BPM Strengthens Tax Consolidation

New regulations spur companies to connect tax planning with performance management systems.

When you review all of the corporate functions in which business performance management (BPM) software is frequently applied, the tax department doesn't even make a showing. One reason is that tax departments are usually siloed, sequestered off in their own little world. At many companies, the function works at cross-purposes with the idea of becoming more transparent, while BPM is designed to enhance visibility throughout the organization. What's ironic is that BPM can enhance the work of the tax department by providing better tax data, improving tax reporting and making tax planning more accurate. These benefits are touted by BPM vendors interested in convincing companies to start using the tax feature within their application.

The precision and internal controls mandated by Section 404 of the Sarbanes-Oxley Act are another inducement for companies to get serious about applying BPM principles and technology to their tax function. "In the past, tax wasn't a burning platform for greater timeliness and integrity of data," says Sridhar Kadaba, practice director, banking and capital markets, North America, at Parson Consulting in New York City. "Now, as companies globalize, the tax consequences are more complex and widespread, with issues like cross-border transfer pricing to deal with, so companies have to start looking at the tax situation in a more comprehensive way. How fast they're going to move in that direction is being dictated by SOX [Sarbanes-Oxley]."

Section 404 is garnering widespread attention, but it's not the only regulatory challenge facing tax managers. The IRS appears ready to enact rules that would make it more difficult for companies to separate their tax consolidation from their financial consolidation efforts. A recent report written by academic tax experts highlights the problem the IRS wants to solve: Tax returns of some large corporations are improperly consolidated, which can be seen as making the return less transparent to the IRS. The report, "Consolidation Anomalies in Form 1120: Corporate Tax Return Data" by Charles Boynton, Portia DeFilippes, Petro Lisowsky and Lillian Mills, may lead to a requirement for greater alignment between financial and tax consolidation.

At the time of this writing, one such change to IRS rules was already in the works. "Schedule M-3, which was issued July 7, 2004, would change a major part of the U.S. tax consolidated form," says J.D. Choi, CEO of Tax Technologies Inc. in Haworth, N.J. "It attempts to reconcile financial reporting consolidation with tax consolidation. The AICPA and other accounting organizations are lobbying to postpone the effective date of M-3 because it would add more administrative burden to tax departments and require more time to do taxes."

But the IRS wants to be able to see more clearly how much creative tax reporting plays into a company's profit margins and cash flow. A company using BPM for tax purposes would likely have a much easier time showing the IRS what information it used to calculate its taxes and where that information originated. "It would be difficult to create a set of tax reports based on artificially propped up data that doesn't gel with the BPM data," says Roland Mosimann, managing director of software vendor Business Intelligence International Inc. in Malvern, Pa. "If those two sets of reports are going in different directions, you'd be hard put to explain why."

"With BPM, you have a lot more evidence that there's a method to the madness when it comes to taxes," says Bob Norton, vice president of tax solutions in the Broomall, Pa., offices of BPM provider Longview Solutions. "With Excel, on the other hand, you have numbers flying all over the place. If your tax process is mostly manual, you better have a lot of checks and balances in terms of documentation. The ideal situation is to have one database of financial truth, the same database for both financial reporting and tax reporting."

Using spreadsheets to store tax data opens up questions about controls -- who's doing what and whether all employees are doing what they should be. "Most companies use Excel for taxes, which creates risk because you need control over who's making changes in the tax document," says Eric Eager, director of product development at BizNet Software, a BPM provider based in Irving, Texas. "It's the same set of problems you have using spreadsheets for budgeting. With a BPM solution, you can put alerts on any changes made in the document and establish internal controls over document libraries [for taxes]."