Bob Norton
Bob Norton

The Next Best Practices for Tax Planning

How will today, tomorrow and the future look for tax planning?

December 8, 2011
by Bob Norton, CPA

In the next five years, tax technology is expected to evolve gradually and in ways that will transform all core tax processes: provision, compliance, planning and audit defense. In the future, all of these processes will run on a single platform leveraging one, comprehensive tax database. Ultimately, as enterprise tax solutions mature over the next few years, they will enable true tax performance management, equipping organizations with the analytics and modeling tools needed to make more strategic tax decisions and better manage their effective tax rate and cash taxes in real time — even as tax legislation and rules change.

Against this backdrop, Tax planning is essential to minimizing a company’s consolidated effective tax rate and cash taxes. But with so many moving parts (including transfer pricing between hundreds of legal entities, countries and states; foreign cash repatriation; and many entity types; to mention a few), it’s already a challenging task. Doing it effectively during periods of massive and rapid tax changes will be nearly impossible without more sophisticated tax-planning solutions than the spreadsheet-based solutions available today.

Today: Unstructured Planning

Current planning solutions require that tax professionals manually pull together the appropriate data (a time-consuming effort) and build the calculation logic in a spreadsheet. Little, if any, structure is imposed to ensure users employ the best analytical approach, which means that the accuracy of the model depends upon the skill of its creators and reviewers. In general, the limitations of Excel mean that Tax only has high-level comparison models, as Excel doesn’t support sophisticated analytics. Furthermore, the tax planning process is siloed in Excel. As a result, Tax can’t easily leverage inputs and outputs to and from the provision, compliance and audit management processes.

Tomorrow: Scenario-Based Planning

Again, leveraging the core data management foundation and common, platform-wide components, the next evolution of tax planning software will support in-house, scenario-based planning and analysis. The data and structure for planning, such as the book information and the entity hierarchy for aggregation, will be provided as a common framework by a tax system and enterprise tax data warehouse. This will eliminate the “search and retrieve” activities that consume tax professionals engaged in planning. The logic for planning will reside in the tax system or be maintained in Excel, but it will be executed as part of a planning scenario controlled by the tax system framework. Results from analysis will be saved as a specific scenario — with a name and version number — so they can be shared, collaborated on and compared. You will be able to leverage business intelligence tools for detailed scenario analysis and comparisons.

The Future: Goal-Seeking Planning

The tax software of the future will proactively generate recommended tax-planning scenarios by recombining user-specified elements, such as entity structures and transfer prices, to find an optimal tax profile. For example, you will be able to instantly identify where you can conduct certain types of business (for instance, where to set up new factories and warehouses) with the lowest tax impact and plan accordingly to minimize your effective tax rate. The foundation for this functionality will be the tax-data warehouse and electronically updated business rules and rates, as the software will be able to quickly crunch through multiple scenarios using this data, right from your desktop.


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Bob Norton, CPA, is Vertex’s chief income tax officer and a leading contributor to the company’s global product strategy and vision. In this role he brings more than 25 years of corporate tax, accounting and technology experience from both public accounting and global industry. He is an Editorial Advisory Board member of Financial Executives and is a member of FEI, the Tax Council, AICPA, PICPA and the Association for Computers and Taxation.