There are many arcane byways in the world of finance and accounting, but surely none is more obscure than the subject of taxes. To me, tax accounting exists in some weird parallel universe with oddly designed yardsticks and shifting concepts of reality. Even people who work in finance departments have limited knowledge of the laws. When Ventana Research has benchmarked topics that involve taxes, typically we find that half of the people with finance titles say that they don't have enough firsthand experience to offer information or an opinion.
When it comes to information technology, corporate taxes also seem out of the mainstream. Financial systems are constructed for statutory accounting and reporting purposes, not taxes. Charts of accounts, for instance, reflect business structures, which are only indirectly connected to tax jurisdictions. Thus, just because it has a solid, reliable financial system doesn't mean that the organization can handle taxes easily or well.
Consequently, tax professionals spend a great deal of their time performing manual and semi-manual recordkeeping and analytical tasks. Much of the work takes place in desktop spreadsheets, which means that people are spending a great deal of time checking for errors and correcting them. Because information typically is scattered around the department and various parts of the company, assembling data often is time-consuming and involves a great deal of duplicated effort. All of this requires the time of people your company is paying to be tax specialists, not spreadsheet jockeys. Worse: Over time, enterprise data can scatter or be restructured, which can make longer-term lookbacks for the purpose of an income tax, value-added tax (VAT), or sales-and-use tax audit much more difficult.
In my opinion, something needs to be done to make life simpler for the tax guys. Here's my suggestion:Companies with complex legal structures, those that have "nexus" (a legal term meaning that an entity has a sufficient presence in a jurisdiction to make it subject to the taxing authority) in a large number of locations (especially if these are in different countries), and those with 5,000 or more employees should develop a tax database of record.
A tax database of record is a recasting of all of a corporation's financial data in a tax-centric way. The purpose of such a database is to substantially reduce the amount of time it takes to prepare taxes and deal with audits. It also can increase the accuracy of tax returns, and in some cases it probably can be used to reduce tax liability.
Such a database is developed by translating the company's results, ideally automatically, into a jurisdictional context rather than a corporate one and then maintaining the translated data in a perfect as-was state. The translation is necessary because there isn't always a one-to-one relationship between legal entities and the accounting structure. In addition, the tax-relevant characteristics of the legal entities -- their domicile and places of nexus, for example -- can (and probably will) change over time.
Also, from a tax standpoint, "time" may have a different meaning than it does in the general accounting context. For instance, if a grace period applies to the tax accounting, an event that takes place in fiscal year 2010 may be a 2009 event from a tax standpoint. Maintaining all of this in an as-was state is critical for tax purposes because that is the only valid reference framework when dealing with taxing authorities.
Often, when companies reorganize, accounting data for past periods may be altered to reflect the changes, a move that makes it that much more difficult for tax departments to reconstruct history in the way it needs to be presented from their perspective. In such situations, a tax database is invaluable. The database also can be used to preserve tax records for the statutorily defined period and, equally important, to eliminate these records when the retention period expires.
Companies can use the tax database of record as a collaborative tool, a place where analyses and models can be stored, accessed, and reused. They're also likely to find that it gives them improved control and auditability, since access can be limited to a small group of tax professionals and corporations can maintain a separate audit trail for tax-related items.
Creating and maintaining a tax database of record need not be all that difficult or expensive. But it's not a finger snap, either: If your company's structure is complicated enough to warrant having one, it will take some work. Indeed, the larger and more complex the organization, the more difficult it will be to construct such a warehouse -- and the more valuable it is likely to be. It's very likely that the tax database itself will use database software that your company already licenses, so its incremental cost may be very low.
Building and maintaining this tax data warehouse requires integration of data from multiple systems -- at the very least, your ERP systems and tax software. Because integration will be ongoing, it's crucial to automate the process of extracting data from the source systems and ensuring its accuracy and consistency through the use of "master data management." The table accompanying this article includes major tax software providers as well as data integration technology that can easily help to simplify the data-related integration tasks.
Just having the database isn't enough; having the right tool to work with it is also necessary. Our research shows that tax departments are heavy users of desktop spreadsheets for data collection, analysis, and reporting. Yet, spreadsheets are notoriously error-prone and difficult to audit effectively. Moreover, they are poorly equipped to handle more than a few dimensions, which means that it is time-consuming and difficult to perform what-if analyses to assess the potential tax impact of business reorganizations, timing options, and so forth.
The table includes the key business intelligence (BI) tools that companies use for the analysis and reporting of data. All of these are capable of working with large databases and are highly controllable; indeed, your company may already be using one or more of them. This can mean low incremental costs for licensing and an existing skills base to develop applications and reports. The disadvantage of BI software is that it usually will require an IT department to create applications and reports to work with the database. However, there are applications and tools that enable corporations to eat their cake and have it, too: They have a spreadsheet interface but the data is stored and manipulated in a multidimensional database. The spreadsheet replacements listed in the table will enable those in the tax department to work with the data using Excel or, in the case of Quantrix, a type of spreadsheet that may be better able to do the sort of analyses the tax department may need to do.
Managing taxes may not become any less arcane, but it can and should be a lot less time-consuming and tedious. Tax professionals should focus their time and effort on using their insight and knowledge to optimize their company's tax positioning. They will be better equipped to do so if they have the right IT tools -- a central tax data repository as well as appropriate analysis and reporting tools.