Ventana Research Analyst Perspectives

A Good Example of More Effective Tax Data Management

Posted by Robert Kugel on Nov 17, 2011 7:29:04 AM

Right after I posted my blog about the dearth of useful content for the line-of-business and finance audience at this year’s Oracle Open World, I attended a truly useful session. (Of course, it had been shunted to the next-to-last time slot on the final day of the event.) It was a case study presented by AT&T’s tax group, discussing its use of Oracle Hyperion Financial Management to manage the corporation’s tax data.

The session focused on two of what I see as necessary ingredients for effective tax management – the people and information dimensions. While technology and process are also important components to promoting more effective management of the tax function, I’ve found that in midsize and larger organizations, deeper functional integration of tax activities into finance processes and better tax data management are bigger obstacles.

When it comes to the tax function, in most companies the “people” dimension almost always needs addressing. In most large organizations, the tax department is not well integrated with the rest of the organization – an issue I’ve commented on before. In this instance, I think one of the reasons behind AT&T’s success in improving tax management was the fact that the CFO (who previously was the controller) had a tax background so it did not get ignored. From the start, the effort was driven by cross-functional group including Tax, Finance and IT. Moreover, the integration of Tax into finance processes is deep: To eliminate unnecessary data complexity, AT&T tightly manages its chart of accounts (COA), and Tax participates in decisions.

Data is another major barrier companies run up against when trying to improve tax processes and operations such as provisioning and planning. AT&T made data governance was a key part of the project to streamline data collection for the tax function. Rationalization and maintenance of the chart of accounts are keys to managing finance department data. AT&T took the important step of making this investment in its data infrastructure, which pays off in time and money saved in just about any finance department process, not just tax. AT&T was able to cut the number of accounts by about two-thirds by aggressively consolidating wherever possible. Moreover, there is a tight review process whenever a new account is proposed that Tax participates in.

Another data-related rationalization was at the legal-entity level where the corporation had unnecessary complexity. Many midsize companies and most larger ones have complex legal-entity structures. This means they have many different types of entities (such as corporations, limited liability companies and partnerships) with different ownership structures (full or partial ownership and potentially cross-shareholdings).

The combination of a complex legal structure and poor data governance puts a heavy burden on the tax department to execute filings and audit defense because of the manual data collection and multiple reconciliations required to accurately translate the data into a taxable entity structure. This applies to direct taxes (income), indirect (such as sales and use or value-added tax) or property.

In this case both the complexity of the legal structure and chart of accounts issues were partly the legacy of the corporate amalgamation of several of the regional Bell operating companies (RBOCs) and the “old” AT&T. Still, it’s a problem that many larger companies face. Like the chart of accounts, creating new legal entities requires a review, effectively balancing the needs of various parts of the business.

In addition to addressing structural issues, creating a tax data warehouse of record is another component that companies may find useful. (AT&T did not set one up specifically for its project.)

The AT&T presenters indicated that the project enabled the team to achieve several important benefits. By streamlining data collection and making appropriate use of their technology infrastructure, they were able to accelerate the closing process and cut the burden on the tax department. Reconciliations were minimized, and Tax gained greater visibility into operations. Even little things like naming conventions and adjustment techniques were standardized to ensure consistency, improve accuracy and facilitate later analysis and justification of tax positions. And now because executing the mechanics of tax functions is easier, the company has been able to redeploy tax resources to higher-value planning and compliance efforts.

I don’t want to take anything away from the value that a proper application of Oracle’s software can generate, but I think the same benefits that AT&T achieved could be realized using other vendors’ products to automate the financial consolidation, close and external reporting functions. What’s most important is understanding and dealing with the data challenges that tax departments routinely grapple with as well as integrating Tax with the overall finance function. I believe virtually any large corporation (those with 1,000 or more employees, by our definition) will benefit substantially from a project to rationalize its tax, chart of accounts and legal entity data.


Robert Kugel – SVP Research

Topics: Master Data Management, Office of Finance, chart of accounts, Tax, Business Analytics, Business Collaboration, Business Performance, Financial Performance, CFO

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Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.