BPM: The Missing Tax Component
Businesses spend a tremendous amount of effort structuring, managing, and monitoring
their operations to generate value for their organizations. Unfortunately, they
are often unaware of the value being lost through tax mismanagement of these
operations, which can account for a significant proportion of earnings. Our experience
shows that multinational companies typically make one of two critical errors
in business performance measurement. Either they ignore tax completely or they
don't effectively measure the performance of tax initiatives.
Companies must better understand the need for what we call Tax Insight, the integration of tax information into the corporate performance measurement system for all corporate personnel and real-time visibility of key tax drivers to tax professionals.
Evaluating Tax Performance
There are many ways to look at tax performance. One method is to evaluate which transactions and decisions impact each element of the corporate tax computation, such as disallowed expenses, capital gains, or interest. Another is to consider the value levers that ultimately have a tax impact. While the focus is on corporate income and transactional taxes, capital and property taxes can both be encompassed within the direct tax category. Next to each of the value levers are sample performance metrics (see Figure 1).
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Figure 1: Tax Value Levers and Metrics
Each of the value levers in Figure 1 can be managed when supported by reliable information in a timely manner. In addition, certain analytical tools may assist in the effort.
Consider the effective tax rate lever. The ability of an organization to plan its operations in a tax-effective manner (to reduce effective tax rate and the current-year tax charge) is indicative of its ability to tie together business strategy in a manner that locates costs and benefits in the place where they provide the most tax benefit. This might include such considerations as organizing entities to generate sales in optimum jurisdictions or repatriation of overseas profits in the most tax-effective manner. A planning model that automatically gathers this information and permits what-if scenario modeling will enhance the ability to plan effectively.
Importance of Tax Performance
Tax performance is visible to both external and internal stakeholders. In addition, certain measures of tax performance (i.e., effective tax rate), though not necessarily the most reflective of management skill, are widely published and benchmarked. (Also see World-Class Tax Planning in Chapter 3.)
External Perspective
The success of a public company is most often measured by the risk-adjusted net present value of future after-tax cash flows and after-tax earnings. These are typically gauged from the published statutory reports, where often tax is one of the largest expense items. A significant increase in tax can lead to an associated fall in distributable reserves (and thus dividends), in cash outflows (and the loss in working capital), and will affect the creditors and deferred tax asset/liability lines on the balance sheet.
Another impetus for tax insight is corporate governance. A topical example is the Sarbanes-Oxley Act, which stipulates new requirements for companies to report events that will have a significant impact on the market. To achieve this, an integrated performance management tool is needed to allow companies to plan and model the comprehensive (i.e., after-tax) effect of key transactions.
Internal Perspective
Employees throughout a company, not just tax professionals, need to have a fundamental understanding of tax to truly understand corporate performance. A marketing manager, for example, would be short-sighted to implement a major promotion program and only consider the direct costs, disregarding the fact that the majority of expenses incurred may not be tax-deductible. Many functional areas within an organization need to be aware of the impact of tax elements.
The basic value of tax information to the business as a whole is clear, and the thoughtful consideration of this information to guide decision-making is valuable. Even more value comes when tax professionals can view tax information more efficiently and accurately to develop strategies for the entire enterprise. This can lead to global optimization of cash tax expense, which is positively reflected in external reporting.
Enabling Tax Insight
Once what is needed has been identified, and there is strong evidence of this datas importance, an effective delivery mechanism must be put into place. Figure 2 illustrates the typical elements in a tax performance management solution. One common problem is that businesses use current technical architecture and data management capabilities as a constraint. Ideally, companies should start by defining their information needs and then develop the enablers.
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Figure 2: Typical Elements in a Tax Performance Solution
The primary difficulty faced by tax departments is the availability and access to tax-relevant data. Several difficulties compound this. The data may not be complete, may not contain a sufficient breakdown, or may not be available in a timely fashion. An enterprise-wide tax data management solution will enable the tax user to access such information more easily if it includes the following three requirements:
- Sensitizing tax data at source. This may require capturing the level of
detail to separate capital and revenue expenses, or having underlying information
about the profit or loss on the sale of an asset;
- Integrating data from a variety of systems. Typically, the data needed
to have a holistic tax view comes from multiple finance systems, manually
created spreadsheets, and other ad hoc systems; and
- Storing data in a common repository. This is vital not only to allow speedy access to data, but also to create an environment where all users access the same set of master and transactional data at any point in time.
A truly integrated system would incorporate not only financial transactions, but also data such as tax payments made during the year, operating losses, and overseas withholding taxes, which often reside on internal tax repositories and spreadsheets. Web-based data-collection tools can be used to gather information from entities around the globe. This can be expanded to include qualitative information such as what the common tax pitfalls are in a country where the group operates, what the progress of an audit defense is, or direct access to documents produced locally to enable knowledge dissemination.
If reliable, timely data is available, then a common downfall of tax departments is the inability to view the information effectively. Typically tax functions focus only on data manipulation when it comes to completing the tax return and computation and do not have the skills to prepare ad hoc reports as needed. A reporting solution is therefore a powerful component. Query, reporting, and analysis tools enable tax users to view tax-relevant numbers in the way that will help them understand the underlying data or allow them to see the high-level trends. Having the ability to slice and dice, to prepare graphs, and to drill down on data are useful features of most reporting solutions.
This integrated solution will aid in compliance reporting, audit defense, and strategic tax planning, and ultimately will deliver information to key decision-makers to allow them to make more rapid, more effective decisions based on better insight into the business internal and external circumstances. Many companies have found in implementing such systems for regulatory purposes that the information they have gained has provided valuable, group-wide visibility, which has enabled strategic decisions to be made more effectively. The following example illustrates this:
Bringing Strategic Tax Audit to the Forefront
A global pharmaceutical company faced the challenge of needing fast, efficient access to historic tax-relevant data to adequately meet audit requests and requirements by the fiscal authorities. Three barriers needed to be overcome: finance source systems would not accommodate data going back for seven years, as required for tax; tax-relevant data had not been defined; and front-end solutions were not available to allow tax and accounting professionals to view the data.
Accenture worked with the client to implement a data-archiving-and-retention tool that periodically archived tax-relevant data (from well-defined fields in the SAP enterprise system). Overlaying this were Business Objects reports, which were built to meet business requirements. The reporting tool provided both standard static reports as well as the ability to slice and dice and to build custom ad hoc reports as needed.
In addition to meeting the expected requirement for future tax audits, the solution was viewed as enabling a "strategic audit," i.e., by allowing users to access data quickly, in a user-friendly format, the business could make informed decisions about how current transactions impacted tax and how they may be queried in the future. They were also empowered with a wealth of information to assist in strategic planning with the ability to model period data by legal entity, or to view previous trends to form a basis for forecasts.
| Evaluating Tax Performance |
| Specific Techniques Discounting
Balance Sheet Economic value |
Conclusion
The tax function can add immense value to the operations of a company by optimizing cash tax outflows and by managing the impact tax has on the bottom line. Furthermore, tax impacts many functional areas through the organization, and omitting tax performance can give the wrong conclusion as to how the business is performing. Given this, it is vital that processes, capabilities, and metrics exist to enable the business to see what and how tax impacts overall corporate performance and to enable the tax function to have maximum insight so as to best measure and assess that performance.
True corporate performance can therefore only be managed by integrating tax into the definition of key performance metrics and the performance data used to measure the success and failures of the business. Tax must be viewed as a critical component in the value chain that defines the organizations business performance management structure.
