Tax management within organizations is a critical and increasingly sensitive matter. In these more austere times there is heightened public interest in the amount of tax paid by large corporations, and tax authorities are becoming more adept at identifying businesses whose tax charges are out of line with expectations. Yet despite its importance for the wellbeing and reputation of the enterprise, the corporate tax department is sometimes viewed as something of a backwater—a highly specialized and cocooned function which is rarely at the forefront of technology and best practice processes.
But pressure for change is mounting as the setters of international accounting standards seek to improve the accuracy of tax provisions for the readers of published accounts and tax authorities strive to increase tax collections by imposing greater accountability, disclosure, and transparency, as well as leveraging their own IT-based risk assessment techniques.
Take for example, the Internal Revenue Service’s requirement for certain corporate taxpayers under the jurisdiction of the IRS’s Large Business and International Division in the United States to file a schedule of ‘uncertain tax provisions.’ A move “intended to reduce the time it takes to find issues…and help prioritize selection of issues and taxpayers for examination.”
Or consider HM Revenue & Customs’ initiative in the UK, which in the same period introduced the requirement for the senior accounting officer of large companies and groups to report on the adequacy of their accounting systems for tax returns with personal liability and fines for those that do not comply with the law.
Furthermore, the rapid adoption of XBRL in the US and elsewhere is expected to add to tax risk as tax authorities use it to profile taxpayers, selecting those that appear to be out of line with industry trends and averages.
Adding to the pressure is the rising number of restatements in large publicly traded companies (245 restatements in 2012, up from 202 in 2011), according to research firm Audit Analytics. According to Lynn Turner, former chief accountant at the Securities and Exchange Commission, the uptick reflects some of the complexity large multinational companies are facing in tax accounting.
In the foreseeable future, understanding these developments and being able to respond proactively to any inquiry by leveraging tax software solutions is likely to become a vital business tool for managing tax risk.
For the multinational organization with distributed operations, the timely and accurate collection of information from which to calculate the group tax provision presents a formidable challenge. Historically, over-reliance on spreadsheet-bound processes and doubts over the quality of local accounting resources in remote locations have added to the burden of collecting relevant data and navigating the complexity of multiple GAAP regimes and tax jurisdictions.
But tax functions are not alone in facing such challenges—the corporate finance function operates in similar territory. For example, corporate finance is required to collect monthly, quarterly and year-to-date actuals from across the organization; it too has to contend with the complexities of a multi-GAAP regime and it also has to overcome the vagaries of scarce accounting resources of uneven quality operating within a variety of business cultures, languages, and time zones.
However the similarities stop there. Corporate finance functions have long since eschewed spreadsheet-based processes in favor of sophisticated financial consolidation systems and processes which enable them to effortlessly and speedily collect, validate and consolidate actual figures on a regular basis. So it is not surprising that tax functions are turning to this successful and proven model for inspiration.
Added to which there are benefits to be gained through exploiting the interdependencies between the process of preparing the statutory accounts on the one hand and the calculation of the group tax provision on the other. For example, they leverage the same legal entity structures and there is constant interplay between the accounting information captured from reporting entities and the tax provision derived from it. Changes in one give rise to commensurate changes in the other.
So integration of the tax provisioning process with the financial reporting process makes complete sense. It helps ensure that the financial data reconcile at all times, eliminates duplication, and allows the tax function to work with the latest financial data, supporting greater transparency between book and tax data—especially for tax journal entries, disclosures, and key metrics such as effective tax rate. As a result, tax professionals can spend less time chasing and manipulating data and more time on analysis, reporting, and compliance.
In fact, given the similarities between the tax and financial reporting processes it is perhaps surprising that it has taken so long for organizations to spot the opportunity to streamline and integrate them.
Fortunately new solutions are coming on stream at just the right time. For example, Oracle’s new application, Oracle Hyperion Tax Provision, is built with exactly the same technology as the popular Oracle Hyperion Financial Close Suite. It is also integrated fully with Oracle Hyperion Financial Management, used by thousands of organizations for statutory and financial reporting.
The ‘icing on the cake’ is that investing in the combined process is likely to yield greater benefits than the sum of the parts. A timely, integrated, and holistic statutory reporting process should liberate scarce resources in both departments, enabling individuals to carry out more in-depth value-added analysis to support the enterprise, as well as reducing tax and reputational risk.