Most organizations employ Business Intelligence (BI), the use of data and software to enable better decision making, throughout many of its functions in order to drive business success and make strategic decisions. Regrettably, one department that has historically not received the benefits of BI is indirect tax. The reality is BI offers indirect tax the opportunity to unlock its strategic potential within the organization, thereby increasing the organization’s competitive advantage in the marketplace.
Indirect tax compliance has the reputation of being a necessary evil, something that needs to be done but essentially adds no value. This is a sentiment that does not need to prevail, because indirect tax can be transformed into a strategic partner within the organization by unleashing the value that is contained within tax data. With the use of BI tools, indirect tax can move beyond compliance with such value added activities as forecasting reserves, improving transparency, and reducing audit risk.
There are a variety of examples of how BI can unlock the strategic potential of tax within an organization. For example, a survey recently conducted by Tax 2.0, an interactive tax industry forum, entitled “Optimizing Tax Operation,” revealed a high level of agreement among tax professionals that other business functions need to have a greater understanding of the tax implications of their business decisions. The survey also supported the notion that the tax department sees a need to be more involved with internal tax policy decisions stemming from tax legislation changes. Both of these goals can be achieved by providing quantitative indirect tax information to other parts of the organization through the use of BI.
Other examples can be found in sales and procurement transactions, which both contain valuable information that can be leveraged for strategic purposes. For instance, one company has used procurement transaction data to structure their entities in a way that minimizes the tax implications, whereas another has used procurement transaction data to analyze nexus and determine where a facility should be located to permit the lowest possible tax liability.
Indirect tax data can also be used for legislative purposes: A company can use the quantitative evidence embedded in the transactions to help shape legislation by understanding the effect of changes to exemptions or increases in tax rates.
BI is an umbrella term for tools that exist to enable the analysis of data at increasing levels of complexity based on the needs of the organization. This article reviews the BI tools that can be used in indirect tax and examines examples of how each may be used to advance the use of data as information for the benefit of the organization.
Where to Start: Standard Reports
Standard Reports are the entry level into BI and the first tool that an organization generally deploys. They consist of any type of data access method where the format of the report is fixed and cannot be modified. Even though the format of the report is fixed for column order and sort order, the report generally contains prompts for the user to choose filter criteria such as date ranges or product codes. Although they have a historical perspective, these reports still provide value and tend to be operational. Standard reports typically ask questions such as “What happened?” and allow an organization to take corrective action.
An example of a standard report that would use indirect tax data is the gross amounts, taxable amounts and tax amounts for each jurisdiction within a given date range. This report could be executed every month to assist with the remittance process or to support an audit, but it is operational and historical in nature since it displays transactions that occurred in the past.
Access to Data: Ad Hoc Reporting
The next step on the evolutionary scale for BI is ad hoc reporting. This functionality gives the tax staff access to the data that they want, when they want it.
Whereas standard reports answer the same question of “What Happened?” each time the report is executed, ad hoc reports ask questions such as “How Many?,” “How Often?,” or “Where is the problem?” They also allow the user to ask a question, receive an answer, and then ask a follow-up question to pinpoint an area to be investigated. The user can also explore the data to find patterns as well as outliers that may be crucial to an internal audit. The data used by ad hoc reporting are generally still historical in nature, but the information is now being used in an active manner.
For indirect tax, a competitive advantage can be gained by using the tax data to analyze where sales occurred. This information can be provided to the marketing department to enable them to target their subsequent campaigns thus ensuring the maximum impact. Indirect tax may also use an ad hoc report to ask what sales tax did an organization collect over a date range for each state. After reviewing the results, the user may ask a follow-up question by adding more information to the ad hoc report. Furthermore, the user may spot a deviation from the expected values for a particular state and want more information about a smaller time period, such as a week, to focus the report on the unexpected values. This information can be used for revenue recovery purposes that can affect the bottom line of the organization.
Also, traditionally there is heavy reliance on the IT department to create reports, with ensuing delays frustrating decision-makers. Ad hoc reporting allows the user to easily redefine their report to include the necessary information and gain the new insight into the data without relying on IT.
Real Time Monitoring: Events and Notifications
The next level of BI is events and notifications. Events are used to monitor the tax data on a real-time basis for a specific incident and enable the tax staff to take an action based on the occurrence of the event. The events that are created and tracked are specific to the business, and they may be temporary events or permanent depending on the need. The notification will alert the user that the event has occurred and these notifications can be in the form of an email, text message, or a report.
This is the type of BI where data are being used on a real-time basis because information is being monitored as transactions occur, rendering the data no longer historical in nature. Business decisions can now be made in real time, when they have the most effect. With this type of BI, the tax staff can passively monitor the environment, instead of the user actively executing and reviewing a report to track the status of the event. Essentially, the user is free to work on value-added activities while remaining aware of exactly when the event occurred.
An example of where an event would be useful could be with a new nexus rule in the Colorado tax law. Simplistically stated, the state has adopted new legislation to require a retailer, in a controlled group of corporations, that does not have nexus in the state and chooses not to collect sales and use tax but has sales of more than $100,000, to notify their customers that they are responsible for sales and use tax. A retailer could create an event to monitor the amount of sales within the state of Colorado and set a notification to alert the tax staff when the $100,000 limit is crossed. The use of events and notifications increases productivity by allowing the tax staff to concentrate on other value-added activities and eliminating the need to actively monitor the amount of sales within the state.
Planning for the Future: Forecasting
Forecasting is another type of BI and pertains to predicting future outcomes based on past experience. Forecasting allows the tax staff, for the first time, strategic insight owing to the use of projected transactions. The tax department can understand and plan for the future using the current tax data by analyzing the trends over the preceding time periods and extrapolating this information into the future.
One application for the use of forecasting is to estimate reserves. By analyzing the composition of past transactions, the tax department can more accurately predict the necessary reserves needed for subsequent time periods. By accurately estimating reserves, cash can be freed up for ventures with a higher ROI, thereby positively affecting the bottom line of the operations.
Another application for forecasting is to use this technique to project sales or purchases if tax rates change in a jurisdiction. This quantifiable information could be used to help an organization work with the department of revenue to ensure a beneficial legislative outcome.
Tapping the Data Population: Statistical Sampling
The ability to use a small sample of records and have them accurately represent the entire data population is at the heart of statistical sampling. If the small sample is a valid representation, then conclusions drawn about the sample can be propagated to the population as a whole. When the organization uses statistical sampling for internal audits, a smaller sample size can be analyzed for trends and outliers which can be discovered and corrected at a much earlier time. This proactive investigation of the data can help ensure that the organization is a low-risk taxpayer for the revenue authority.
In addition, various revenue authorities use statistical sampling during audits. If the organization has the ability and the infrastructure to participate in statistical sampling, the amount of time dedicated to the actual audit can be reduced because only a representative set of data will be examined instead of the larger population. This reduction in time translates into an opportunity for the indirect tax staff to participate in additional value-added endeavors.
A Step Beyond Statistical Analysis: Predictive Analytics
One of the most sophisticated types of BI is predictive analytics. This is a step beyond statistical analysis and creates a mathematical model of the data to predict future outcomes. This type of BI is the most complex and involved, but it also provides some of the highest potential for ROI because the organization has gone from asking the question of “What happened?” with standard reporting to, “What is next?” and “What do we do about it?” with predictive analytics.
By combining historical data with real-time conditions and forecasted expectations, the indirect tax staff is able to add strategic value to the organization. One example is to provide quantitative information to the mergers and acquisitions department regarding predicted future outcomes. This information would assist with the determination if a division should be acquired or divested.
Another application for predictive analytics is to use indirect tax data for the optimization of state apportionment for direct taxes. Predictive analytics enables the indirect tax department to move away from just providing historical values as inputs to the state apportionment calculation and towards the strategy of minimizing the tax obligation. This is accomplished with activities like finding the optimal placement of facilities or to modify distribution routes.
BI and the Indirect Tax Department
Although BI tools and processes have long been deployed at all levels of an organization, their use can clearly be expanded in respect of indirect tax; it can be raised to a strategic level. Moreover, the examples cited in this article are just a start as the tax department will find additional cases for BI as they make forays into this brave new world.
As tax departments increasingly incorporate BI, they will experience an elevated level of influence and credibility within the organization, deeper insight into the data not only shaping tax, but the organization as a whole, and have a positive effect in terms of dollars and cents. The result is indirect tax will be viewed as a strategic partner that brings valuable information to the table and adds to the bottom line.
Karen Stine is Director of Business Intelligence at Vertex Inc., a leading provider of corporate enterprise tax solutions. Ms. Stine designs business intelligence strategy roadmaps and oversees all aspects of data access. Her more than 15 years of experience in business intelligence, data warehousing, and reporting covers a diverse range of industries, including telecommunications, insurance, consumer packaged goods, and supply chain management. Ms. Stine was part of the Vertex team that was recognized in 2008 with the IBM/Cognos New Partner Solution of the Year award for the Vertex Reporting and Analysis product. She received her B.S. degree and Master’s degree in Business Administration from Robert Morris College. She may be contacted at email@example.com.