Robert Kugel's Analyst Perspectives

The tax provision process is an essential part of the close process and a core responsibility of tax departments. This process estimates the amount of income tax an enterprise will have to pay tax authorities in the jurisdictions in which it operates. Tax accountants derive the number by adjusting the reported net income with a variety of permanent differences, such as expenses that are not deductible and temporary differences–for example, using allowable accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.

Tax provision is an essential part of the close process. Digitizing the process can enable an enterprise to shorten its accounting close. Although by consensus, the established benchmark for completing the process is one week, our Smart Close Dynamic Insights research recently found that only 44% of enterprises can complete the quarterly process in six days or less.

Tax provision is one area where the need for digitization has grown over the past decade as countries impose new regulations designed to increase revenues. For example, base erosion and profit shifting is a set of standards and support established by the Organization for Economic Cooperation and Development designed to enable countries to establish a minimum level of corporate taxation to reduce incentives to shift corporate income to low-tax jurisdictions from higher ones. An increasing number of countries have adopted this framework, which under “Pillar Two” now applies to enterprises with €750 million or more in global revenues. Another example is statutory accounting for uncertain tax provisions, which are more rigorous and require greater tax transparency for tax authorities, especially on the part of multinational enterprises. This increases the need for greater visibility and oversight of tax to minimize tax expense and exposure while mitigating tax risks. This is especially true for publicly held companies.

Historically, spreadsheets were the tool of choice for tax provision because, until recently, technology limitations meant that tax accountants did not have an alternative. Despite the growing availability of options, spreadsheets are still popular: Our Office of Finance Benchmark Research found that 59% of tax departments use spreadsheets exclusively for tax provision, while just 22% utilize a third-party tax application. ISG-Ventana Research asserts that by 2027, one-half of enterprises with even moderately complex legal structures will use dedicated tax provision to streamline the close and reduce risk.

Spreadsheets are a major barrier to making the tax function more productive and effective. One well-known issue with spreadsheets is that they are error-prone, which is not a risk that tax professionals should have to bear. To be certain that tax provision and other tax-related calculations are correct, individuals must double- and even triple-check the numbers. This overlaps with a second major issue with spreadsheets: They are time-consuming, so much so that they prevent individuals from doing more valuable work–in this case, tax analysis and planning.

Beyond delaying the accounting close, another spreadsheet-related issue is that they diminish visibility into an enterprise’s tax provision and tax positions. Using spreadsheets takes so long that executives get to the numbers late in the financial close process. This matters because of the impact that tax expense has on profits. In addition, spreadsheets are black boxes: They are difficult to control, and it’s difficult for anyone other than the spreadsheet’s owner to understand their construction. Often, assumptions are buried in formulas and hard to uncover. It’s not well-understood whether formulas are inconsistent or wrong, and it’s not easy to spot them. Even with advanced spreadsheet management techniques designed to make updates consistent (such as applying the LAMBDA function in Excel), it’s hard to be certain that some cell wasn’t overwritten with another number.

Using a dedicated tax application enables tax and accounting departments to operate more effectively. It allows the entire department to manage a consistent set of tax-sensitive data in a controlled process that promotes accuracy and auditability. Software promotes data integrity and efficiency by managing provision as an end-to-end process that takes numbers directly from authoritative source systems to construct tax financial statements, calculates taxes owed and keeps track of cumulative amounts and other balance sheet items related to taxes. Having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides executives with greater certainty and reduces the risk of noncompliance as well as attendant costs and reputation issues. Maintaining an accurate and consistent tax data store enables enterprises and tax departments to better execute tax planning, provisioning and compliance.

I recommend that midsize and larger enterprises–especially those that operate in multiple tax jurisdictions and have an even moderately complex legal entity structure–use dedicated software to automate income tax provision and analysis functions. Enterprises that take more than a business week to close the books should assess whether streamlining tax provisions would have a positive impact. Beyond that, using dedicated software rather than relying on spreadsheets helps the tax department and those working in it increase strategic value so they won’t be obsolete tomorrow.

Regards,

Robert Kugel