The Growing Convergence of Finance and Tax
Today tax reporting requires the same level of transparency and integrity as financial reporting. The result is a major transformation in not only how tax gets its job done, but when and by whom.
May 7, 2009
Times have changed for corporate tax and financial executives. Once considered more of a departmental reporting function, the tax impact of both actual and forecasted financial results is now a key point of integration between two historic neighbors — finance and tax. In fact, despite efforts to comply with Sarbanes-Oxley, accounting for income tax remains the leading cause of SOX 404 deficiencies, comprising 24 percent of overall deficiencies in 2008, according to a recent KPMG tax study.Corporate tax and financial executives must now deal with increased board visibility and SEC (U.S. Securities and Exchange Commission) scrutiny on the financial reporting of income taxes and related internal controls. At the same time, they are now faced with global accounting standard changes that could match and for some companies exceed, the 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 departmental tax technology solutions simply won’t 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.
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 — 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 Enterprise Resource Planning (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 value planning and risk management activities and CFOs can see effective tax rates and cash taxes in real 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 like Vertex have successfully transformed indirect taxes like sales, consumer use and Value Add Tax (VAT) 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 regard to income taxes, a trend will emerge where global companies will begin to 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, will employ technologies that will provide a common tax management and planning platform that is tightly integrated with a corporation’s enterprise-wide financial operations.
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 SOA-based Web services is inevitable in enterprise businesses today.
The only question is whether finance and 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? 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 impact the effective tax rate and therefore investor relations, 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 addresses both interim and year-end provisioning. And shop around. Solutions providers like Vertex are now offering more advanced provision solutions that are a strong first step toward Tax Performance Management.Get Tax on the IT Roadmap: Tax executives with the help of their counterparts in finance need to work more closely with the Chief Information Officer to better understand your company’s IT strategy. In most cases, IT and finance have a technology roadmap – and tax isn’t on it. Finance and tax executives need to collaborate to understand where the CIO is heading and work to get tax projects on the overall 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 CIO can provide you 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 up-front 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 impact 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 and Canadian MI 52109. Tax is the largest expense on most corporate profit-and-loss (P&L) 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 can’t move to new technology because they can’t afford disruptions in their schedules. Failing to do so, however, exposes companies to significant risk. Forward-thinking tax professionals know that 24 percent of material weaknesses are related to tax — weaknesses that can be addressed by moving to enterprise tax solutions.
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