Companies trust their tax departments with a highly sensitive and essential task. Direct (income) taxes usually are the second largest corporate expense, after salaries and wages. Failure to understand and manage this liability is expensive, whether because taxes are overpaid or because of fines and interest levied for underpayment. Moreover, taxes are a political issue, and corporations – especially larger ones – must be mindful of the reputational implications of their tax liabilities.
There are five interrelated requirements for the work that tax departments do:
- The work must be absolutely accurate.
- Corporate and tax executives must be certain that the numbers are right; therefore instilling confidence is key.
- Certainty depends on transparency: Source data and calculations must be demonstrably accurate, and any questions about the numbers must be answerable without delay.
- Speed is critical. All department tasks related to tax planning, analysis and provisioning can become sources of delay in core finance department processes. Being able to quickly execute data collection and calculations allows more time to explore the results and consider alternatives.
- Control of the process is essential. Only particular trustworthy individuals can be permitted to access systems, perform tasks and check results. Control promotes accuracy, certainty and transparency.
In recent years it has become common for large and even midsize companies to automate their indirect tax management process. However, direct tax management has remained a backwater in its use of technology, a bastion of manual processes built on a heap of desktop spreadsheets. Our benchmark research on the Office of Finance finds that almost all tax departments in midsize and larger companies exclusively (52%) or mainly (38%) use spreadsheets for tax provisioning.
At one time desktop spreadsheets were the only practical tool available to tax departments. Today, however, there are alternatives and good reasons to use them. The inherent technology shortcomings of desktop spreadsheets make tax processes not only needlessly time-consuming (even using macros and other spreadsheet automation techniques) but also prone to errors and inconsistency. This is especially true if people must enter the same information multiple times, which increases the chances of mistakes. In addition, assumptions made and rationales behind formulas used in data transformations may not be documented or readily accessible to others in the organization. This legacy can be problematic even years later in an audit, especially if the individual who prepared the spreadsheet is no longer employed at the company. As with many spreadsheet-driven processes, auditing taxes and the underlying data and calculations is difficult and time-consuming. On top of all this, the effects of the desktop spreadsheet’s inherent shortcomings multiply with the size of a corporation. By their nature, spreadsheets hinder a corporation’s ability to understand tax issues and optimize related decisions.
Tax organizations shouldn’t put up with these outdated, counterproductive practices. New tools can help streamline tax processes and, along the way, give the tax department more clout in the company, as I have written. One dedicated tax management application is Vertex Enterprise, a single-platform approach to managing all types of taxes (direct and indirect) throughout the entire tax life cycle, from analysis through provisioning to audit defense, using a single data source. Calculating and accounting for direct taxes is complicated, largely because income tax laws can be convoluted, especially in certain industries. In addition, the larger the number of tax jurisdictions in which a business operates and the more numerous its subsidiary legal entities, the more complex tax management becomes.
Managing a company’s tax data well is essential to all tax-related processes because it can cut the tax department’s workloads, enhance visibility into tax calculations and facilitate tax planning. Vertex Enterprise includes a tax data warehouse (TDW). The basic rationale for a TDW is straightforward: It’s a data store that makes all tax data readily available and can be used to plan and provision a company’s taxes. However, handling tax-related data is a far more complex task than what’s required for statutory or management accounting. Until recently, that complexity overwhelmed available information technology. Today, however, the basic idea is finally realizable in a practical sense.
A TDW has several purposes: to ensure accuracy and consistency in tax analysis and calculations, improve visibility into tax provisioning and cut the time and effort required to execute tax processes. It can be useful because data management is one of the biggest operational challenges facing tax departments. That is, the information necessary for tax provisioning, planning, compliance and auditing may not be readily available to the tax department because accounting and other information is kept in multiple systems from multiple vendors. Our research on the financial close shows that 71 percent of companies with 1,000 or more employees use financial systems from multiple vendors. In addition, not all of the data necessary for tax department purposes is captured by the ERP system. In addition, data collected in a general finance department warehouse or pulled together in a financial consolidation system may not be sufficiently granular for the tax department’s purposes.
Moreover, U.S.-based companies’ ERP systems (the core technology for gathering transaction data) may not record transactions and journal entries at the legal entity level. If not, tax departments must repeatedly perform transformation steps to have data formatted and organized properly. (Other countries, such as Germany, mandate specifying the legal entity associated with every transaction.) Sometimes the data must undergo multiple transformations because, for example, the transaction information collected in an overseas subsidiary must be reported locally using the local currency and accounting standard, but it must be translated to the parent company’s tax books in a different currency using a different accounting standard. In some industries (such as financial services) there may be multiple local reporting standards, one for general statutory purposes and another reflecting specific rules for that industry demanded by some regulatory authority. In short, there are numerous data-driven headaches tax professionals have to address before they even get down to work. In addition, direct tax laws, regulations and rates change from year to year, requiring a company to make multiple adjustments to reflect those changes.
Managing tax-related data is especially difficult for larger companies with above-average tax complexity, as I’ve noted. Complexity is produced by the number of tax jurisdictions in which a company operates, the complexity of the tax codes of some jurisdictions (Brazil and India are notorious in this regard) and its own corporate structure (the number of legal entities and their ownership characteristics).
Vertex addresses data management issues with its Tax Data Warehouse, which brings together all financial data from multiple global general ledger systems. It collects all relevant data including subledgers, journal entries and transactions into a single authoritative repository for all open tax years that facilitates access and audit.
Another module, Vertex Tax Accounting, functions as a global tax consolidation system that provides provision and compliance functionality. It serves as a comprehensive tax subledger and automates the creation of routine tax journal entries, manages the creation of tax footnotes for regulatory filings. The software works with multiple vendors’ general ledger systems, under multiple accounting standards in multiple currencies. It automates tax-related calculations, including year-to-year adjustments, thereby improving the speed, control and accuracy of provision-related processes. Unlike spreadsheets, the system ties back to each individual general ledger.
Vertex Audit Support is built on the capabilities of its TDW, which makes all tax-related data readily available. Since it’s designed to serve the needs of the tax department, tax-related data for all open years is kept in an “as was” state, unlike data stored in general business data repositories, which may be deleted or modified for organizational purposes such as acquisitions, divestitures or reorganizations. Audit Support is designed to enable external tax auditors to drill down into individual transactions for supporting detail and examine individual calculations. This facilitates the audit process and reduces the tax department’s workloads in supporting audit requests.
Companies that replace spreadsheets with dedicated tax software can spend less time on mechanical, repetitive tasks and more on those that make a difference. Tax data held in the TDW is available for modeling to explore the impact of different tax strategies. For example, modeling can help in determining the best approach to transfer pricing or gaining a clearer, more detailed understanding of the tax consequences of an acquisition or divestiture, or a legal entity reorganization. In our research a majority (53%) of companies said that having a better understanding of their tax positions could save them money.
As noted, direct taxes are a major cost to businesses. Corporations face an increasingly stringent environment as hard-pressed governments look for ways to increase their revenue. The evolving tax environment means that tax departments must be in the mainstream of finance organizations. Yet our research on the financial close finds that a majority of finance executives do not know how long it takes for their tax department to complete quarterly tax calculations. Executives who are not tax professionals usually do not appreciate the important difference between finance and tax data requirements. Corporations are constantly changing their organizational structure as well as acquiring and divesting business units. As these events occur, accounting and management reporting systems adapt to the changes in both the current and past periods. Tax data, on the other hand, must be stable. Legal obligations to pay taxes are based on facts as they exist in specific legal entities operating in a specific tax jurisdiction in a specific period. From a tax authority’s standpoint, these facts never change even as operating structures and ownership evolve. Audit defense requires a corporation to assemble the facts and related calculations, sometimes years after the fact. A general finance data warehouse does not deliver this capability because it is not – and for all practical purposes cannot be – structured to satisfy the needs of a tax department, particularly those that operate in multiple jurisdictions.
I recommend that companies with even moderately complex tax requirements look into dedicated software such as Vertex Enterprise. It was recognized with a 2013 Ventana Research Technology Innovation Award in Office of Finance. The readily accessible authoritative data set makes tax department operations more efficient. Reducing the time and effort to execute the tax department’s core functions frees tax professionals to conduct more useful analysis. In this challenging tax-levying environment, having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record gives corporations and their tax departments the ability to execute better in tax planning, provisioning and compliance.
Robert Kugel – SVP Research