Robert Kugel's Analyst Perspectives

To manage taxes more intelligently  tax departments need to focus more on execution than compliance. I’ll confess that this observation is based on informal rather than rigorous research, so I’ll leave it up to individuals that work in these departments and in the finance function generally to consider whether this applies to their company.

Compliance is essential, to be sure, but it shouldn’t be the only objective. Tax codes the world over are extremely complex and require careful study. For this reason and because people with legal backgrounds often run tax departments, they may be more focused on the technical and enforcement aspects of what’s in the tax filing rather than the people, process, information and technology elements that produce that filing. I believe paying greater attention to enhancing the technology and data aspects of the tax function is all the more important today because technology not only can help deliver accurate and timely tax filings but can do so in a more efficient and effective fashion. If your company has 5,000 or more employees, it needs a tax technology expert, an individual who first has a strong grounding in tax but also understands how to apply information technology to this function.

 The efficiency aspects of applying IT to the tax department are pretty straightforward since it’s mostly about the number of people-hours required to get to the end result of timely and accurate tax and accounting filings. Yet I believe time also can and should be invested to achieve a more effective tax function, an outcome that will be much more valuable.

Consider: Does your company apply a consistent tax risk management approach across the corporation? Are risks measured and assessed using a formal framework designed to communicate with executives? Are your tax defense efforts as effective as possible? What would it take to improve them? Does the tax department operate in a purely reactive mode or does it assess potential consequences of possible changes in depth and measure the impacts of alternative approaches?

A greater focus on the execution aspects of the tax function is necessary if corporations hope to actually achieve the kinds of operational improvements that are possible today. Unfortunately, I think there are a several key barriers standing in the way of capturing the benefits that technology can provide.

One issue is the “tone at the top,” the attitude communicated by executives running the company who know little and almost always care little about the tax function (unless it bites them on the bottom). Then there’s the attitude of those running the tax function, who by training usually are lawyers or have joint legal/accounting degrees. Understandably they are focused on the technical aspects of tax law and interpretation and much less so on how to use technology to enhance the execution of the tax function. 

A second issue is the isolation of the tax function in most corporations. Our benchmark research finds that as many as half of the finance organizations we surveyed have a very limited understanding of what goes on inside their tax department. Part of this is cultural; tax is a highly technical area with its own vocabulary and conceptual frameworks, which often makes it difficult to have a dialog with the rest of the organization. And because tax matters are highly sensitive, tax people are by training, and probably inclination as well, discrete.  

A third issue is that few people who understand technology appreciate how it can be harnessed to improve tax department execution. People who work in IT departments are also technically focused specialists with their own vocabulary and conceptual frameworks. Consequently, they cannot be strong advocates of the proper provisioning of ERP systems to support the tax function or a tax data warehouse of record, for example. Companies often skimp on the former because they do not realize that by failing to make their ERP systems inherently tax aware they force tax departments to do extra, unproductive manual operations. This drives greater costs than properly provisioning the ERP system. Moreover, it is often a barrier to more timely completion of tax analyses and filings. Few have adopted the latter, possibly because they do not understand how a tax data warehouse can save time and promote tax risk management, enhance tax defense capabilities and increase tax visibility. Taxing authorities worldwide are stepping up their efforts to increase collections, increasing their use of information technology to strengthen their oversight and litigate their positions. Having a central, accurate source of “as reported” tax related data enables a company to mount a more effective defense.

Having an individual with a deep understanding of what a tax department needs and what information technology can do to meet those needs is an important part of improving execution in the tax function. This person does not have to be a subject matter expert in tax law but they do have to understand the functional requirements of the people in the department as well as a knowledge of what capabilities IT systems can deliver.

Regards, 

Robert Kugel – SVP Research