As the leader of the largest tax practice in the U.S., I often speak to chief financial officers. And — no surprise — they ask for my opinion on improving their tax department. My answer: Don’t just look at your tax function with an eye toward minimizing risk; look at it as a place where you can create value for your business.

I am not suggesting CFOs overlook the former for the latter. Identifying, analyzing and mitigating tax risk can and should be a critical role for a tax department. But CFOs must concurrently seek to deliver value from the tax function. This is a difficult balance: I find that most companies focus primarily on mitigating risk and neglect the opportunity to create real value from their investment in tax.

In a recent PwC study of tax departments, we found that tax personnel spend roughly 40 percent to 60 percent of their time on data-management tasks. Not surprisingly, a majority acknowledged they spend less than 30 percent of their time on strategic analysis.

PwC tax department technology

Mark Mendola, PwC

Many CFOs historically have paid scant attention to tax as an area for improvement. Instead, they concentrate on improving their supply chain or business services functions. In addition, unlike in most other departments, little investment has been made to automate and technology-enable the tax function. The result:

  • Much work still is done manually and in spreadsheets;
  • There is a lack of transparency into underlying business-unit data; and
  • Precious little time is spent on strategic analysis and analytics.

Those can prove to be crucial errors. Regulatory complexity has been increasing, putting pressure on businesses’ compliance responsibilities and tax-reporting burdens. Regulatory scrutiny, emanating from tax audits and disputes, has also been intensifying. In this environment, companies cannot afford to make errors.

The answer to solving this issue and truly unlocking the value of the tax department is to simply use the same approach you did to transform other segments of the business. Challenge leaders to transform the way they think about people, processes, data and technology. The most telling statistic in our recent study was that more than half the companies surveyed (55 percent) admitted they do not have a long-term plan related to tax technology nor any plans to develop one.

How can that be? If a CFO told that to the Securities and Exchange Commission or an auditor about their accounting department, it would be a real problem. Why do CFOs allow tax departments to use a combination of spreadsheets and licensed tools to perform such a high-risk compliance function?

Tax departments cannot do the job without an investment in technology. CFOs have a part to play in helping enterprise technologies support their tax strategy. If technologies already employed in other parts of the business are extended to the tax function, companies will create efficiencies and decrease risk by reducing the number of redundant activities. This isn’t a short-term effort; it must be part of a long-term strategy to integrate enterprise technologies with tax.

Technology, however, represents just one element to consider. Those who oversee the tax department must consider overhauling manual and disjointed processes that do more harm than good. They must make the investment in an environment that brings data, documents and workflow together. This enables multiple people to collaborate and share information, and gives visibility into  processes, which enables identification of bottlenecks or inefficiencies.

In an increasingly complex regulatory environment, it is tempting to focus solely on compliance and data manipulation. But CFOs who decide to take their companies a step further should not underestimate the “people” side of transforming a tax department.  In an environment in which people are increasingly mobile, an investment in collaboration tools improves their efficiency and effectiveness. One benefit often emerges: Tax professionals who spend more time on strategic analysis often are more satisfied and engaged employees.

For CFOs eager to lead the most forward-thinking businesses, one last step can make a profound difference in the transformation process: converting tax data into strategic information for driving forecasting and modeling. For instance, a company might use data to consider the tax implications of an acquisition or a financing transaction. It also might model the effect of tax law changes on planned business activities.

You can make best decisions only when you possess good data and good analytics. This becomes reality with a transformed tax function.

Mark Mendola is a vice chairman of PricewaterhouseCoopers and the U.S. tax leader. He is responsible for the network of tax practices across the Americas and guides the strategic direction of the practice with respect to client service, quality and talent development. Mendola has advised a wide range of multinational companies in a variety of industries, including automotive, industrial products, and retail and consumer products.

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5 responses to “Don’t Neglect Your Tax Department”

  1. Of all of the areas within a company that needs to “play well” with tax treasury maybe one of the more important.

    A treasury that moves its’ cash cross border without considering tax consequences is asking for potential deemed dividend or other. tax issues, possibly in the host country. On the other hand a tax department that doesn’t consider treasury’s need to match future sources and uses of cash / liquidity will be creating additional fx or interest rate exposures for the company.

    A good example is Apple. Their tax department was very good at sequestering Apple’s cash beyond the immediate reach of the IRS, but treasury then found it necessary to borrow someone else’s cash (i.e. its banks) to pay dividends. Apple may still be net ahead from a P & L perspective, but the cost of these unanticipated borrowings over the immediate future has put a dent into the savings generated by pursuing the “perfect” tax strategy. Also, there could be greater exposure to FX gains / losses if some of this offshore cash is denominated in non USD.

  2. Mark,

    This is a great article. Having experience from both a Big 4 and an industry perspective, many firms are too focused on the short-term cost-benefit analysis, where the cost related to the design and implementation of the tax information system is compared to the benefit. As you alluded to in the above article, the issue is really the perception of the benefit. Many times, benefit is significantly defined as risk management (i.e. what would be the benefit resulting from minimizing failed compliance or audit risk). However, as you point out, there are greater benefits that result, from tax planning, business integration and well as leadership. I believe that one effective way to promote this greater understanding is education of the CFO about the daily operations of tax departments. If an organization/CFO is open to such education and additionally value “people”, this approach should allow for a more proper cost-benefit analysis to occur when assessing tax technology decisions.

  3. I really enjoyed your article Mark!

    As someone who works in the area of tax operations strategy and technology, I couldn’t agree more with the need to not only transform the tax function, but to do so in a way that delivers value beyond risk mitigation. It is a great call out and really speaks to the bigger business opportunities available via a strong tax operating model.

    I especially liked how you broadened the conversation to include the variety of process and information aspects that should be addressed beyond just the technology in order to achieve overall success.

  4. The finance folks often don’t include the tax guys in IT projects. When they do, they don’t honor the requests of the Tax guys.

    How many times have I seen the controller refuse to collect separate company information, even thought the tax guys need it. How many times have I seen controllers refuse to create a set of tax books in the GL. How many times I have seen Treasury refuse to implement systems that can compute the tax numbers.

    The tax function needs its data in electronic format where they can grab it and don’t need to manipulate it. That means the core information systems have to collect this information (general ledger, investment management, fixed assets).

    Often they don’t. Often the finance folks refuse to alter the systems to collect it. Often the finance systems are a rats nest (thousands of different general ledgers) where any information collection is pretty crazy.

    Until that gets fixed, welcome to tax where we create our information, tear the stuff apart, create separate company financials, and waste our time running numbers and collecting data.

  5. Too many businesses manage from above the line, ignoring the effect of taxes. PLEASE include the tax department in planning opportunities.

    I had an example where the tax department was actually consulted before a business opportunity was a done deal. We had a $200K after tax profit opportunity sequencing auto parts for an assembly plant. By consulting the tax department before doing the deal, we avoided a state tax liability in KY of $300K PER YEAR.

    When you manage by EBITDA only and ignore the tax effect, you can have situations like this. EBITDA says profit and go ahead. Full effect analysis can either alert you to extra costs that can be avoided, or that keep you from entering into unprofitable transactions.

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