The growing convergence of finance and tax - what it means for the future of tax technology.
Corporate tax and financial executives are now dealing with increased board visibility and SEC scrutiny on the financial reporting of income taxes and related internal controls. At the same time, they are faced with global accounting standard changes that could match, and for some companies exceed, SOX-related workload. Couple this with chronic talent shortages and reduced timelines for corporate closes, and the pressure on tax departments has never been greater.
Today's reality is that tax reporting requires the same level of transparency and integrity as financial reporting. Considering that tax is typically one of the largest expenses on corporate income statements and that the effective tax rate is much more volatile than in the past, finance and tax must now live virtually in the same house. The result is a major transformation in not only how tax gets its job done, but when, and by whom.
Because of these trends, the bar has been raised significantly on corporate tax operations--most notably in the area of global accounting for income taxes. As demands continue to grow, today's array of tax technology solutions simply will not be able to provide the necessary control, transparency, efficiency, and management capability needed to meet new demands. These departmental point solutions for provision, compliance, and data management, even when loosely connected together with portal technology and custom integrations, end up creating disparate sources of data, require manual spreadsheet workarounds, limit scalability across a global enterprise, and are prone to audit exposure. In addition, these products are oriented toward supporting a single department rather than the whole enterprise at the same time many companies must deal with increasingly global operations with multiple locations, enterprise resource planning (ERP) systems, and jurisdictions to manage.
For this reason, enterprise-level automation, process improvements, and training innovations will be required to address the current and upcoming challenges facing corporate tax departments. Consequently, a new class of enterprise-level tax systems is emerging that when combined with process and resourcing improvements create a new industry category called tax performance management (TPM). Solutions that enable TPM process all tax types on a single, integrated web services platform that's tightly integrated with ERP and corporate performance management (CPM) systems. TPM addresses the whole spectrum of managing direct and indirect corporate tax performance from financial reporting to compliance, planning, and defense--all on a global basis.
The goal is simple: reduce the operational complexity of managing all aspects of the global tax process and build tighter integration between financial and tax data so that tax professionals can focus on higher [logical not] value planning and risk management activities, and Chief Financial Officers can see effective tax rates and cash taxes in real [logical not] time. This is a state where, when the books close, tax closes with the accuracy required for financial reporting and tax compliance--and with complete transparency and significantly reduced audit risk.
By tightly integrating ERP financial applications with enterprise tax solutions, companies offering software solutions (such as Vertex) have transformed indirect taxes (such as sales, consumer use, and value add taxes) from an overwhelming process and reporting effort to a seamless, automated, and efficient process. The end result is a function that is under control from a tax governance and risk management perspective.
With respect to income taxes, a trend will emerge where global companies will move from today's departmental tools to more enterprise-level solutions, and finally to TPM solutions. These advanced tax solutions, based on an open architecture, employ technologies that will provide a common tax management and planning platform that is tightly integrated with a corporation's enterprise-wide financial operations.
The Problem with Status Quo Tax Processing
For years, tax has been the unknown "black box" within the corporate finance function. But with the release of regulations such as Sarbanes-Oxley--combined with a host of other changes, such as FIN 48, e-filing mandates, and ever tighter closing deadlines--corporate tax departments face unprecedented pressure and scrutiny.
In response, tax departments have scrambled to implement and document exhaustive internal controls and provide transparency into the inner workings of global tax processes, calculations, and assumptions.
As difficult as the past few years have been, new and emerging trends will challenge the people, processes, and technology of tax departments in equally far-reaching ways:
* Effective tax rates are becoming more volatile. As a result of FIN 48, the accounting and transparency of the quarterly income tax provision is causing increased volatility in interim effective tax rates. That means potential surprises which could adversely impact earnings per share. Changes in effective tax rates could stem from any number of factors, including:
--The jurisdictions in which profits are determined to be earned and taxed
--Adjustments to estimated taxes upon finalization of various tax returns
--Changes in available tax credits
--Changes in the valuation of deferred tax assets
--Changes to or the interpretation of global tax laws
--The resolution of tax audits
* Global tax complexity and workloads are increasing. The effects of globalization have really just begun. As businesses continue to expand internationally, regulators are following suit. For example, the U.S. Securities and Exchange Commissioner and the Financial Accounting Standards Board are working hand-in-hand with the International Accounting Standards Board to develop International Financial Reporting Standards (IFRS) that will soon come to the United States. These new accounting standards will affect every aspect of what tax departments do. Because the switch to IFRS will mark a significant change in financial accounting--the starting point for most global tax calculations--tax departments will have to change the tax processes, systems, and calculations used to calculate the global provision and file tax returns. And as companies expand internationally, tax departments also have to understand the local country accounting implications and the impact on in-country and consolidated tax provisions.
* Global information sharing between tax authorities is increasing. Countries are sharing information more than ever before and learning to extract "information" from the reams of unstructured data available to them via electronic filing (e-filing). To increase data transparency and sharing further, country tax administrators are looking to begin tagging data via XBRL as well as creating new, common taxonomies or structures of accounts for corporate filers that will drive financial and tax reporting for these countries. For corporations, these trends will increase the audit efficiency of global tax authorities, such as tax planning and risk management.
* Chronic talent shortages make it harder than ever to hire and retain top tax talent. Over the next decade, the retirement of experienced professionals will shrink the pool of global finance and tax talent considerably. Because tax workloads are also increasing, the global tax risk of today's multinational corporations will also rise. They will not have the resources needed to ensure compliance with new jurisdiction laws, handle cross-border tax disputes, accurately account for global income taxes, and create tax plans that minimize the global income tax burden.
These trends represent both a challenge and an opportunity for corporate tax departments. They will challenge companies to gradually leave behind the inefficiencies and risks associated with departmental solutions, manual processes, and spreadsheet-based tax processing- and push them into the future of enterprise-wide, automated global tax management that is synchronized with finance and supports the entire tax life cycle, from gathering data to generating returns to settling these returns.
ERP--Finance Technology Foreshadows Future of Tax Technology
For the past 15 years, many finance departments invested significantly in ERP-enabled process improvements. To address the limitations of ERP systems for data analysis and reporting, finance organizations then implemented CPM and business intelligence (BI) solutions that sit on top of ERP systems. These enterprise-level solutions helped finance departments centralize global data, automate consolidations, implement controls, create detailed audit trails, and gain complete visibility across the enterprise for better budgeting, planning, forecasting, and decision-making--activities required to not only comply with Sarbanes-Oxley, but also drive better business performance.
It is no surprise that global businesses now consider ERP, CPM, and BI solutions from companies such as IBM, SAP, and Oracle as essential strategic infrastructure. Yet during this transformation, tax was often overlooked or made a low priority. Times are changing, however, and finance and tax executives are beginning to see tax as a natural extension and part of global finance operations. Why?
* First, data management issues and inefficient manual processes mean weak internal controls as revealed by SOX 404 audits.
* Second, tax errors are the cause of effective tax rate surprises, which get the attention of analysts, shareholders, and the Board.
* Third, these issues result in missed tax savings' opportunities and time, energy, and money wasted on extracting and sensitizing financial data for tax--consuming scarce resources that could be used to find savings' opportunities and lower effective tax rates. Because tax is typically one of the largest expenses on most corporate income statements, executives appreciate the need for better tax planning and real-time visibility into the key drivers of tax expense.
* Fourth, in today's world, without an enterprise approach to tax, tax executives and CFOs cannot go before their boards with confidence and say, "Tax is under control--there's no risk of meaningful surprises."
These drivers, combined with the recent ERP/BI consolidation, will lead to a convergence of finance and tax in the coming years. Over the past few years, the major ERP vendors have each acquired leading CPM and BI vendors, such as Hyperion, Business Objects, and Cognos. Also, web-based indirect tax solutions have been tightly integrated with ERP solutions for more than a decade. They leverage real-time ERP data to drive seamless, automated tax calculations and processing of sales transactions, as well as VAT supply inputs and outputs. With emerging web services platforms and BI tools now part of the product mix, the next tax technology convergence will involve the integration of income and all other tax applications with ERP and finance software to enable automation and transparency in a similar way--and ultimately move organizations away from stand-alone, departmental tax solutions.
Moving Beyond Departmental Tax Solutions
While departmental income tax solutions have standardized how tax provisions and returns are calculated and managed, they are showing their limitations. Consider, for example, how global provisions are calculated and reported for today's large, multinational corporations. These spreadsheet-like, departmental provisioning solutions were not built for global, enterprise-scale use because they are:
* Annual only: Most solutions do not support the interim provisioning process pursuant to APB 28 and FIN 18 (in the United States) or IAS 34 for companies reporting under IFRS.
* U.S.-focused: These solutions were only designed to comply with U.S. accounting standards.
* Built with weak controls: Departmental solutions, like their spreadsheet predecessors, provide insufficient data management and data integrity between the book or GAAP trial balances and those used for the tax process.
* Not integrated with ERPs: These early solutions are unable to automatically import timely trial balance information -which is a must when calculating accurate provisions in the short amount of time allotted for this task.
* Weak in analysis and reporting functionality: Companies increasingly need full, drill-down, and slice-and-dice analysis into the details behind their consolidated tax disclosures -but departmental tools don't provide this functionality.
* Insufficient in data detail: Businesses also need detailed data to support a timely and accurate tax return that can be primed from the provision. Departmental solutions only gather the data needed to complete the provision, leaving reams of supporting data to be gathered after the fact to complete the return.
Because of these weaknesses--and the historical lack of investment in automation and tax process improvements--the existing talent pool is necessarily focused on and bogged down by manual processes to comply with the global tax return workload and the complex task of financial reporting of income tax.
The Next Evolution in Tax Performance Improvement
Because of this a significant gap in tax technology has emerged along with the need to bridge tax processes and enterprise financial processes and related access to data. Without optimized tax processes, a consolidated view of tax data, and robust analytical tools, tax is not in a position to deliver optimal strategic value. To fill this gap, a natural evolution of tax technology is underway from departmental, point solutions to more integrated, enterprise-level solutions as part of a broader tax industry movement to TPM. Enterprise tax solutions that enable TPM will address the whole spectrum of direct and indirect taxes from accounting for income taxes to compliance, planning, and defense.
From a technology perspective, enterprise tax management solutions will feature a single, global platform that combines ERP, CPM, and BI data management and reporting capabilities with global tax accounting, compliance, and tax planning solutions for end-to-end global tax process optimization. They will share a common user interface and leverage a unified database that centralizes all tax-related data pulled from ERP, financial systems, and tax compliance systems. Users will be able to enter data once and use it from anywhere in the world.
As this platform evolves over the next few years, businesses will realize increased value from their tax operations. Early enterprise solutions will deliver greater operational efficiency and visibility and reduced tax risk. As enterprise tax solutions mature they will equip organizations to make more strategic tax decisions to better manage their effective tax rate and cash taxes in real time on an ongoing basis.
Preparing for the Future
Tools are beginning to emerge that can better enable the process and data integration needed to leverage the global financial data in these systems to the accounting for income tax and tax compliance processes. Equally important, migration to web services based on services-oriented architecture (SOA) is inevitable in enterprise businesses today since it enables better control and performance while lowering total cost. The only question is whether tax departments will be prepared to use this transition to their advantage. In light of these trends, how can tax departments and other executives plan ahead for TPM especially with current economic conditions? As organizations make decisions about new tax technology, they should:
* Automate Provision with Vision: The pressures of developing accurate and timely provisions are an immediate reality for both tax and finance, and can influence the effective tax rate and therefore earnings per share, so automating this process now is a necessity. But what tool to use? Look for a web-based solution that can handle global tax accounting standards and is not limited to simple provision calculations but also to automated tax journal entry and tax accounting roll-forward processes. And shop around. Solutions providers are now offering more advanced provision solutions that are a strong first step toward Tax Performance Management.
* Get Closer to IT and Finance: Tax executives need to work more closely with the CFO and controller and better understand the finance department's IT strategy. In most cases, finance has a technology roadmap--and tax is not on it. Tax executives need to understand where finance is heading, get on their roadmap, and develop a complementary IT roadmap. If the tax department is too overwhelmed with daily activities to engage in strategic planning, they should consider selective outsourcing to free up resources.
* Be Alert for Key IT Triggers that Signal a Move to Web Services and SOA: Building a strong relationship with the CFO and the chief information officer can provide the tax executive with insight into their plans to move to a web services platform. As these moves are being considered, it is important to present the case for tax being included upfront in the process. If necessary, leverage success stories from colleagues at other companies about the risks of not being proactive in dealing with tax risk. Waiting until a significant material weakness or audit occurs is too late.
* When Purchasing New Tax Software, Look for Solutions that Are Compatible with Web-Based Applications and Service-Oriented ERPs: When deploying true, web-based tax products, organizations are laying the foundation for TPM. The choices made today will affect the tax department's ability to add value to the business. It is best to look for an enterprise tax accounting system designed to support both the decentralized and centralized computation and recording of global tax provisions in compliance with the internal control standards of Sarbanes-Oxley, Canadian M152-109, and other countries' securities regulations.
Tax is one of the largest expense on most corporate profit-and-loss statements. As such, it deserves the highest level of attention in your company's enterprise planning. Many tax professionals are resistant to change--saying that they cannot move to new technology because they cannot afford disruptions in their schedules i but failing to do so exposes companies to significant risk. Forward-thinking tax professionals know that the majority of material weaknesses are related to tax--weaknesses that can be addressed by moving to enterprise tax solutions.
John A. Viglione is Vice President and Chief Technology Officer for Vertex Incorporated, a position he has held since 1998. In this role, he is responsible for the overarching technological direction of the organization, including commercial product and internal system development. Before joining Vertex, Mr. Viglione served as the Director of Architecture and Methodology for Reliance Group holdings. He received his B.S. degree from St. Joseph's University and his M.B.A. from Pennsylvania State University. He may be reached at john. firstname.lastname@example.org.
Bob Norton joined Vertex as Chief Income Tax Officer in February 2008. He has more than 25 years of corporate tax experience in both public accounting and global industry. Before joining Vertex, he was Vice President of Tax Solutions for Longview Solutions, a provider of corporate performance management software. A certified public accounting, Mr. Norton received his B.A. in Accounting from Pennsylvania State University and his M.S. degree in Taxation from the Villanova University School of Law. He may be reached at Bob.Norton@vertexinc.com.
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|Author:||Viglione, John; Norton, Bob|
|Date:||Jan 1, 2009|
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