Keeping up with the increasingly complex business tax landscape is a fast-evolving challenge for large organizations. And for the companies with the most complex structures -- either because they do business in numerous countries or because they're organized into many legal entities -- the answer has historically been spreadsheet software.
Over the past few years, however, the realization that Microsoft Excel-based tax provisioning too often devolved into chaos, coupled with significant advances in technology, has driven many companies to explore the emerging world of tax provisioning applications. It's a software category that's seen by many as long overdue.
"You've got all these people focused on getting the financial statements right, and yet companies were still using two sticks to make a fire," said Tim Lapetina, a tax partner with PricewaterhouseCoopers.
One reason tax provisioning software has taken so long to meet enterprise needs has been the evolving and increasingly complex tax-reporting structure itself, according to experts. The sheer number of tax-collecting entities and rules that govern global companies is complicated enough; add in the beefed-up regulatory requirements brought on by legislation such as the Sarbanes-Oxley Act, and it's easy to see how onerous the processes of tracking, analyzing, reporting and collecting tax data have become.
Robert Kugel, senior vice president and research director at San Ramon, Calif.-based Ventana Research, said there are thousands of taxing entities in the U.S. alone and that countries such as Brazil and India suffer from similar complexity. The burden of knowing which entity gets what ultimately falls upon the tax-filing company.
"It really does matter which side of the street you're on," Kugel said. "You can mess up and pay the wrong [entity], and the entity you decided to pay your tax to may drag their heels" in processing a refund.
Such risks are why there's a growing consensus among complex global companies that it's time to replace clunky, inefficient and error-prone Excel-based processes with automated systems. Specialized vendors such as Corptax, Longview, Thomson Reuters and Vertex are leading the charge to provide viable solutions, of both the on-premises and cloud-based variety, while enterprise applications providers Oracle and NetSuite also are looking to join the fray. Each vendor claims its software is built to help companies automate the crunching of their tax data, and in a more standardized fashion, theoretically resulting in quicker financial closes, reduced organizational stress and more valuable use of tax professionals' time.
"I think we're as close as we've ever been to having the technology to make that feasible," Kugel said.
Prep the general ledger before installing tax software
As with many application categories, however, companies looking to adopt tax provisioning software can't expect it to be a panacea. But by taking a few preparatory steps before deploying the technology, they can enjoy much more powerful benefits.
"The software is only as good as the source information it's pulling from," PwC's Lapetina said. Without ensuing that the right information will be finding its way into the software, "it's going to be no better than using a typewriter -- a very expensive typewriter."
The most logical place to gather the information a tax provisioning application needs is in a company's general ledger. But as Lapetina noted, many companies don't have their general ledgers set up to collect the required tax data, often using them for little more than logging and computing transactions. The problem is that the tax department needs data broken down into much more detailed chunks than the accounting team does.
Casting a critical eye on the general ledger before deploying tax provisioning software helps companies get away from the hunting, pecking and investigation associated with spreadsheets, according to experts. By upgrading or rebuilding the general ledger so that detailed tax data is included, companies "are setting themselves up nicely for provisioning software when it becomes necessary," Lapetina said.
While many companies are scared off by the expense and complexity of adopting tax provisioning software, they'd be well advised to get past those obstacles, according to Craig Fjelsted, director of tax reporting and compliance for Caesar's Entertainment Corp., which has been reaping the benefits of Thomson Reuters' OneSource product for a few years.
"Assuming you've got the budget for it, make it work," Fjelsted said. "You should be out of Excel because of the all the benefits it will bring the organization, plus it will reduce your risk."
It also helps if a company is prepared to manage change and wait for the hard benefits to become clear. Richard Slinko, senior manager of domestic tax for GATX Corp., pointed out that any time an old process is modernized with new technology, a healthy amount of change management and patience is in order.
"There's going to be some fear and skepticism," Slinko said. But, he added, "All that work will pay dividends two or three years from now, if it even takes that long."
Tax provisioning software's widespread benefits
Lapetina agreed that companies shouldn't expect measurable payback on tax provisioning software for a couple of years, but he and Kugel both said that once the software kicks in, it delivers more efficient processes and better use of resources. Here are a few examples:
- With tax provisioning technology in place, a company's highly paid tax professionals can spend more time on high-value activities like tax planning and less time digging through numbers.
- Tax calculations can be computed in days instead of weeks, meaning faster quarterly closes, quicker regulatory filings and shareholders getting information sooner.
- Risk can be reduced as error-prone manual processes are jettisoned.
- Staff members are less likely to be forced to work nights and weekends, translating to less workplace stress.
What's more, an effective tax provisioning deployment can serve as a much stronger layer of audit defense by greatly easing the process of obtaining answers to auditors' questions.
Of course, there is a downside: The vendors that are building these systems are also arming the taxing entities with more effective technology, enabling them to use big data tools to discern things such as partnerships being used to creatively hide income or disguise holdings.
"I think it will behoove corporations going forward to have greater visibility into their income taxes past and present," Kugel said. "They're probably going to be scrutinized to a greater degree and with better effectiveness by the tax authorities, who are desperate to scrape up every piece of revenue."
If that doesn't motivate complex global companies to want to modernize and automate their tax provisioning processes, then nothing will.
About the author:
Tony Kontzer has been writing about technology and business for nearly 20 years and currently freelances from his home in the San Francisco Bay area community of Albany. A 1988 graduate of the University of Missouri-Columbia School of Journalism, Tony spends his spare time relaxing with his wife, playing with his three sons, and when time allows, playing saxophone and traveling. His somewhat infrequent Twitter posts can be found at @tkontzer.