sales/ use and VAT taxes. This is a very significant missed opportunity. Increasingly, however, there has been a dramatic uptick in tax departments seeking to leverage enterprise technologies such as ERP systems and related tools to reduce time spent on data management and, thereby, enable mission-critical objectives, such as (1) speed-to-close, (2) agility to model the tax effect of merger and acquisition activity, (3) agility to forecast the tax implications associated with a new product release, (4) effective tax rate (ETR) and cash tax forecasting, (5) stronger tax controllership, and (6) greater visibility into global tax operations.
Often, tax organizations have not properly configured their existing ERP or related modules to automate extraction of information needed for tax reporting and planning. The use of extract, transform, and load (ETL) tools and business intelligence (BI) platforms to eliminate manual processes is often overlooked. Opportunities exist to replace spreadsheets with so-called accelerators (i.e., commonly licensed enterprise tools configured to enable complex book/tax computations or critical processes) that can be configured to achieve benefits such as:
- Reduced single-user limitations and key-person dependency
- Greater efficiency by integrating the compliance and provision processes
- A formal architecture (e.g., ETL, database, and BI reporting) that promotes faster data collection, automation, and data management efficiency
- Improved data quality by reducing dependency on controllers, spreadsheets, and email by going directly to source systems
- On-demand access to data required for compliance, planning and forecasting, in the format needed
Combining the power of data extraction tools, a robust accelerator library, and a powerful work flow tool to drive process improvement and transparency can dramatically transform a tax department’s efficiency and will likely be a big part of the tax department ecosystem of the future. Ideally, company leaders should learn everything possible about how technology can help drive enterprise value, but regrettably a significant number of senior tax executives have not developed an overall vision of how the tax function can contribute value in the context of its data management strategy. One strategy would be for the broader finance function can look at the tax department as a great opportunity to do a proof of concept around creating an integrated ecosystem. Utilizing tools that provide a collaborative workspace to exchange data, drive work flow, and provide access to documents in an organized, controlled way significantly improves the efficiencies of how information moves through the tax function and really drives the potential to realize the efficiency dividend.
The team would include people who not only understand the technology (and are not thrown off by buzzwords), but also the application of technology to the technical and regulatory compliance responsibilities a tax department faces every day.
The so-called trinity of tax technology — ETL + database + BI — represents the core architectural components for many point solutions, or “accelerators” that can be integrated into an overall vision to transform a high-pressure environment into an integrated ecosystem that drives improvements in productivity, quality, and risk.
Senior tax executives should increase their understanding of enterprise-grade technologies like ETL and BI to better understand the value they can bring to the tax organization, and then develop a multiyear road map for technology and where their priorities should be. The tax department is filled with opportunities for improvement — improvement in terms of its ability to (1) forecast, (2) model how changes in the business may affect transfer pricing, (3) automate collection and documentation of R&D credit data, (4) migrate to realtime audits, bringing greater certainty to tax accounting results, and (5) support the business with bona fide predictive tax analytics.
Experience teaches that these ambitious goals are supported by pursuing an aggressive tax data management strategy. Accelerators are industrial-grade, web-based technology tools configured to enable the most data-intensive, labor-intensive, and high-risk computations and processes within your tax function.
- Transfer pricing/cost allocations
- Foreign Tax Credit
- Foreign Information Reporting
- R&D Credit
- E&P Tracking
- Section 199
- IDR Management
The benefits typically associated with using an “accelerator” strategy to enable complex computations and processes include:
- Automated data collection used for computation of specific book/tax differences
- Improved quality from less reliance on spreadsheet-based processes
- Greater agility to model changes in the business
- Reduced tax accounting year-end/quarter-close cycle time and improved productivity
- Increased analysis of permanent and temporary differences resulting in better quality and risk management
A CFO-Ready Message
Having the time to perform more and better analytics is the value associated with realizing the “efficiency dividend.” An informal survey of hundreds of tax functions across the United States have led us to conclude that, in most cases, tax personnel spend roughly 40 percent of their year on data management tasks, which takes them away from true tax analytic and risk management activities — a significant opportunity cost by any measure.
This challenge represents an opportunity for tax functions to reduce time spent on data collection, manipulation, and validation by 50 percent — giving back 15 to 20 percent of the year (the efficiency dividend) through technology and process improvements — by leveraging existing investments in enterprise systems. This is a proposition that CFOs embrace, since implicit is improvement to ROI on sunk IT costs coupled with a relatively small incremental investment.
There is little doubt that most companies can realize significant financial benefit by embarking on a well-thought-out tax data management plan and create value by realizing the “efficiency dividend.” This will require senior tax executives, however, to venture into unfamiliar territory that will test their leadership skills by forming coalitions of dual-domain specialists (tax and technology) and to think creatively in ways that have not traditionally been part of their responsibilities. The tools are there, the technology is there, the opportunity is there — the ability to transform rests squarely on vision and leadership.
Steve Cranford is Tax Information Management Leader for PricewaterhouseCoopers LLP. He may be contacted at firstname.lastname@example.org. com. Fernando Murias is a Tax Partner, Tax Function Effectiveness, at PricewaterhouseCoopers LLP. His email address is fernando.murias@ us.pwc.com. Mark Schutzman, partner, PwC U.S.’s Tax Function Effectiveness Leader, email@example.com.