Taxes are a complicated area of business that often requires carefully designed strategy and planning. In addition to income taxes, an organization has to be mindful of regulations involving property taxes, sales and use taxes, and excise taxes, among others. The situation is even more complicated for global organizations that need to navigate complex regulations in multiple countries or regions.
While taxes are often unavoidable, organizations do have control over how significantly they invest in this area to maximize savings and ensure that that spending is in line. For this month’s metric, we’re examining the total cost to perform the process group “manage taxes” per $1,000 of revenue. This process group includes developing a tax strategy and plan (including a foreign, national, state, and local tax strategy) and all of the activities associated with processing taxes, from preparing tax returns to monitoring tax compliance and addressing tax inquiries.
Data from APQC’s Open Standards Benchmarking database shows that spending on this process group can vary widely. Organizations in the top quartile spend $1.02 or less to manage taxes per $1,000 of revenue, while organizations in the bottom quartile spend a little over five dollars per $1,000 of revenue (see graphic below).
The data is not meant to suggest that one quartile is outperforming another necessarily, but to show a range of possible spending on this process group across industries and organizational sizes. The key question for this metric is not how organizations can spend less (or more) on their processes for managing corporate taxes, but instead what an organization hopes to achieve with its investments in people and systems.
Tax management and strategy can encompass a wide range of considerations for a larger organization, including how to minimize its federal, state, and local taxes; which states or regions might be the most advantageous to operate in for tax purposes; how to structure purchase acquisition deals to minimize the tax impact on owners and partners; and how to leverage debt financing to deduct interest.
Answering these questions and planning around them means these organizations spend more time and money on tax processes. Broadly speaking, an organization that invests heavily in its tax strategy is likely doing so because it anticipates a significant reduction in its effective tax rate as a result. For a large, multinational organization, this investment could mean millions in tax savings.
For smaller and less complex organizations, additional investment in tax strategies and tax management might yield very little benefit in terms of its effective tax rate. So, it may not be a good investment.
These organizations, however, still must navigate their own complex set of tax considerations. As the CFO of a nonprofit organization, for example, it is imperative that I understand the nature of our current and future revenue streams. Any revenue stream that is not in line with our education and research mission could be categorized as “unrelated business income” (UBI), which is deemed taxable by the IRS. If our revenue composition tilts too heavily toward UBI, our organization could lose its 501(c)(3) status as a tax-exempt nonprofit. Even as we navigate these complexities, our spending for this process group remains much lower than larger and more complex organizations.
Regardless of an organization’s size or industry, managing taxes and developing a tax strategy is complex. As a CFO, you will have to determine what resources are appropriate to commit to it. A good first step is benchmarking your own spending alongside organizations of a similar size and complexity to know what you spend relative to others. If your tax needs are more complex, you’ll likely be investing above the median relative to those organizations.
It’s also important to know exactly what you’re spending for each activity in this process group and to identify opportunities for improvement wherever possible. Paperwork-heavy areas of tax management like reporting for compliance should be as fully automated as possible to minimize low value-added work and to make the process as efficient as possible.
Tax strategy, meanwhile, can benefit from strong knowledge management practices. Ensure that those responsible for the process have a framework in place for knowledge sharing and collaboration and empower them with access to the knowledge resources they need as they develop a tax strategy for the organization. Tracking your spending for each area of the process group and improving wherever possible will ensure that your time and money is well spent.
Benchmarking your spending for tax management and strategy and considering your expenditures for each activity in this process group will help ensure that the money you spend delivers what you need.
With the wealth of available automated tax solutions and process improvement frameworks available, there are more opportunities than ever to strengthen and optimize these processes and ensure that spending is where it needs to be. Tax management and strategy are complex enough without wasting effort and money on work that adds little value — or missing opportunities for significant savings because of too little investment.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.
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