I was amused and encouraged to see that in a recent Deloitte white paper (“Finance Transformation: Think à la Carte, Not Overhaul”), corporate tax pros were described as “the rock stars of the bottom line.”
At last — a little recognition!
And why not? After all, the tax liability is among the largest items on many a corporate P&L and balance sheet, and the function’s effectiveness directly impacts it. As the white paper points out, “potential bottom-line tax-related benefits are found [in places] throughout the organization, including logistics, procurement, capital projects, and corporate development.”
I’m not sure how enthusiastically tax folks will take to the “rock star” designation, but it sure makes a change from the traditional image, which is more like “forgotten stepchild.” Yet there’s still some truth to that old image, too. In many businesses, tax is still perceived, often correctly, as a house divided within itself, operating according to its own arcane laws and connected to the business at large by little more than endless uncoordinated and repetitive requests for information.
On the technology side, despite a burst of investment after Sarbanes-Oxley, tax still lags the finance and accounting functions. In a 2009 Business Finance Tax Survey of 175 finance and tax executives, we found that many corporate tax departments are still caught up in collecting, manipulating, and validating data. About a third of respondents said that their tax function spends more than 30 percent of its time on such low-value-add tasks. Fifteen percent said that these processes consumed more than half of their time.
But tax may be on the point of shaking off its dowdy, tech-deprived image. Money for IT projects is still tight in this economic environment, for sure, but forward-looking companies are finding themselves tempted by potential efficiency gains from software upgrades. And some are building tax infrastructures worthy of the function’s rock-star status.
Bridging the Provision and the Return
When it comes to preparing and filing the returns, you’ve just got to do it; it’s not the most strategic activity in the world. But compliance work soaks up huge amounts of tax departments’ time and resources, seemingly out of all proportion to the end product. In most companies, compliance remains siloed off from the tax accounting process, almost guaranteeing a lot of backing and filling between them.
The gap has seemed almost unbridgeable. The two processes occur at different times and in vastly different time frames. With the provision, you’re under intense time pressure — a few days — to align with the book close. For the returns, you get a relatively leisurely 6 months or so. The levels of materiality are different; the summarized data used in the provision must be broken out into the detail required by the return. In many organizations, the two processes are performed by different people.
Despite the challenges, companies are aware of the potential efficiencies to be gained by leveraging provision work to ease the compliance process. But the infrastructure just hasn’t been there. The results of post-Sarbanes software implementations in the heavily spreadsheet-dependent tax accounting process were not always encouraging. “Many vendors had a software package that helped to prepare the provision, and many other vendors or the same vendors offered a software package that would help with the tax return, but they didn’t really speak to each other,” recalls Scott Wrag, managing director with CBIZ Tofias in Boston and leader of the accounting firm's tax services group. In 2006, a KPMG survey of corporate tax pros found that among respondents who used third-party provision software, those who found it beneficial barely outnumbered those who did not. Significantly, one of the most common criticisms was the tools’ “lack of flexibility or compatibility.”
A lot can change in four years, though. Best-of-breed tax software providers are touting big advances in connectivity in the newest generation of their products. And there’s substance behind the hype. “The market is changing around tax accounting applications,” says Ravi Gupta, partner in Deloitte’s tax management services group. “They used to be little stand-alone applications, but the vendors are putting a lot more investment into developing them and working to integrate them with compliance, because that’s where the value is.”
“The leading software solutions that are out there will get you substantially where you need to be from a provision and compliance perspective,” adds Jay Turchin, director in RSM McGladrey’s tax process and technology service line. He emphasizes the need to establish a consistent process methodology before tackling a tech implementation across the provision/compliance divide. But once that’s in place, together with a software solution that helps to standardize the processes, “all of the backtracking — all of that ‘What was the latest version? Where do we end up on this position?’ — can really all go away.”
Or at least if there’s a residue that doesn’t go away, it will be highly transparent and auditable. Turchin concedes that some key numbers may not be available at provision time, and estimates may still be necessary. But he estimates that by leveraging automation and treating book-tax differences at both periods in much the same way, companies can get upward of 70 percent to 80 percent of a return populated with the information that’s available at provision time.
BPM’s Promise
Tax software vendors are touting improved integration not only among their provision and compliance tools, but also with business performance management (BPM) systems, according to Gupta. Indeed, BPM software offers perhaps the most solid foundation for a truly integrated tax technology infrastructure (see sidebar, “An Efficient Record-to-Report Cycle”).
At the heart of BPM’s promise is its ability to provide the highly granular data, expanded chart of accounts, and consolidation by legal entity that tax needs. Companies may be able to capture the necessary tax attributes in their ERP system, as long as their G/L is standardized across legal entities. However, “when an organization doesn’t utilize a single G/L — a very common situation, for various reasons — or when extensive M&A activity makes this kind of standardization impossible, expansion of the ERPs isn’t going to do the trick,” notes Christopher Iervolino, senior managing director at Itec Inc., a financial software consulting firm.
Fortunately, BPM software is adept at pulling in data from multiple G/Ls and ERP systems and a host of other source systems and feeding it into the full range of tax applications. Many companies already own BPM systems that can be tax-sensitized to create this kind of integrated data flow, although few, to this point, have done so. Only 10 percent of respondents in our 2009 survey reported that they use a performance management or business intelligence (BI) application for their tax work.
This may be because some older BPM systems lacked the muscle for major tax-related outputs. “There was a time when consolidation systems would be bogged down if there were too many accounts in the system,” says Marc Seewald, VP of tax products with BPM provider Longview Solutions, “but that’s no longer the case.” In BPM reimplementations industrywide, he says, “you’re now starting to see a significant level of detail in the chart of accounts, so there’s no technical reason that you can’t make life easier on the tax side.”
There may be people and process reasons, though, since more accounts means more work for consolidation managers and more training for the folks in accounting who are responsible for ensuring that everything gets coded correctly. “The continuing challenge is building processes, even in a small to midsize function, that align with how the technologies need them to work so that they’re running in the same direction and you get very predictable results,” reports Alan Atwell, managing director with RSM McGladrey and leader of the firm’s tax process and technology service line. Too often companies want to automate, but they also want to stick to the old familiar processes they know and love, even if they’re ad hoc and inefficient.
Time to Get Holistic
This lack of a broad vision is the paramount challenge for tax integration. When I talked with Jason Rinsky, SVP of corporate taxation with DRS Technologies, he was emphatic on this point. Rinsky joined DRS, a global supplier of products, services, and support to military forces and intelligence agencies, in 2006 after a stint with the tax consulting arm of a Big Four firm. He came in with a wide-ranging vision and the determination to realize it and make it stick. Simply put, Rinsky wanted to create “a cultural mind-shift in terms of how you operate the tax function, so that instead of being reactive and compliance-driven, you can essentially automate the function and do so in a fashion that allows you to be proactive and resolve issues in a timely way, instead of reporting the consequences of those issues at a later date.”
Like many large organizations, DRS had settled over time into well-worn tax processes that involved considerable duplication of effort and placed unnecessary data-gathering burdens on operations and finance people in the business units. The solution was a rigorous rethinking of the entire cycle, which formed the basis for selective software upgrades. Says Rinsky: “We wanted to use tax technology to allow us to, in essence, go directly from a trial balance — and specifically from trial balances that are on different ERP platforms — automatically into a tax provision application that would allow us to have the provision prepared within a very, very, time-constrained cycle, and then be able immediately to roll that information directly into a tax return so that there’s no duplication of effort between the provision process and the return process.”
The new system, which includes homegrown elements as well as components offered by vendors that have since been acquired by Thomson Reuters, achieved all of those goals and then some. Data gathering and variance analysis are no longer rigidly tied to the calendar year but occur in real time; if questions crop up about a particular transaction, Rinsky’s team can talk to the people who were involved in it while it’s still fresh in their minds. “It turns the whole tax function into a collaborative function so that you’re running in real time with the other functional areas of the organization,” he notes. When the GAAP books close, tax closes.
In late 2008, DRS was acquired by Italian defense giant Finmeccanica S.p.A. Faced with a conversion to IFRS and the need to file two very complex tax returns for the same year, Rinsky was determined to rise the challenge without impairing either the quality of the reporting or his team’s quality of life. The new technology helped his staff to essentially complete the first return within a month and a half of year-end following the provision (they continued to refine it from there) and then immediately start on the second. They finished both returns in less time than it had previously taken to do one.
Asked to put his finger on the main benefit of the implementation, Rinsky thinks of the positive response from his team. “It’s always difficult to retain and motivate the best-in-class tax professionals,” he says. “What we’ve attempted as a result of this is to do away with a lot of the ‘busy work’ and to keep the job fun, motivating, and challenging for our professionals.”
Wait … “fun”?
Absolutely. Rinsky underscores the point. “The reason why something is mundane is that it’s viewed it as duplicative and non-value-add. And if there’s a way to do away with that, it makes the job more interesting, more challenging, and, yes, more fun.”
Given that you’ve set up your tax processes so that they align with the technology and you’ve put the work into developing and sensitizing your primary systems, here’s how an integrated tax platform might look.
It’s important to remember that there’s no such thing as the one best tax tool for any given slot in your system, notes Ravi Gupta, partner in Deloitte’s tax management services group. What you’re looking for is the best process and infrastructure that works.
The range of possible tax-related source data systems is vast, and varies widely by company. In addition to ERP systems and G/Ls, it might include, for example, sales-and-use tax packages, systems that track state apportionment information, third-party fixed-asset accounting tools, even HR systems. Business performance management technology is designed to handle number crunching on a massive scale. It can function as a tax data repository, and its extract, transform, and load (ETL) tools can consolidate the information and feed it into the calculation engines. From there, the data can flow into the tax compliance, reporting, and filing tools.