To manage taxes more intelligently, tax departments need to focus more on execution than on compliance.
Full compliance with tax laws is essential, to be sure, but it shouldn't be the only objective of the finance department. Tax codes the world over are extremely complex and require careful study.
For this reason and because people with legal backgrounds often run tax departments, they may focus more on the technical and enforcement aspects of what's in the tax filing than on the people, process, information and technology elements that produce that filing.
In particular, paying greater attention to enhancing the technology and data aspects of the tax function is more important today because technology not only can help deliver accurate and timely tax filings but can do so in a more efficient and effective fashion. That's why if your company has 5,000 or more employees it needs a tax technology expert, an individual who has a strong grounding in tax but also understands how to apply information technology to this function.
The efficiency aspects of applying IT to the tax department are pretty straightforward; it's mostly about managing the number of people-hours required to get to the end result of timely and accurate tax and accounting filings. Yet time also can and should be invested to achieve a more effective tax function – an outcome that will be much more valuable.
Consider the following questions: Does your company apply a consistent risk management approach to taxes across the corporation? Does it measure and assess risks using a formal framework designed to enable communication with executives? What would it take to make your tax defense efforts as effective as possible? Does the tax department operate in a purely reactive mode, or does it assess potential consequences of possible changes in depth and measure the impacts of alternative approaches?
If you are like most people – including many controllers and CFOs – the answer to all these is "I don't know."
A greater focus on the execution aspects of the tax function is necessary if corporations hope to achieve the kinds of operational improvements that are possible today. In doing so, though, be aware of several key barriers that may stand in the way of capturing the benefits that technology can provide.
One issue is the "tone at the top," the attitude communicated by executives running the company (who often know little and care little about the tax function unless it bites them on the bottom) and those running the tax function (who may be lawyers or have joint legal/accounting degrees). Typically they prioritize the technical aspects of tax law and interpretation and not inclined to think about how to use technology to enhance the execution of the tax function – attitudes that are communicated.
A second issue is the isolation of the tax function in most corporations. Ventana Research's benchmark research finds that as many as half of finance organizations have a very limited understanding of what goes on inside their tax department. This is understandable: Tax is a highly technical area with its own vocabulary and conceptual frameworks. And because tax matters are highly sensitive, tax people are by training, and probably inclination as well, discreet.
A third issue is that people who understand technology usually have little understanding of the needs of the tax department. People who work in IT departments are also technically focused specialists with their own vocabulary and conceptual frameworks. Consequently, they are not well equipped to be strong advocates for processes that would strengthen the department's execution, such as properly provisioning ERP systems to support the tax function or creating a tax data warehouse of record.
Companies often skimp on the former because they do not realize that by failing to make their ERP systems inherently tax-aware they force their tax departments to do unproductive manual operations. This ultimately costs more than properly provisioning the ERP system. Moreover, failing to do so often slows the completion of tax analyses and filings. Few have adopted the latter option of creating a tax data warehouse of record or even understand how a tax data warehouse can save time and promote tax risk management, enhance tax defense capabilities and increase tax visibility.
Taxing authorities worldwide are stepping up their efforts to increase collections, partly by increasing their use of information technology to strengthen their oversight and litigate their positions. Having an accurate central source of "as reported" tax-related data enables a company to mount a more effective defense.
For all these reasons, employing an individual who has a deep understanding of what a tax department needs and what information technology can do to meet those needs is an important part of improving execution in the tax function. This person need not be a subject-matter expert in tax law but does have to understand the functional requirements of the people in the department as well as have knowledge of the capabilities IT systems can deliver.