Robert Kugel's Analyst Perspectives

Bringing Tax Into Mainstream Finance

Posted by Robert Kugel on Feb 28, 2011 7:03:59 AM

Taxes are a big expense for most companies, profitable or not. Many larger and midsize companies must traverse a complex and constantly shifting landscape of tax rules, rates, and jurisdictions. I’ve previously written about the need for corporations to manage their taxes more intelligently, and that that may require someone in the tax department who understands both the department’s functional requirements and what information technology can do to improve those functions. Today I am going to discuss some organizational changes that are required to transform the tax department from a poorly understood, isolated and tactically driven silo into a mainstream finance function that is tightly integrated with the rest of that organization.

This transformation will depend in part on CFOs and controllers embracing three ideas: that they should have greater visibility into their future tax exposure, that they should be able to better optimize their tax exposure, and that they should actively and consistently manage their tax risk. In other words, they should apply the same basic performance management approaches used in other areas of the finance department, as well as throughout the organization, ­to tax processes.

 Performance management is an iterative process of cycles (or sets of cycles) in which companies plan, measure and assess results, then adapt tactics, strategies and objectives that reflect the new circumstances and will optimize future results. The performance management process requires relevant metrics, effective collaborative processes, accurate and timely data and the right analytics and reporting tools. The last of these enable all the rest and for finance is what I have been educating on for a decade in what is called financial performance management. Finance must manage their own performance but also have the ability to help guide an organization.

 Corporate tax departments have the same basic performance management software needs as general business users. They are:

  • Planning – the ability to set baselines, determine optimal courses of action and understand the consequences these will have on a company’s income statement and cash flows. From a tax standpoint, this means streamlining and improving the accuracy of the processes used for planning and provisioning their direct (income) tax expense.
  • Reporting – the ability to provide information (rather than just data) that also enlightens and alerts. For public companies, this means incorporating and managing important tax-related disclosures in their external financial statements; for U.S.-based companies, for example, these include what are called uncertain tax positions, or UTBs.
  • Risk management – the ability to understand and manage the risk exposure of a company consistently and in a manner that is consistent with its risk appetite. Given the vagueness and complexity of tax rules (for example, when is a cake a cookie), corporations routinely make assumptions – some of them aggressive – that put them at risk of ultimately paying more than they have provided for in their tax returns.
  • Analytics – the ability to provide measurements and insights. For taxes, this means automating tax analytics and providing an alternative to desktop spreadsheets.
  • Dashboards – the ability to easily construct concise visual communications, such as charts and other graphics, that enable understanding of the information and that highlight actionable conditions.
  • Scorecards – the ability to communicate quickly the performance of individuals or groups using a set of predetermined key performance indicators (KPIs).

Some specialized tax software already provides performance management capabilities that can be critical in helping an organization transform its tax department. A company can find other capabilities in its existing software; for example, business intelligence (BI) tools always include generic reporting, dashboard and scorecard functions. Bringing tax into the mainstream, however, also means that finance departments will have to tightly integrate standard processes, such as budgeting, forecasting, treasury management, financial close and so on, with the output of their tax-related processes such as planning and provisioning.

 The speed with which tax goes mainstream will be influenced by tax policies and tax enforcement. When governments bite them hard enough and often enough with tax surprises, CFOs will begin to see the need to bring tax departments into the finance department mainstream. When enough CFOs are bitten, it will become a full-blown trend.

 Until that time, I see three important trends in taxes that will promote the mainstreaming of tax departments. First, many governments in the developed world are experiencing financial stress and are therefore looking for ways to increase revenues. For example, state and local governments in the U.S. are looking for ways to expand their tax rolls by finding new ways to attach “nexus” (a legal presence) to companies that are not physically located in their tax jurisdiction in order to collect direct (income) or indirect (sales and use/VAT) taxes. This will put additional pressure on companies to automate tax planning and provisioning.

 Second, mistakes can be costly and are likely to become even costlier. In some cases, companies could wind up paying taxes on the same item multiple times or paying fines for noncompliance when their tax departments should be spending time focused on audit defense and on optimizing their tax positions. Also, because of greater uncertainty over which tax laws ultimately will apply to whom and to what, companies will need to manage a broader set of uncertain tax positions.

 Third, a great deal of political pressure is currently being exerted to simplify tax codes; many of these proposals seek to lower rates and to expand the base by eliminating exemptions and preferences. Simplification, should it happen, is likely to lessen the pressure for more tax automation and management. However, since simplification is not necessarily in the interest of either those in charge of tax laws and regulations or those who currently benefit under the tax status quo, we should all be skeptical this will happen any time soon.

 I believe that what I have discussed here will come to pass. But even if only some of it does, companies still need to take a more intelligent approach to managing the processes they use to make tax decisions and to calculating and reporting their taxes. Doing so makes not just good business sense but also dollars and cents.

Over the past two decades, finance departments have increased their efficiency by embracing automation in general and technology-driven performance management in particular. They should extend this embrace to their tax departments and bring them into the mainstream of financial management.


Robert Kugel – SVP Research

Topics: Tax, Governance, Risk & Compliance (GRC), Business Performance Management (BPM), CFO, Financial Performance Management (FPM), Corporate Finance, Financial Performance Management

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.