Indirect tax accounting begins and ends with data

November 12, 2013

Tax transparency

“Tax transparency” is how an organization adds clarity to communicating with stakeholders about its approach to tax. It is not a new concept, but until recently, tax transparency was generally considered a novel way of communicating with an organization’s stakeholders by going beyond the formal requirements.

But recently things have started to change. More companies are interested in providing good quality information about their tax affairs – not only to the tax authorities, but also to the wider stakeholder groups.

In part, this change has come from the additional scrutiny that many organizations are facing. Many media commentators are characterizing tax planning as a means of tax avoidance, rather than as part of sensible business planning.

Many have been talking about company’s having a “moral responsibility” to disclose tax amounts paid and to pay the right amount of taxes globally. At the same time, most multinationals are looking to ensure that they pay the right amount of tax and to be able to demonstrate that they have done so.

So, if companies do indeed have a moral responsibility in this area, just how easy is it for organizations to be transparent, disclose payments made and ultimately deliver the level of global visibility that will keep governments, the media, their shareholders and the general public informed and happy?

Data is the beginning and the end of every task. Managing data effectively is not only the key to tax transparency – it is also an imperative in our data-rich world. If companies do not seize the challenge to manage tax data effectively, tax authorities will.

Technology is key, but also provides challenges

Imagine a model tax department. You would expect to see the head of tax having full control and visibility over the people and processes within. You’d also expect tax managers and analysts following those processes as they fulfill reporting requirements, meet internal audit standards and add value to their function.

And in support are technology systems giving accurate, concise and complete outputs from the vast dimensions of underpinning data. But does our model tax department use the most effective tools to manage all this information?

Despite improvements in recent years in the technology used for data management and reporting purposes, and the growing trend toward commercially developed software, spreadsheets continue to be the most widely used tax provisioning software tool. Articles and surveys indicate that more than 50% of Fortune 1000 companies utilize spreadsheets in this way.

The top challenges for companies using spreadsheets include:

  • Lack of process controls
  • Workbook consolidation or breakout into multiple workbooks
  • Data and formula validation
  • Template consistency

In most tax departments, five to six feeds may be needed to automate 80% of the reconciliations between bookkeeping ledgers and consolidated tax numbers. As such, can spreadsheet models really be considered a best practice?

Also, can this model stand up to intensive scrutiny from tax authorities, which increasingly have the skills, technology and desire to perform detailed tax audits focusing heavily on data to identify anomalies and underpaid taxes? Companies that rely on figures prepared using the spreadsheet model may find themselves floundering very quickly in these situations.

Data management tools

So what can be done? A wide range of data management, cleansing, consolidation and reporting tools exist. And they can often be found within the organization with a little digging. Frequently, the finance team may use data warehousing tools and dedicated reporting tools to manage and consolidate management accounts and prepare board-level reports, yet the tax team is completely unaware of them. So the first port of call may be to use what is already there.

Where tools do not exist, or are not suitable for tax, new tools may be acquired. Companies that are undergoing finance transformation projects may be able to take advantage of the many new technologies that hit the market every year that can be incorporated into such projects.

If we look at the typical software capabilities, very little has changed since spreadsheets became the tool of choice.

But today, technology and associated tools have evolved, and looking at the market we find integrated compliance and provision for income tax, global solutions for indirect tax, workflow and document management for multiple processes and global tax calendars with both internal and external assignments.

Teams are now able to use these tools across multiple functions.

Managing “big data”

Data itself presents a range of challenges to tax departments. We work in an era when data is so readily recorded and stored that an astonishing 90% of the world’s data has been created in the last two years.

But these capabilities mean that the data is becoming increasingly unmanageable, and we find ourselves faced with “big data” issues, including:

  • The vast volume of data we have as a starting point
  • The speed at which the data we need can be accessed
  • The variety of data sources and data structures that we need to work with
  • The trustworthiness of the data we harvest — do we have the right data for our purpose?

These are important issues to address; having organized data allows effective reporting, and it creates levels of visibility over all areas that individuals have responsibility for that were previously only dreamt about.

Before fast, effective data analysis and consolidation became easily available, tax teams would deliver tax and management information as static reports, created through wholly manual effort. Improvements in this area can be achieved quickly through simple business intelligence (BI) products.

Mobile BI applications for smartphones and tablet devices are now readily available in large numbers. They enable flexible reporting solutions that can be viewed on the go using real-time information. For example, real-time updates can utilize data warehouse source feeds, allowing for a refresh of the information as and when the warehouse is updated.

This also ensures that organizations that grow through acquisition and run nonstandard ERP systems across the globe now have a way of consolidating multiple feeds and delivering integrated tax reporting.

The full version of this article was published in EY´s Indirect Tax Briefing, issue 8 (PDF, 3.28 MB).

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