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Technology for the Office of Finance can have transformative power. Although progress has been slow at times, today’s finance organizations are fundamentally different from those of 50 years ago. For one thing, they require far fewer resources (chiefly people) to perform basic accounting, treasury and corporate finance tasks. In addition, public corporations report results sooner – sometimes weeks sooner – than they could in the mid-20th century. And finance departments are able to harness substantially more data and a wider array of analytics to promote insight and support more agile decision-making.

Even in this context, in many corporations the tax function remains a backwater in its use of technology. Most of their tax professionals are awash in desktop spreadsheets, tools that they initially thought would promote efficiency and accuracy. But the inherent problems with desktop spreadsheets make tax processes not only needlessly time-consuming (even using macros and other spreadsheet automation techniques) but also prone to errors and inconsistencies. This is especially true if people must enter the same information multiple times, which increases the chances of mistakes. In addition, assumptions made and rationales behind formulas used in data transformations may not be documented or readily accessible to others in the organization. This legacy can be problematic years later in an audit, especially if the individual who prepared the spreadsheet is no longer employed at the company. And with spreadsheet-driven processes, auditing taxes and the underlying data and calculations is difficult and time-consuming. On top of all this, the effects of the desktop spreadsheet’s inherent shortcomings multiply with the size of a corporation. By their nature, these spreadsheets hinder a corporation’s ability to understand tax issues and optimize  related decisions.

Organizations do not have to put up with these outdated, counterproductive practices. New tools can help streamline tax processes. One is Vertex Enterprise (which I reviewed earlier this year). VR_tech_award_winner_2013Vertex recently was awarded Ventana Research’s 2013 Innovation Award for the Office of Finance for this suite of application and integrated use of tax data and analytics. Vertex offers a single-platform approach to managing all types of taxes (direct and indirect) across the entire tax life cycle, from analysis through provisioning to audit defense, using a single data source. Direct (income) tax management is still a largely manual process involving a plethora of desktop spreadsheets. Calculating and accounting for direct taxes is complicated, largely because income tax laws can be quite convoluted, especially in certain industries. As well, the larger the number of tax jurisdictions it operates in and the more numerous its subsidiary legal entities, the more complex tax management becomes.

Vertex Enterprise includes tax provisioning software for both indirect and direct taxes. Indirect Tax is managed by the company’s O Series software, a single platform that handles sales-and-use-, VAT- and goods and services taxes on a global scale. Direct taxes is handled by Vertex Tax Accounting, global tax provisioning and reporting software that works with multiple general ledger systems in  multiple currencies and across multiple years within the context of multiple accounting regimes such as US- and other national generally accepted accounting standards (GAAP) and International Financial Reporting Standards (IFRS). The web-based software supports a distributed, collaborative, enterprise-wide tax decision cycle process that can achieve more optimal tax-related decision making. Direct taxes exist in a parallel universe, and one advantage in having a single system is that it facilitates the process of reconciling the business accounting performed in ERP systems with the tax accounting governed by law. Vertex automates tax account reconciliation and reporting and manages adjustments that span multiple time periods.

One notable advance for corporate tax departments offered by Vertex Enterprise is its tax data warehouse (TDW). Because a TDW can automate much of the painstaking work that occupies much of the tax practitioner’s time, it can free these trained individuals to focus on making the best tax decisions possible. Also, because a TDW can increase visibility into tax analyses and calculations, corporations can be more confident in their tax-related decisions. And with this greater visibility and confidence, tax departments can become a mainstream participant in the finance function. This is especially important in an era of increasing cooperation between tax authorities worldwide. More than ever, corporations that operate globally must be able to optimize their tax positions over time and across multiple jurisdictions. A TDW enhances that capability.

Conceptually, a TDW is simple: It’s a data store that makes all tax data readily available and can be used to plan and provision a company’s taxes. However, in larger companies (those with more than 1,000 employees) that operate in multiple tax jurisdictions and have even moderately complex legal entity structures, tax-related data structures and calculations become fiendishly complex, as I noted in an earlier perspective. For that reason, the first attempts to create TDWs proved unworkable because the sheer complexity of the direct (that is, income) tax domain overwhelmed the available information technology. These limitations forced companies to take shortcuts, which meant that each TDW had to be a largely custom effort and therefore expensive to build. And because these shortcuts rendered the systems brittle and difficult to change, they were expensive to maintain. Today, however, technology is available to make TDWs practical.

A TDW has several purposes: to ensure accuracy and consistency in tax analysis and calculations, improve visibility into tax provisioning, vr_Fast_Close_2012_ERP_01_multiple_erp_systems_are_commonand cut the time and effort required to execute tax processes. The technology is especially useful because data management is one of the biggest operational challenges facing tax departments today. 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 90 percent of companies with 1,000 or more employees use financial systems from multiple vendors, and 43 percent use four or more. 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 ensure that data is 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 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. A TDW addresses this problem.

Ventana Research is dedicated to helping organizations enhance the effectiveness and strategic value of the Office of Finance. Tax departments, CFOs and controllers in larger, more complex corporations should examine how the tax organization spends its time and determine to what degree more enterprise automation and fewer desktop spreadsheets would enable the company to understand and manage its tax needs more intelligently. Vertex Enterprise can be a useful foundation for transforming the tax function, which is why it received our Technology Innovation Award for Office of Finance for 2013.


Robert Kugel – SVP Research

Taxes – both indirect (sales or value added taxes, for example) and direct (income taxes) – are one the largest expense items on the corporate income statement. In recent years it has become common for large and even midsize companies to automate their indirect tax management process, but direct tax management has remained a bastion of manual processes built on a heap of desktop spreadsheets. In previous blog posts I discussed this issue and the role of the tax data warehouse as a necessary foundation for automating the direct tax process. Addressing an important need, Vertex is currently providing a limited release of its Enterprise offering, a single-platform approach to managing all types of taxes (direct and indirect) across the entire tax life cycle (from analysis through provisioning to audit defense) using a single data source.

For large multinational companies and many companies with even moderately complex legal structures, managing direct taxes is fiendishly complicated. Why? To begin with, national tax codes can be convoluted (India and Brazil lead the league tables but the United States is not too far behind). Not only do specifics (such as depreciation schedules or inventory expensing rules) vary from one country to the next, but even basic tax concepts can differ. Then there is the parallel universe element, because “tax expense” is not the same as “taxes paid.” Tax and Finance departments must be able to track and reconcile these differences and allocate tax expense accurately to individual business units. Accounting rules specify when tax expense must be recognized, but this can lag when those taxes are actually paid. Timing differences are the reason why very profitable companies pay nothing to tax authorities in some years and write big checks when they are losing money. A company’s tax position can be fluid, so it’s important to be able to work across multiple tax periods. Adjustments to individual entity tax expenses and positions occur frequently, so accurate adjustments and true-ups across tax periods must be easy to calculate, record and retrieve. Behind this are a myriad of specific journal entries to effect changes and the need to assemble a consistent set of account reconciliations to manage the details. This is why we have computers. Yet, until recently, scale and complexity have made it difficult for anyone to offer a workable packaged solution, so most companies have used desktop spreadsheets to assemble and analyze data, calculate taxes, generate reports and store the data, analyses, calculations and reports.

Some very large corporations have attempted to automate their direct tax management processes to save time and money. They and their consultants have found that the devil is in the details. Custom solutions have worked for some but not all organizations. Businesses have a need for an off-the-shelf solution for managing direct taxes, but until recently they have been hampered by the utter complexity of the issue compounded by the need for any system to scale to handle a large number of individual records.

The foundation of Vertex Enterprise is its tax data warehouse. Having a dedicated tax data source is important. Many companies do not set up their financial systems to be tax-aware, for instance by recording the specific corporate legal entity related to a transaction. It therefore takes significant time to extract and transform data from multiple sources to be able to file a tax return. Desktop spreadsheets limit visibility into how calculations are performed and the assumptions behind them. Spreadsheets substantially increase the chance of data or calculation errors occurring.

Even if a company’s ERP system is provisioned with an eye to tax preparation, a tax data warehouse can be valuable at the other end of the life cycle – facilitating audit defense – because the data is readily available in an “as-was” state. Tax authorities are interested only in the conditions that existed during a specific period they are examining, but corporate financial systems and general-purpose data warehouses may not maintain the data in this state for as long as necessary. Corporate structures change: Business units may be reorganized or sold, or legal entity characteristics may be altered. A finance department’s enterprise data store may not preserve all the underlying details of the balance sheet and income statement construction in a prior tax year, including the trial balances, adjustments and other pertinent information that may be used in tax calculations. The calculation details relating to how each income tax filing was provisioned may be scattered in multiple spreadsheets; keep your fingers crossed that the individuals who did the work are still with the company if and when an audit takes place. And, it may turn out that paper records may be the easiest way to retrieve the details of what was in the return being audited.

The tax data warehouse is fundamental to automating tax processes. Having an open data platform is key because large multinational companies typically have multiple heterogeneous financial systems. With Vertex Enterprise, it and the software applications built on it are designed to be fully integrated with ERP systems. (At this time Enterprise enables real-time data synchronization with SAP, Oracle and Hyperion using prebuilt integrations supported by Vertex.) Companies can use their own business intelligence (BI) systems to view information or use a Vertex-provided BI tool designed specifically for the tax function. Vertex Enterprise has workflow management so that tasks can be automatically handed off for additional work or for review. Administrators can keep on top of process bottlenecks and automate reminders as completion times come due. In the past, custom-built systems were forced to sacrifice adaptability and flexibility to be able to meet scalability requirements. Technology advances have made it possible to make the system better able to adapt to changes in tax codes, corporate structures and accounting and financial systems.

Automation enables tax departments to operate more efficiently throughout the entire tax lifecycle, but the benefits extend well beyond that. One of the most important benefits is the improvement to governance, control and risk management that corporations can achieve through greater transparency. Spreadsheets are problematic when they are used to support tax processes because they lack transparency (often it is impossible to trace a number in a cell back to its original source) and, as our spreadsheet research confirmed, errors in data and formulas are common, even in the most important spreadsheets. Too often, such issues are ignored until a spectacular failure is made public. By establishing a tax database of record, companies can ensure the accuracy and consistency of the data as much as possible because the system can ensure data integrity using built-in validation and data management capabilities. It therefore can reduce the risk of losses caused by errors and the risk of failure to prevail in a tax audit defense because of errors, data losses or an inability to reconstruct the rationale behind a tax position.

Since taxes are a major expense, companies often measure performance on an after-tax basis. Having a single system of tax records makes it far easier for corporations to calculate after-tax results in a consistent fashion to assess results by individual business units down to the entity level, or by division, geography or jurisdiction. As well, greater transparency enables senior executives and the board of directors (especially the audit committee) to have a more informed dialog with tax departments about managing tax risks. All large multinational companies have considerable scope to be aggressive or conservative. There can be considerable scope to optimize the tradeoffs between minimizing taxes paid and the risks of not withstanding an audit. Yet few companies have the ability to see an informed view showing how they can optimize their tax risk exposure.

Today, tax departments rely heavily on spreadsheets to manage all aspects of the direct tax lifecycle. They have been forced to tolerate the inefficiencies and risks of this technology because alternatives have been too expensive, too unwieldy and not adaptable enough. Vertex Enterprise is designed to enable large corporations with complex tax structures to increase tax data transparency and facilitate tax provisioning with the ultimate goal of improving tax expense and tax risk management. I recommend that heads of tax departments, CEOs, CFOs and controllers as well as members of audit committees investigate Vertex Enterprise.


Robert Kugel – SVP Research

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