Robert Kugel's Analyst Perspectives

I recently had a briefing from Vertex on its tax data warehouse (TDW), a key component of its tax technology platform Vertex Enterprise. The TDW concept has been around for decades, but the earliest versions were custom-built and hampered by the technology limitations of their day. This made them expensive to deploy and maintain and constrained their ability to adapt to changing corporate requirements. The basic idea behind a TDW is straightforward: a data store that makes all tax data readily available and can be used to plan and provision a company’s taxes. But the complexity of tax-related data overwhelmed the ability of information technology to deliver on the concept. With today’s technological advances the basic idea is finally realizable in a practical sense.

A TDW has several purposes: to ensure accuracy and consistency in tax analysis and calculations, improve visibility into tax provisioning and cut the time and effort required to execute tax processes. It can be useful because data management is one of the biggest operational challenges facing tax departments. That is, the information necessary for tax provisioning, planning, compliance and audit may not be readily available to the tax department because accounting and other information is kept in multiple systems from multiple vendors. (Our benchmark research shows that 71% of companies with 1,000 or more employees use financial systems from multiple vendors.) In addition, not all of the data necessary for tax department purposes is captured by the ERP system. As well, data collected in a general finance department warehouse or pulled together in a financial consolidation system may not be sufficiently granular for tax department purposes.

Moreover, most companies’ ERP systems (the core technology for gathering transaction data) are not inherently “tax aware,” so tax departments repeatedly need to perform transformational steps to have data formatted and organized properly. Sometimes the data must undergo multiple transformations because, for example, the transaction information collected in an overseas subsidiary must be reported locally using the local currency and accounting standard but must be translated to the parent company’s tax books in a different currency using a different accounting standard. In some industries (such as financial services) there may be multiple local reporting standards, one for general statutory purposes and another reflecting specific rules for that industry demanded by some regulatory authority. In short, there are numerous data-driven headaches tax professionals have to address before they even get down to work.

Managing tax-related data is especially difficult for larger companies with above-average tax complexity, as I noted in anearlier blog. Complexity is produced by the number of tax jurisdictions in which a company operates, the complexity of the tax codes of some jurisdictions (Brazil and India are notorious in this regard) and its own corporate structure (the number of legal entities and their ownership characteristics).

There’s a market for tax data warehouses partly because most tax departments perform these data transformations in desktop spreadsheets. Due to the inherent problems with desktop spreadsheets, the process is not only needlessly time-consuming (even using macros and other spreadsheet automation techniques), it is also prone to errors and inconsistencies. This is especially true if the same information must be entered multiple times, which increases the chances of a mistake. In addition, assumptions made and the rationales behind formulas used in data transformations may not be documented or readily accessible to others in the organization. And finally, with spreadsheet-driven processes, auditing taxes and the underlying data and calculations also is difficult and time-consuming. The impacts of the desktop spreadsheet’s inherent shortcomings multiply with the size of a corporation. Thus, I expect that over the next several years larger companies (those with 1,000 or more employees) and even some midsize ones with complex corporate structures will find the advantages of a tax data warehouse increasingly compelling.

One of the basic sources of value derived from establishing a TDW is automating, standardizing and controlling the process of extracting data from transaction systems like ERP, transforming it into a tax-relevant structure and making it the single source of data accessible to the systems and processes that need to access to tax-related data. This need makes a TDW a core capability that can substantially increase the efficiency of a company’s tax provisioning and planning process and increase the effectiveness of tax compliance and audit defense.

Another reason for creating a TDW is that it enables the company to keep tax-related data and analyses in an “as was” state – in a virtual file box separate from other systems. There may be good business reasons to change historical data in financial systems (for example, reorganizations or divestitures), but since tax audits can take place many years after a filing, it’s handy (and potentially lucrative) to be able summon up original, error-free data.

Any company large enough to need a TDW probably has a large IT department, but I suspect that few IT departments are up the task of creating one, and it would be difficult to justify the ongoing investment required to maintain it. A TDW goes beyond the standard IT notion of the data warehouse, which focuses mainly on the high-level technical requirements of acquiring data from operational systems and putting it in a useful form for business users. Taxes are fiendishly complicated, so the details of how the extract, transform and load (ETL) steps are handled (including the required movements and validations) require a specific knowledge of the intersection of accounting and taxes. This domain expertise is necessary to enable individual corporations to facilitate the process of setting up (and later changing) data imports and exports from and to other enterprise systems to suit their specific tax requirements. (These requirements may be a function of their tax complexity or their industry.)

To address these requirements, Vertex’s data management platform brings together the key components necessary for data collection, movement and management as well as reporting and exporting to other functions and systems, including the TDW, and connectors that streamline the integration of a company’s existing financial applications with the TDW. It provides a single database designed to hold trial balance, adjustments and other direct tax data, configured specifically for tax. The data collectors have (or soon will add) prebuilt integration with common data sources, including SAP’s general ledger and Business Warehouse, Oracle’s GL and Hyperion Financial Manager and Microsoft Excel. This list is slated to expand to include other major vendors’ offerings. Currently, there are export connectors to Corptax, Vantage Tax, TaxStream, Excel and a generic flat file (which can serve as a universal connector), and Vertex will expand the array to include other vendors (such as Abacus), a write-back to general ledger journals and an XBRL-tagging capability. Vertex also provides access controls, and its security capability has built-in audit and tracking functions.

Vertex plans enhancements to its TDW this year, focusing on companies’ direct (income) tax requirements to refine functionality as well as facilitate deployment, management and maintenance. For 2013, Vertex plans to improve transaction tax (sales and use, value-added and general sales tax) capabilities.

Now that Sarbanes-Oxley and the global recession are largely behind them, executives and consultants in North America (and to some extent in Europe) are again able to focus on “finance transformation,” an approach that CFOs and finance executives – especially those in midsize and larger companies – should use to enhance corporate performance. Finance departments continue to devote too many resources to rote functions that they could automate. Consequently, they devote too few resources to improving the effectiveness of the finance function. Tax is a case in point. Most midsize and large companies’ tax departments spend their time performing manual processes that now can be automated. With all that effort they are able to achieve a minimum standard of compliance and accuracy. Today, that isn’t enough. I believe a tax data warehouse is a necessary component for any finance transformation project, giving corporations more accurate numbers sooner and enabling more sophisticated tax analyses that would enable companies to optimize their tax expense. As taxes are one of a company’s biggest expenses, the payoff derived from more effective and efficient tax management practices are likely to make tax automation investments such as a tax data warehouse worthwhile.

Regards,

Robert Kugel – SVP Research