When Certifying Your Tax Statement is Perilous
In my previous article, we looked into how data integrity and integration are key to enabling supply-chain success. As we continue the discussion on data value to corporate functions, let’s look at an area often overlooked from information management standpoint: corporate tax.
Managing complex tax operations for global, multinational corporations requires an undaunted focus on current federal, state and international tax laws, finding and implementing creative ways to apply those laws in order to reduce global taxation, identifying and managing the related tax risks and rigorously defending the company’s tax positions. Accounting and reporting of global income taxes used to be simply an annual task, almost an afterthought. With SOX, that world was overturned. The focus shifted from solely designing and implementing tax structures to minimizing global income taxes while accurately accounting for them and the internal controls surrounding this process. It’s no longer just the world of IRC section 482, 904(f), 861 allocations, check-the-box and listed transactions. It’s now about FAS 109, FAS 5, SAB 99 and how to accurately account and report a company’s global income tax position.
This shift has not come easy for today’s tax executives. The old world was all about minimizing transparency so that their creative and legitimate application of global income tax laws withstood the scrutiny of taxing authorities. In the new world of SOX, Schedule M-3 and audit mania, transparency is king. The focus now is how to fix significant deficiencies in internal controls and improve transparency. When you face a problem as broad and complex as the financial reporting of a global company’s income taxes, it is understandably difficult to define, i.e. to “see the forest through the trees” so to speak. But to succeed in solving the problem, the global CFO, corporate controller and tax executives must do just that. The following symptoms are common for global companies across industries:
- “Not accurate enough” global income tax provisions.
- “Not accurate enough” deferred tax balances.
- Inefficient corporate income tax provision process (impacts quarter/annual close).
- Unacceptably large return to provision true-ups.
- Lack of transparency and understanding as to what is driving the consolidated tax numbers.
- Weak tax internal controls.
Most tax executives see the problem as a “tax” problem that can only be solved by experienced, highly skilled tax professionals. However, when you delve into the causal factors a little further, you find that it is not so much a “tax” problem as it is a “data” problem.
To produce accurate, timely and comprehensible global income tax provisions and required disclosures, every company takes its global financial data, processes it according to all of its jurisdiction’s tax rules and reports the outcomes in accordance with its financial reporting standards. So, there are three potential areas where the problem could arise: data, tax rules and reporting rules.
Put the data issue aside and let’s assume that, as tax professionals, the problem is not in understanding and applying the tax rules. This has been the career focus of all tax professionals and, even though it’s very complex, most tax executives of today’s multinationals are more than up to the task. In addition to their tax expertise, they are typically reassured with the advice and counsel of outside tax advisors, plus when you consider that most tax laws, whether as promulgated under the U.S. Internal Revenue Code or other country’s tax codes, can be complied with via simple math, the problem is not the complexity of the tax math. So, it is not a tax problem.
In the same way, while FAS 109 and Regulation S-X are complex, the rules have existed for awhile and can be applied by most competent corporate controllers and tax executives. So, the problem is not with the accounting/reporting rules.
By process of elimination, then, many of the above symptoms come from data. Consider this: Most corporate tax executives will tell you that their biggest problem is reconciling and manipulating book data just to get to an accurate starting point to compute their tax provisions. That is a data problem. Also, when a U.K. subsidiary’s controller has access to his local statutory accounts, his U.S. GAAP accounts and his tax returns, but does not accurately track and roll forward his local temporary differences, that is a data problem. Lastly, the typical corporate tax department takes more than nine months to convert their company’s book data to an acceptable tax return format. The actual data is available immediately upon year-end close. The tax rules are known at or by the previous year end. That, then, is a data problem.
Issues could arise with data integrity, data accountability, data access, visibility or data currency or all of them. Let’s look at each of these data components and how they might be solved within the context of the corporate income tax process:
Is the tax data reliable?
This is the simple concept of garbage-in equals garbage-out. If the data entering the system is not accurate, then the resulting provision will also not be accurate. For example, inefficient methods of collecting and consolidating data can result in accurate source data being consolidated to the wrong legal entity. Another example is the likelihood of errors arising from using standard manual, Excel-based data collection and tax provision solutions, which by inherent design limitations require multiple manual entries of the same data. Solution to data integrity problem: Touch data once. Throughout the process, standardize system of entry and owner of data for each important entity so it’s maintained and distributed across teams without losing meaning.
Who owns the data?
This is an offshoot of data integrity. In today’s world of SOX, the CFO must attest to the validity of the data reported in the annual report, including the global income tax provision and tax balance sheet accounts. To confidently do this, the CFO needs to know that the individuals in the field supplying the inputs are held accountable for their submitted data. Solution to data accountability problem: Formalize data ownership at capture and track each data owner’s data touches. This is necessary for both data governance and audit trail.
How do you ensure easy and consistent access to book and tax data?
Ultimately, someone at corporate (usually a tax professional) must compile all of the tax provisions and deferred taxes for each legal entity across the globe, pull it together, tie it out and draft the income tax footnote. To be very efficient, that individual needs clickthrough/drill-down access to the underlying book and tax data driving the footnote disclosures. In addition, they need to see how these data inputs are processed in order to opine with the accuracy of the calculations. In the majority of today’s corporate tax departments, this access and visibility is prevented due to obsolete technology or lack of data integration and lineage. The solution to data access and visibility problem is twofold. First, use the same data for both the corporate consolidation and tax processes. Second, ensure data lineage and clickthrough/drill-down traceability where possible.
How do you keep data harmonized and current?
This speaks to the issue of changes to data inputs by data owners and how quickly the new outputs are available to end users. Solution to data currency problem: As soon as data owners touch data, the tax outputs need to be made available through syndication to all the downstream processing quickly. That is, the data is dynamically translated, consolidated, eliminated, calculated and immediately available to all end users within the context of their information needs. So when top-side late entries are booked, the tax department need only determine the permanent/temporary differential impact to get updated tax provisions.
Let’s look at an example of tax data management for a global company. The typical tax department uses Excel to collect a large amount of the data required for the quarterly and annual tax provision process without appropriate controls and traceability. The tax department emails a “tax package,” usually an Excel workbook, to 50 remote site-controllers throughout the world. The package consists of templates to collect financial information that cannot necessarily be directly pulled from the ledgers or corporate consolidation system, such as non-deductible meals and entertainment, amount of accrued compensation to be paid within 2.5 months of the year’s end, etc. The site controllers are responsible for completing the tax packages and sending them back to the corporate tax department for translation, consolidation and inclusion in the corporate provisioning model. This method of data collection leads to frequent inaccuracies and synchronization issues.
A good solution enables new processes for data collection and synchronization through an integrated data architecture where:
- Tax data submitted by the local site controller at a remote site is integrated with corporate tax databases or directly entered to a centralized database (data synchronization).
- The input templates are prepopulated with validation points that ensure the submitted data reconciles to beginning and ending book balances, which ultimately tie-out to consolidated earnings (data integrity).
- A SOX-compliant approval process requires “sign-off” from the site controller. The corporate tax department can track the status of the data collection process at all sites via embedded workflow and audit trail (data governance).
- The submitted data is dynamically translated, eliminated, consolidated and calculated in the corporate tax database and is immediately available for analysis. This is the exact same data that flows to the provision calculation and disclosures (data availability).
In addition to improving data integrity and addressing accountability issues, tax data management and integration greatly increases the speed and accuracy of global provisions and deferred taxes while reducing the burden on the corporate tax department and site controllers. It eliminates hours, or even days, from the typical manual, resource-intensive process of collecting, translating, consolidating and reconciling the tax data.
It’s no longer just the world of IRC section 482, 904(f), 861 allocations, check-the-box and listed transactions. It’s now about FAS 109, FAS 5, SAB 99 and how to accurately account and report the effect of their company’s global income tax position. You probably have your own experiences, all of which impact the tax governance problem, i.e., weak tax internal controls and lack of transparency. However, at the root, they are quite often not “tax” problems, but rather “data” problems: data integrity, data accountability, data access and visibility and data currency. While the penalties for these data problems can be severe, they can be solved by integrated tax data management solutions that enable:
- Data integrity - touch the data once;
- Data accountability - know and track each data owner’s data touches;
- Data access - use the single version of truth for both corporate consolidation and corporate tax provision processes and convert Excel-based data processing to a click-through, drill-down data visibility solution;
- Data currency - as soon as data owners touch their data, the tax outputs are made immediately available.