The challenges facing tax departments are mounting. Governments worldwide are scrutinizing companies’ reporting more closely in an attempt to raise revenue. In response, corporate boards and executives increasingly are demanding greater visibility into direct (income) tax positions and their implications. Their goal is to oversee the process more closely. They aim to plan more effectively to minimize tax expense and exposures while mitigating tax risks. In this environment, tax departments need to provide analyses sooner. They must be able to communicate alternatives and their implications to a wider set of stakeholders faster than ever.
Information technology can address these challenges and enable tax departments to respond effectively to the changing environment. In particular, dedicated software can enable tax departments to better manage their direct tax reporting processes. The dedicated tax provision functionality they offer speeds the processes, enhances control, reduces the chance of errors and ensures consistency. A dedicated tax application that uses a database ensures data integrity and accuracy, which is a benefit as the mandated country-by-country reporting requirements puts a premium on consistency: There is a single version of the truth and the formulas it uses are correct and consistent. A dedicated application also simplifies collaboration because tax data isn’t siloed and is therefore readily accessible.
It’s important for finance and corporate executives to recognize that tax exists in its own world and needs to have its own software that incorporates tax business logic and a dedicated tax database. Therefore, the software must be connected to but not constrained by the broader finance department data and processes. Taxes are levied on legal entities subject to the laws of tax jurisdictions based on their definitions of income, expenses, assets and liabilities. However, corporate structural hierarchies used for financial and managerial accounting aren’t necessarily consistent with those needed for tax accounting. Moreover, the application of accounting concepts such as depreciation in tax law doesn’t always correspond to statutory financial and managerial accounting. Tax data also exists in discrete tax time frames that must be maintained for tax audit defense. Mergers, divestitures and corporate reorganizations can rearrange the historical structure of financial and managerial accounting systems, but tax authorities are concerned with the structure that existed within their time frames.
Tax sensitizing accounting data, performing tax calculations and maintaining a single authoritative data repository for tax data is far more efficient, accurate and controllable using a dedicated application and a dedicated tax data repository. Yet our benchmark research finds that nine out of 10 companies with 1,000 or more employees manage their tax provision, analysis and reporting mainly or exclusively with desktop spreadsheets. Only 10 percent use a dedicated application, which facilitates analysis, provision and reporting and addresses the requirements of the 21st-century tax department.
I recommend that companies investigate and asses how dedicated direct tax software can help them achieve greater speed, visibility, control and transparency in their tax reporting processes. The software must conform solely to the requirements of the tax department in order to:
In addition, the software vendor must have a team of accomplished tax professionals to provide ongoing support and customer service consisting of individuals who understand the needs of the department. Vendors must also provide sufficient references that can validate vendor claims and provide guidance on implementation and use.
Prospective buyers shouldn’t assume that tax provision software provided by their ERP or tax compliance vendor is the best approach simply because of integration and maintenance considerations. Working with a single vendor has benefits but these shouldn’t be an overriding consideration. Focusing on functionality, ease of use, customer support and customer references ensures that the needs of the tax department are the priority in vendor selection. This approach provides the highest return on a software investment. Although maintaining integrations affects IT department workloads, the impact may be less than imagined. Much of the work is done in the initial installation and updates typically are infrequent. Moreover, our research finds that 69% of companies with more than 1,000 employees have ERP systems from multiple vendors, so integration likely will be required regardless.
The corporate tax environment is increasingly challenging. Consequently, executives and corporate boards are becoming more demanding. A dedicated tax provision application will help tax departments improve their performance and address today’s and tomorrow’s challenges.