It has been said that the only certainties in life are death and taxes. And unless your company is a large corporation with teams of lobbyists in Washington, D.C., it’s a certainty that your organization is going to pay a lot of taxes to a lot of entities — income taxes, payroll taxes, property taxes, sales and use taxes, and possibly more.
If you operate in more than one country, your tax situation may be even more complex. The costs of administering business taxes can add up quickly for that reason, but skimping on costs can bring its own dangers.
This month, we’ll break down what companies spend to manage their taxes and explore why it might be advantageous for some to actually spend more on this process. Cross-industry data on this measure from APQC’s Open Standards Benchmarking database in tax and treasury shows the total process cost as the sum of outsourced, overhead, personnel, system, and other costs, normalized per every $1,000 of organizational revenue.
By this measure, companies in the 25th percentile pay $0.14 per $1,000 revenue to manage their taxes, those at the median spend $0.70, and those in the 75th percentile spend $2.50. 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 across industries and organizational sizes.
The key question for this metric is not necessarily how a company can spend less (or more) to manage its taxes, but instead what it hopes to achieve with investments in this process.
Break Down Process Costs
A smart tax strategy requires a deep understanding of the environment the business operates within. Make sure to assess potential tax risks in each area of the business, from payroll to income to property and beyond. Huddle with the tax team to make sure they have a good understanding of the business’s operations, the unique tax advantages and constraints of its localities, and any applicable laws.
With that knowledge in hand, a good first step toward building a tax strategy is to benchmark spending alongside organizations of a similar size and complexity to know what the company spends on the process relative to others. If the organization’s tax needs are more complex, it will likely be investing above the median relative to those organizations.
Given the COVID-19 pandemic and economic downturn, there may be good reasons why a company wants to invest more time and resources into ensuring that it is taking advantage of every available deduction. Some examples of pandemic-related tax credits that are currently available (especially to smaller businesses) include:
- Employee retention credits
- Paid sick leave refundable credits
- Research and development credits (especially if the company had to invest in services to help pivot the business).
- Accelerated depreciation rules for qualified improvement properties (including bonus deductions for health and safety upgrades).
There may be numerous deductions beyond these that a savvy tax professional can help find and apply. If it’s worth it to look more deeply into these deductions, does the organization have the right people with the right capabilities to do so? If the tax team has mostly been completing simplified tax returns and wants to do something a little more complex this year, the company could benefit from bringing additional team members on board or hiring an external firm that can find every available deduction and get the documentation in order.
Don’t Forget Process and Knowledge Management
Besides benchmarking the company’s total spending on the tax process, break down spending in each area to look for any improvement opportunities. As with any other process, be on the lookout for any bottlenecks or inefficiencies that might be costing money that doesn’t need to be spent.
Paperwork-heavy tax management areas like reporting for compliance should be as fully automated as possible to minimize low value-added work and make the process as efficient as possible.
Some organizations also achieve savings and greater efficiency by leveraging tax centers of excellence (COEs). For example, energy and automation digital solutions company Schneider Electric leverages regional COEs for tax planning. Comprised of small teams of subject matter experts, these COEs provide high-quality tax support and advice that would be expensive outside of a shared services or COE framework.
A tax strategy will also benefit from strong knowledge management practices. Does the team responsible for managing taxes have processes in place to facilitate knowledge sharing and collaboration? How easy or hard is it for them to find the internal resources they need to develop the tax strategy? Knowledge sharing and collaboration are enablers for better performance in this process and many others.
Benchmarking helps to put process cost in a broader context. In contrast, internal legwork helps to understand the resources at the CFO’s disposal (in terms of people, technology, and processes) to develop a tax strategy. As long as processes are well-managed, there’s nothing wrong with spending more than others on the tax management process, especially if doing so will make the company more effective at finding potential savings. While a company may not avoid taxes, taking a deeper dive into tax management can certainly help an organization avoid spending too much — or too little.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.