Recent events are forcing corporations to adopt dedicated software for tax provision, transfer pricing and tax analysis. The fiscal damage that the global pandemic is inflicting on countries is likely to result in a more aggressive tax enforcement environment. This will further pressure organizations to establish centralized control and oversight in managing income taxes in corporations. This will also require visibility into tax processes by senior executives, especially for the CFO. Dedicated software for managing tax processes provides greater control and visibility compared to desktop spreadsheets. Our Office of Finance benchmark research finds that 62% of organizations that use a dedicated tax provision application say they can effectively control tax risks compared to 33% of those that use spreadsheets.
Over the past decade, tax department workloads have increased as statutory accounting and tax authority reporting requirements have become more demanding. For example, in the United States there are more rigorous requirements for accounting for uncertain tax positions. Tax authorities worldwide are requiring that multinational companies provide greater transfer pricing transparency. In response, corporate boards and senior executives are demanding greater visibility into the direct (income) tax provision process to be able to oversee practices more closely and plan more effectively to minimize tax expense and exposures while mitigating tax risks.
Yet despite these mounting challenges, many companies appear unprepared. Our research reveals that only one-third of companies use analytics to actively manage their tax strategy.
Fortunately, technology that addresses the stringent demands of tax departments has matured to the point that departments can affordably use it to manage their income tax processes and analyses in a controlled and consistent fashion. Dedicated tax software:
- ensures data integrity and accuracy. There is a single authoritative source of tax data and all formulas are verifiably correct and consistent.
- accelerates accurate and consistent data collection and management.
- can substantially reduce the amount of time it takes to prepare a company’s tax provision because all the data used in calculations is easily retrieved from a single data store, so there are no spreadsheets to roll up into a consolidated data set.
- enhances data reliability because data movements are automated.
- facilitates audit defense because a dedicated application saves all the data, formulas, calculations and notes as they existed in the original provision and transfer pricing processes.
A provision for income taxes is the estimated amount that a business expects to pay in income taxes for its current fiscal year. It calculates a provision by adjusting the net income (defined by applying generally accepted accounting principles) using the permanent and temporary differences created by the tax code. For example, a temporary tax difference is created when a company uses accelerated depreciation allowed by the tax code but straight-line depreciation for financial reporting. A permanent difference occurs, for instance, when certain expenses such as fines or some entertainment costs cannot be deducted for tax purposes.
How data is sourced in calculating the tax provision matters. For example, most companies find that they can achieve a consistently high degree of accuracy, auditability and visibility by having their tax provision application share the same data used by their financial consolidation and reporting system. Using the same data ensures that the data used in the tax provision process is always reliable and up to date. Moreover, tax professionals spend far less time checking the accuracy of the data and calculation, which speeds up the tax provision process and therefore can shorten the accounting close.
Using a dedicated tax provision application saves the time of tax professionals who currently rely on spreadsheets to manage their process. Our research shows that most organizations use spreadsheets to manage their tax provision and analysis: 59% use them for their tax provision, even though the prevalence of data and formula errors in spreadsheets could be deemed to be a material weakness in tax provision and in the calculation of uncertain tax positions. A dedicated application saves time that can be used for analysis and planning aimed at lowering tax outlays. Today, only 26% of organizations use tax analytics extensively. Tax professionals also can use this time to do what-if scenario planning that simulates possible outcomes and helps guide strategic decision-making across the organization. Spreadsheets may have been the only practical alternative at one time, but today they aren’t the right tool to use for tax provision.
The term “transfer pricing” relates to how corporations price transactions within and between legal entities under common ownership. Companies have an economic incentive to structure transfer prices to shift profits away from high-tax-rate jurisdictions to ones with lower rates. Because of the potential for abuse, tax authorities scrutinize cross-jurisdiction and cross-border transactions and challenge intracompany transfer prices that appear abusive. Management and control of transfer pricing has become more challenging for multi-national companies because of country-by-country tax reporting. The mandated reporting requirements put a premium on achieving consistency in how internal transfer prices are set across a company.
Organizations must have controls in place to ensure their transfer pricing is defensible and only as aggressive as senior executives allow. Especially in corporations where tax reporting is decentralized, a dedicated tax application that manages transfer prices ensures uniformity because tax data isn’t siloed — as it often is when the process is handled in desktop spreadsheets. Having consistent, reliable data and a system that scales to handle an organization’s volume of transactions enables pricing management that has consistency and control. A dedicated application enables senior corporate executives and internal audit staffs to have greater visibility and assurance in the application of transfer prices.
The application of analytics to tax is important to managing tax expense and tax compliance risks. Our research reveals that 64% of participants believe that their company could reduce its tax expense if it had the ability to quickly drill down into the details of transactions and balance sheet items to gain insight into its tax position for each taxing jurisdiction. And having the assurance that comes with relying on a single source of data and a consistent set of analytics to assess tax data can help senior executives anticipate where there might be perceived issues related to taxes paid. This awareness can help guide tax-related decisions and help prepare a company to respond to any challenges.
The corporate tax environment is increasingly difficult and consequently tax departments are facing challenges that put a premium on both speed and accuracy. Executives and boards of directors are demanding greater internal tax transparency. A dedicated tax provision application will help tax departments improve their performance and address both existing challenges and those to come. I recommend that CFOs and tax departments assess the value of using dedicated software to enhance the quality and efficiency of their tax processes.