Provision Strategies from World-Class Tax Departments Transitioning from the tactical execution to driving strategic value. 1 Income tax accounting is tough; demand for greater detail and material accuracy—while using disparate data sources and working within condensed timeframes—makes getting the work done and out the door the priority. World-class tax departments realize that the tactical approach—just getting the work done— is not enough. They use the provision process to garner insights that can reduce risk and provide the organization with information to understand what is driving effective tax rate and cash taxes. Learn from leaders in this field by implementing three strategies that make your provision process strategic, add value to the organization and take your team to the next level: Strategy #1: Think from the Top Down Strategy #2: Minimize Risk by Reducing Reconciliations Strategy #3: Improve Process Transparency Provision Strategies from World-Class Tax Departments 2 Provision Strategy #1 – Think from the Top Down “Getting finance and tax on the same page from a forecast perspective is paramount—the forecast needs the most recent actuals to be precise, and the actuals need to feed into the forecast immediately.” - Brandi Langhans, Tax Technical Director, Nationwide Insurance Based upon their knowledge of expected events and planned transactions, finance and tax executives have a consolidated “top-down” understanding of the company’s effective tax rate (ETR) for the year. This estimate is often calculated in a spreadsheet or literally on the back of a napkin. Despite being high level, it is a critical means of communicating to senior management the expected impact of income taxes on the financials. As the year progresses, the “bottom-up” or detailed provision is calculated based upon actual results. Next, someone compares the two very different calculations. Early visibility into the actual ETR compared to the estimated ETR enables the CFO to explain fluctuations in net income because of a rising or falling ETR. Going forward, this visibility allows important business decisions to be based off of a more accurate effective rate. This is critical because having a more accurate calculation during the year improves budgeting and planning—and as such should be included as part of the overall provision calculation and not as an offline process. The world-class strategy here is to combine both processes seamlessly within a single model, mapping the transaction-based actual detail to the event-driven, high-level forecast, and ensure that those actuals reflect the largest potential rate drivers—transfer pricing adjustments, mergers and acquisitions, and any major permanent differences, to name a few. With these significant items working in tandem (as actuals and forecast), the current forecast as well as the next year’s forecast will be even more accurate as transparency increases. Figure 1 - The provision can be the starting point vs. the back of a napkin for determining the ETR. Provision Strategies from World-Class Tax Departments 3 Provision Strategy #2 – Minimize Risk by Reducing Reconciliations “Too many systems and too much time being spent on basic ‘does this match that?’ activities interferes with critical analysis.” - Pam Griffing, Assistant Vice President- Taxation, MAPFRE Insurance Tax professionals often feel like they are working for their data—chasing-down information to make sure it is included and accurately incorporated into the tax provision. Manually moving and reconciling data is not a valued-added exercise; it is a tactical and time-consuming step to ensure that the information is accurate. Without strategic thinking, the tax professional is doing work that does not add value to the business by asking basic questions like: • • • • Does this spreadsheet equal that spreadsheet? Does this column equal that column? Does net income tie-out from book to tax? Provision was just updated; was the final version of the provision sent to the tax return software? Does the data match from one process to the next? Reducing the multitude of tasks and steps necessary to manually validate data helps Tax shift their focus and think more strategically, providing value-added analysis to the business such as: • • • • What are the trends? Higher than expected, less, or about the same? What is driving the shift in tax expense? Is there something that tax can help with? What future period impacts will uncertain tax positions have? Are we well positioned to accommodate last-minute changes such as re-classes and topside adjustments? • Do we know what drives changes to the tax accounts? • What tax planning strategies should we consider regarding international operations and foreign investments? To transition from a tactical, “get it done” approach to more strategic process, Tax should: • Reduce the need to move data between multiple systems. • Reduce manual reconciliation of data. • Leverage system tools to perform automated validation. Provision Strategies from World-Class Tax Departments 4 Provision Strategy #2 – Minimize Risk by Reducing Reconciliations, cont’d This requires an understanding and a synthesizing of all the different data sets. One of the key factors that necessitate reconciliations is that different tools are used to accomplish different tasks. Many tax departments’ toolset looks something like this: Tax Attributes Trial Balances Tax Adjustments Tax Attributes Trial Balances Tax Adjustments Points of Reconciliation Provision to Return Provision Process Tax Accounts Compliance Process Apportionment VS. Data Sources Single Solution Provision Outcomes Compliance Outcomes Valuable time is often lost while tax teams manually investigate discrepancies while also reconciling data from multiple systems, and then inputting that same data into different spreadsheets. Since the data is not shared from one system to the other, once the provision is completed and the compliance work is underway, there are further reconciliation issues in the true-up. Working with disparate data sets requires continual reconciliation and leaves a large margin for error and the associated risks of those errors. So what do world-class tax teams do differently? They are armed with solutions that harness and standardize data from various sources, pre-empting the need for reconciliation of the minutia. To the extent that the source data is different, they also leverage system tools to validate those sources. Once out of the reconciliation cycle, Tax may spend time analyzing data, uncovering anomalies, or developing tax strategies that support the organization’s business goals. Provision Strategies from World-Class Tax Departments 5 Provision Strategy #3 – Improve Process Transparency “Today, the tax function is wearing more hats than ever, and knowing who’s wearing what hat and at what point in the tax provision process is critical.” - Jennifer Brigman, Tax Reporting & Performance Improvement, PricewaterhouseCoopers A huge effort goes into the tax provision process at leading companies to produce a valuable financial result in an incredibly short amount of time. One strategy implemented by these companies is to improve visibility and build transparency into the process. Shining a light on the tax provision can reveal untapped opportunities where changes in process, people, technology, and data can lead to reduced tax provision risk and increased efficiency. One tangible tool that can help tie everything together is a dashboard. A single dashboard can bring data, documents, and workflow together in an organized manner so that multiple people can collaborate and share information. As the tax team moves through the provision workflow, strategic insights can be identified in real-time: 1. What processes can be performed independently of others? 2. What processes are dependent on others? 3. How long does the provision take, from end-to-end? 4. What activities can be eliminated in a time crunch? 5. When can we free up resources from the workflow so they can work on other tasks? Additionally, team members can easily track the status of an assignment and identify bottlenecks and inefficiencies in the tax provision workflow. Improved process visibility can indicate whether deliverables are on schedule and how resources should be redeployed to meet critical deadlines. These visibility programs can also be customized to benchmark against key performance indicators, such as effective tax rates or cash taxes, adding value to the organization. Summary Transitioning your approach to the provision process from a tactical—just get it done—to a strategic— what insights can we garner for reducing our risks and increasing our profitability—adds valuable perspective and the opportunity for significant business gains. To add strategic value to the tax team, consider transforming the department by: instituting a top-down approach, minimizing risk by reducing reconciliations and improving process transparency. Combined, these strategies empower the tax team to be proactive and drive value that positively influences the bottom line. Provision Strategies from World-Class Tax Departments About Corptax Corptax transforms the business of tax through technology and business process expertise. Offering the only single platform solution on the market, Corptax enhances performance across the entire corporate tax lifecycle. Clients get a single version of the truth, built on accuracy, transparency and speed. Corptax tenaciously pursues increased automation, better risk management and exceptional client service. We’re here to help you experience a breakthrough in your tax performance. Learn more at www.corptax.com. Corptax, Inc. 1751 Lake Cook Road, Suite 100, Deerfield, IL 60015 Phone: 800.966.1639 http://www.linkedin.com/company/corptax-inc. © Corptax 2014 Corptax and the Corptax logo are trademarks of Corptax, Inc. All other trademarks are the property of their respective owners. https://www.facebook.com/pages/Corptax-Software https://twitter.com/corptaxsoftware NOTICE OF CONFIDENTIALITY This document is the exclusive property of Corptax, Inc.; It may not be copied, transmitted or disclosed by any means without the express written consent of Corptax. 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