The Rise of Global Tax Management Platforms
New tax technologies enable process improvement over the entire tax lifecycle, pursuit of significant value creation and sound tax risk management, bringing the tax function on par with finance.
By Bob Norton
Before the technology revolution of the 1980s, finance operations were largely focused on budgeting, the monthly close and analysis of historical financial results in support of management and reporting to the U.S. Securities and Exchange Commission.
The next three decades brought major, disruptive technologies and management approaches that immeasurably changed the roles of the chief financial officer and finance from one-dimensional “bean counters” to multi-faceted stakeholders in corporate strategy and execution.
Although it involved a lot of hard work taking full advantage of these megatrends, finance departments are now able to convert raw data to information that enables proactive, strategic decision-making, delivering value at less cost.
These trends, now well established in finance, are spawning new tax technologies and management approaches that enable the tax function to contribute value and manage risk on par with their finance counterparts.
First Generation Tax Technologies
Different than enterprise resource planning vendors’ and finance’s holistic approach to technology and process improvement, tax’s approach [until recently] mirrored its operation within the organization — in one word, siloed.
Rather than building solutions to address the end-to-end tax lifecycle and integration with a company’s ERP and finance process, tax technology vendors built products to address specific problems within certain phases of the tax process — products that were separate and distinct from the finance and accounting process.
These departmental standalone solutions, while offering some advances in tax process automation, have proven ineffective in providing the global management platform that tax needs to increase its efficiency, elevate its role and deliver value in the way finance has done.
For example, current U.S. tax return compliance systems have been effective in reducing the cost and inaccuracy of compliance with complex U.S. federal and state tax regimes. No company would consider returning to the manual tax return preparation days of the past.
Similarly, first-generation provision technologies that were rushed to market following reforms prescribed by the Sarbanes-Oxley Act of 2002 also have helped to standardize and improve the accuracy of global provisions.
Yet both of these technologies were designed in a vacuum, isolated from each other and from what the company needs from the tax department: tax strategy and planning, tax accounting, tax compliance and defense of the company’s global tax positions. In addition, they failed to address the core problem of tax operations — namely, the management of enterprise tax data, an area that typically consumes as much as 40 percent of skilled tax resources.
Tax Operations Following Finance’s Model
The good news is that with the lessons of its finance brethren and the enterprise approach to technology, tax operations are becoming tightly integrated with finance and global business operations, yielding improved productivity, controls and risk management. With continued cross-border business expansion and global tax and accounting reforms, tax professionals must continue to do more with less, and that is only possible through improved operational efficiency.
Just as with finance-modeled continuous improvement, business process reengineering and other quality management concepts from the innovations of manufacturers (Lean and Six Sigma), tax has learned from finance.
In addition, tax technology vendors that understand modern tax operations have shifted strategies and development efforts from one-off point solutions to holistic, integrated global tax management platforms similar to today’s ERP and business intelligence (BI) technologies.
Based on the finance and information technology lessons of the last 20 years, these new tax platforms have been built from the ground up, versus trying to integrate separately built applications, for tight integration with finance and enterprise tax data management — leveraging that data across the full tax lifecycle for both direct and indirect taxes.
The goal is to touch the data once using a common look and feel across all tax lifecycle processes — similar to ERP-enabled finance processes, but for tax’s specific requirements.
The Foundation: A Tax Data Warehouse
Even more challenging than finance and accounting’s enterprise data management issues, tax data management is absolutely pivotal to today’s global tax departments. Issues like legal entity P&Ls and tax consolidations, multiple ledgers for U.S. generally accepted accounting principles, statutory, International Financial Reporting Standards, much more granular charts of accounts and entity hierarchies put tax’s data needs in a class of its own.
As illustrated in Figure 1, central to mastering tax data management and foundational to the tax department of tomorrow is a commercial-grade tax data warehouse that offers a “single source of the truth” to support every phase of the tax lifecycle.
By providing access to centralized and trusted financial data, in the format and structure needed to meet external tax requirements, tax data warehouses house all pertinent information needed to support the company’s outstanding tax obligations and related reporting.
To get a better idea of these new capabilities, consider a $2 billion multinational with 30 U.S. legal entities doing business in every state and 60 non-U.S. entities doing business in 30 countries. Such a company might have 1,500 tax obligations in more than 80 taxing jurisdictions each year.
Assuming an average of four years open to audit, the company would have 6,000 income tax obligations/returns to manage and account for in its annual financial statements and FIN 48 reserves. Consider that those 80 tax jurisdictions are constantly changing their tax laws, rates and statutory accounting bases, and it is easy to see the potential for significant financial reporting and global tax risk because of today’s siloed, standalone technologies and processes.
To better manage this risk from a data perspective, the tax data warehouse will contain year-end legal entity trial balances for every entity included in the consolidated financial statements for all tax years open to audit.
If accounting’s systems do not maintain pure legal entity trial balances, the tax data warehouse supports conversion of business units to legal entities as required for tax reporting. For each of these, it also contains each return’s book-to-tax adjustments, as well as net operating losses (NOLs), credits and tax rates.
Additionally, it contains each tax obligation’s deferred tax cumulative temporary differences, both gross and net/tax effected, data to support FIN 48 reserves and valuation allowances, the data to support any FAS 123R and comprehensive income (OCI) deferred taxes, as well as the data needed to support outside basis difference deferred taxes or APB 23 assertions.
Finally, it holds each current provision’s “return-to-provision” adjustment data, which ideally goes away with increased provision accuracy.
To support the company’s interim provision calculation, the tax data warehouse includes P&L and book-tax difference forecasts by legal entity, jurisdiction and year. It also houses the detailed state apportionment factors, state specific modifications to federal taxable income and state tax rates. To support a material and growing exposure for many multinationals, it contains all of the intercompany transaction data and underlying product or service P&Ls to support the company’s global transfer pricing. Lastly, it contains copies of all filed returns or electronic filings.
While this represents a significant amount of data, in comparison it’s actually less than the amount every company is currently housing somewhere across the global organization, in disparate systems, various formats, multiple chronologies and accessible by different people in assorted time zones and currencies.
The reality is that the current state of tax technology and tax data management makes it virtually impossible to have control of the company’s entire outstanding global tax obligations and related accounting for income taxes.
Utilizing a tax data warehouse and surrounding tax applications for provision, compliance, planning and defense, data and calculations can be leveraged across each phase of the tax lifecycle for every tax obligation. With this technology in place, tax and finance are now seeing previously unattainable efficiencies, controls and accuracy in tax reporting, representing the future of global tax operations.
Offering state-of-the-art query, analysis and reporting functionality, once implemented, the result is a reduction in the inherent risks of today’s siloed tax processing, when redundant data touches often introduce errors, inaccuracy and weaknesses in internal controls.
Integrated Global Provisioning
The new generation of global provision solutions is designed to work as part of the global tax management platform sharing the data, structures and calculations of the tax data warehouse, as well as all of the platform-level tools (reporting, document management, calendaring and workflow).
From a tax accounting perspective, these tools include innovative new features for handling the complexities of global accounting for income tax process, including:
▪ Automated integration of tax account reconciliations to the general ledger tax account balances;
▪ Detailed prior-year adjustment functionality (for transparency into global return to provision, amended returns and final audit settlement adjustments); and
▪ Robust intra-period tax allocation functionality that captures the tax expense of total comprehensive income by continuing operations and other operations.
These new provision technologies are built on the same global tax management platform that has the tax data warehouse as its foundation — with the same look and feel and platform-level tools offering unmatched tax data management, as well as accounting for income tax process efficiency, accuracy and controls.
The Global Tax Management Platform
With the tax data warehouse as the foundation for all tax lifecycle applications and standard connectors to the leading ERPs, these new tax platforms will support true global tax management of every tax obligation of a company for every year they are open to audit. By incorporating a single platform-level workflow tool, the tax executive will be able to determine the status of each tax obligation within each phase of the tax lifecycle.
Similarly, one document-management tool at the platform level will support the retention and organization of all documents required to support each task within each phase of the tax lifecycle for each tax obligation. A global tax calendar at the platform level allows comprehensive planning and management of due dates and deliverables, from forecasted effective tax rates for quarter close and periodic review of FIN 48 reserve movements to preparation for an audit committee meeting, estimated tax payments and tax return due dates across the globe.
Today, chief financial officers and controllers use role-based dashboards to monitor key performance indicators and workflow status summaries that are critical to day-to-day management of their organizations. In the near future, tax personnel will use similar tools to capture the real-time status of the many processes and deliverables they govern.
Tax Technology and Operations: The Future
With this architectural underpinning, future tax applications (transfer pricing and various tax-planning capabilities) will also leverage the data and calculations within the tax data warehouse, as well as the platform-level tools for query, analysis and reporting, document management and other functions.
Because these global tax management platforms also include U.S. and non-U.S. indirect tax applications (U.S. sales/use tax and global VAT), direct tax professionals can automate and validate things like state apportionment factors and transfer pricing to the transactional details, if desired. At the same time, indirect tax resources can more easily be cross-trained on direct tax principles and tasks.
The vision of a global tax management platform that addresses the end-to-end tax process of multinational corporations is becoming a reality. While there are some shared elements of that vision among tax technology providers, there remain different architectural approaches to the underlying technology.
One approach is to build a tax platform from scratch with a single database, shared tax calculation engine and a common look and feel for user navigation across all tax applications and tools.
Another approach involves separately developed tax applications, each with its own database, calculations and user navigation underneath a portal for accessing the various applications and tools.
While the vision of a global tax management platform that addresses the end-to-end tax process of multinational corporations is becoming a reality, tax technology itself will not pave the way to successful tax transformation on par with finance. It will take strong leadership and executive support, time, money and a plan.
Just as it did for the finance function, transformation will require new skills of tax personnel including management concepts like Lean, Six Sigma and business process reengineering, as well as enterprise technology concepts such as dimensions, hierarchies, query and analytics.
Perhaps more importantly, it will take interpersonal, communication and political skills that leading tax professionals have developed to effectively collaborate and build rapport with finance and business personnel on the needs and value added by the tax function.
It is encouraging that leading tax departments have already started the journey, taking a chapter out of finance’s book for continuous improvement and leveraging early stage global tax management platforms. The benefits are compelling enough to warrant the continued trek toward a better way to operate and manage global corporate taxes for the benefit of all corporate stakeholders.
Bob Norton, CPA, is Chief Income Tax Officer at Vertex Corp., responsible for working with the team to develop Vertex’s global income tax solution vision and strategies. He serves on the Editorial Advisory Board of Financial Executive magazine.
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