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The steady march of technology’s ability to handle ever more complicated tasks has been a constant since the beginning of the information age in the 1950s. Initially, computers in business were used to automate simple clerical functions, but as systems have become more capable, information technology has been able to substitute for increasingly higher levels of human skill and experience. A turning point of sorts was reached in the 1990s when ERP, business intelligence and business process automation software reduced the need for middle managers. Increasingly, organizations used software to coordinate activities as well as communicate results and requirements up and down the organizational chart. Both were once the exclusive role of the middle manager. Consequently, almost every for-profit organization eliminated management layers so that today corporate structures are flatter than they once were. Technology automation also eliminated the need for administrative staff to perform routine reporting and analysis. Meanwhile, over the course of the 1990s, the cost of running the finance department measured as a percentage of sales was cut almost in half as a result of eliminating staff and because automation enabled companies to scale without adding headcount. During the last recession, companies in North America and Europe once again made deep reductions to their administrative staffs, relying on information technology to pick up the slack.

Given this history, the best career choice that an individual can make today is to stay ahead of the trend. Information technologies, especially cognitive computing, will continue to eliminate relatively high-paying white-collar jobs in corporate life, especially in the finance and accounting function. Executives and others working in tax departments in particular should recognize that a major shift is under way in their field. Automation will transform their work over the next five years, driving a fundamental change in what they do. To succeed (or even survive), they will have to embrace automation.

Spreadsheets are a major impediment to making the tax function more strategic for a company and more remunerative for those working in the department, as I have noted. Our Office of Finance benchmark researchvr_Office_of_Finance_15_tax_depts_and_spreadsheets finds that half (52%) of tax departments use spreadsheets only for tax provisioning and another 38 percent mainly use spreadsheets; just one in 10 utilize a third-party tax application. One well-known issue with spreadsheets is that they are error-prone – not a risk that tax professionals can be comfortable with. To be certain that the 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. Our spreadsheet research finds that those working heavily with spreadsheets on average spend 18 hours a month (equivalent to more than two full workdays) just maintaining their most important spreadsheet. Spreadsheets as so time-consuming that they prevent individuals from doing more valuable work, in this case tax analysis and planning.

Another related issue is that using spreadsheets for the tax function diminishes visibility into a company’s tax provision in at least two respects. First, using them 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 a company’s profits. Second, spreadsheets are black boxes: That is, 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 therefore hard to uncover. If these formulas are inconsistent or wrong, it’s not easy to spot them. (This was an important factor behind J.P. Morgan’s multibillion dollar trading loss, which I discussed.) When a spreadsheet is constructed with a given formula repeated in multiple cells, each of these must be updated when circumstances change, and it’s difficult to be certain that all of the changes have been made. Even with advanced techniques designed to make updates consistent, it’s hard to be sure that some cell wasn’t overwritten with another number.

Some people who work intensively with spreadsheets still view them as a form of job security because of their opacity. They think they’re indispensable because they are the only one who understands how their spreadsheet works. This is one of several reasons why their use persists in functions where they constitute more of a problem than a solution. However, these spreadsheet jockeys should recognize that their tools’ inherent inefficiency, lack of visibility and proneness to error make them vulnerable to being replaced by better technology. The real value of tax professionals is not their ability to overcome spreadsheet limitations. It’s in their training in understanding income taxes. Once freed from the drudgery of performing computations, massaging data and checking (two or three times) for errors, tax professionals can turn their attention to performing analytical work aimed at optimizing a company’s tax spend – and thus ensuring their value as employees.

Midsize and larger organizations, especially those that operate in multiple direct (income) tax jurisdictions and that have an even moderately complex legal entity structure, must use dedicated software to automate their income tax provision and analysis functions. They must manage their tax-sensitized data using what I call a tax data warehouse of record. Tax departments must be able to tightly control the end-to-end process of taking numbers from source systems, constructing tax financial statements, calculating taxes owed and keeping track of cumulative amounts and other balance sheet items related to taxes. Transparency is the natural result of a having controlled process that uses a unified set of all relevant tax data. An authoritative data set makes tax department operations more efficient. As noted, reducing the time and effort to execute the tax department’s core functions frees up the time of tax professionals for more useful analysis. Having tax data and tax calculations that are immediately traceable, reproducible and permanently accessible provides company executives with greater certainty and reduces the risk of noncompliance and the attendant costs and reputation issues. Having an accurate and consistent tax data warehouse of record enables corporations and their tax departments to better execute tax planning, provisioning and compliance. Using dedicated software today rather than relying on spreadsheets helps the tax department, and those working in it, increase their strategic value today so they won’t be obsolete tomorrow.

Regards,

Robert Kugel – SVP Research

Longview’s recent Dialog user group meeting highlighted the company’s continued commitment to providing much needed automation tools for improving tax department performance – tools that enable the tax function to play a more strategic role in the management of a company. The sessions also covered the capabilities contained in the company’s latest release, Longview 7.2 Update 2 and gave customers a detailed product evolution roadmap following their merger with arcplan.

Using a dedicated tax application with a dedicated tax data store to handle direct (income) taxes has three main benefits. First, it enables a company to manage its tax exposure more intelligently, potentially reducing its tax expense. This is important because usually taxes are the second largest expense in a company. Second, the tax-related regulatory environment is becoming more challenging. Taxes paid to individual countries by multinational corporations have come under greater scrutiny by local tax authorities that are suspicious that these companies are manipulating individual countries’ tax laws to eliminate or substantially reduce local tax obligations. In this environment, it will become increasingly important for companies to have global visibility into their country-by-country tax exposure and options. Longview’s tax software can help companies determine how best to allocate income by jurisdiction. Third, by centralizing all global tax-related data in a single data store as well as automating calculations and the management of all tax-related data, Longview’s tax software can enables greater efficiency in the tax provision process. By saving time and ensuring all global tax-related data is consistent, it makes it possible for companies to manage their tax exposures more intelligently and makes it practical for companies to optimize tax payments by jurisdiction.

Corporations made up of more than a handful of legal entities and that operate in multiple direct tax jurisdictions can achieve significant time savings by adopting dedicated tax software rather than using desktop spreadsheets to manage the tax provision process. That’s because companies with these characteristics face challenges that quickly overwhelm spreadsheets. Direct taxes are extremely complicated because national tax codes are complex and ever-changing. 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 a “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 (paid or deferred) 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. The complexity of these processes is a large part of why we have computers.

Yet until recently spreadsheets were the most practical approach because the scale and complexity of the data management required made it difficult for anyone to offer a workable packaged solution. So companies have grown accustomed to using desktop spreadsheets to assemble and analyze data, calculate taxes, generate reports and store the data, analyses, calculations and reports. Our research shows that tax departments rely heavily on desktop spreadsheets for analysis and calculations to support their tax provision and compliance processes. More than half use spreadsheets exclusively and just 10 percent use a dedicated third-party application.

vr_Office_of_Finance_15_tax_depts_and_spreadsheetsOne reason why dedicated tax software makes sense is that, despite talk of reducing the complexity of tax regimes, they are still complex. As corporations grow and expand internationally, their legal entity structure becomes more multifaceted and their source systems for collecting and managing tax data can become fragmented. Unless the tax function is completely centralized, companies that operate in more than a handful of tax jurisdictions can find it hard to coordinate their tax data, calculations and processes. Centralization is not a cure-all, either, as the lack of local presence poses its own tax management issues in coordinating with local operations and finance organizations.

Another reason is that national taxing authorities may be making the tax department’s job more difficult. In 2013, the Organization for Economic Cooperation and Development (OECD) published a report titled “Action Plan on Base Erosion and Profit Shifting,” which describes the challenges national governments face in enforcing taxation in an increasingly global environment with a growing share of digital commerce. The OECD also is providing a forum for member governments to take action (including collective action) to strengthen their tax collection capabilities. Optimizing tax expense across jurisdictions will grow in importance if the OECD’s initiative for global tax reporting gains traction. Companies operating in multiple countries will find it increasingly necessary to understand how best to allocate income between countries to minimize the taxes within the constraints imposed by increased external transparency. Corporations that operate globally will need to be able to gauge how best to manage their tax exposure in an environment where decisions about transfer pricing and corporate organization will require greater care and forethought than today.

Desktop spreadsheets are not well suited to any repetitive collaborative enterprise task or as a corporate data store. They are a poor choice for managing taxes because they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have a limited ability to handle more than a few dimensions at a time. Data from corporate sources, such as ERP systems, may have to be adjusted and transformed to put this information into its proper tax context – for example, performing allocations or transforming the data so that it reflects the tax-relevant legal entity structure rather than corporate management structure. Doing this manually in desktop spreadsheets is time-consuming and prone to errors. Moreover, in desktop spreadsheets it is difficult to parse even moderately complex nested formulas or spot errors and inconsistencies. Pivot tables have only a limited ability to manage key dimensions (such as time, location, business unit and legal entity) in performing analyses and reporting. As a data store, spreadsheets may be inaccessible to others in the organization if they are kept on an individual’s hard drive. Spreadsheets are rarely documented well, so it is difficult for anyone other than the creator to understand their structure and formulas or their underlying assumptions. The provenance of the data in the spreadsheets may be unclear, making it difficult to understand the source of discrepancies between individual spreadsheets as well as making audits difficult.  Companies are able to deal with spreadsheets’ inherent shortcomings only by spending more time than they should assembling data, making calculations, checking for errors,  creating reports and auditing the results.

Applications for managing taxes such as Longview Tax are making provisioning and reporting faster, more efficient and more reliable. One of the most important elements of such a system is the tax data warehouse that is at the core of Longview Tax. Statutory and tax accounting are not the same, so it’s important for companies to keep a tax-sensitized record of transactions and balances. This speeds calculations, analysis and reporting and improves the accuracy and dependability of the tax department’s work product. By substantially reducing or eliminating the use of desktop spreadsheets, it increases the transparency of the tax process. Segregating tax data from the rest of a company’s enterprise data is also essential because of the need to keep this information in an “as-was” state. Corporations buy and sell business units as well as reorganize on an ongoing basis. They then adjust their financial and management accounting systems to reflect the current needs of the business. Tax authorities, however, are concerned with the individual legal entities that make up a corporation as they existed in a given fiscal period. Maintaining all tax data together – including all of the minutiae of individual account adjustments and true-ups within and between periods – facilitates tax audit defense.

Beyond handling data better, Longview Tax also makes people working in tax departments much more efficient and the results of their work more accurate and transparent. It ensures that the process of capturing the difference between book (statutory) accounting and tax accounting is efficient, accurate and consistent. It enables corporations to standardize processes and reporting to simplify training and streamline reviews and audits. It’s able to use the dimensional capabilities of the system to enable a company to instantly and consistently create and publish reports that conform to the requirements of different taxing authorities – including, for example, different currencies and different depreciation methods for the exact same assets. By eliminating the need for people to perform repetitive tasks that require little judgment, it enables the department to increase its value and make it more strategic to a corporation.

Longview Tax provides bidirectional integration with a company’s ERP system, data warehouses and tax compliance software to ensure the fidelity of data at every step in tax-related processes. It gives administrators the ability to define and monitor tax department tasks to ensure all steps are performed and alerts them of delays. It provides an Excel add-in to give users a familiar environment in which to work and an ability to do ad-hoc calculations while eliminating almost all of the defects associated with desktop spreadsheets. Data and formulas are stored in a central database, ensuring quality and consistency. All of this promotes accuracy, reduces the risk of errors in calculations and presentations and can substantially cut the amount of time people in tax departments spend checking and reconciling their spreadsheets, which also boosts efficiency. And because Longview offers software for statutory consolidation, disclosures and external financial reporting, the Tax application supports the creation of required financial statement footnotes and tax disclosures.

Just improving the efficiency of a tax department can justify investing in a tax application because of the time it saves, greater accuracy and increased transparency. Companies may also find that by speeding the process of assembling tax data and performing the necessary calculations they have more time to consider their options on where and when they report income. I recommend that any company operating in more than a handful of tax jurisdictions should consider using a dedicated application for tax analysis, provisioning and reporting and that they consider Longview Tax for that role.

Regards,

Robert Kugel – SVP Research

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