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Achieving greater efficiency through tax automation
With reduced resources and a growing need for greater compliance in most tax jurisdictions, internal finance teams are increasingly looking at ways to improve efficiency. One of the most common topics of discussion is the automation of tax compliance processes. The aim is to make the most of the current accounting packages and special purpose software to streamline the reporting process, which often results in less manual intervention, easier reconciliation and greater comfort that the correct tax treatment has been applied.
In some countries, tax authorities are demanding that business make fewer manual adjustments to their processes. The fact that such adjustments are required can lead to a lack of confidence in the systems and the compliance process as a whole.
The Case for Tax Automation
A variety of taxes can be calculated and reported through tax automation, and there are numerous tools available to automate the calculation and reporting of taxes. These tools cover both direct and indirect taxes, and are deployed using Enterprise Resource Planning ("ERP") systems (e.g., SAP / Oracle), tax engines, end-of-month reporting tools, tax planning tools and purpose built solutions.
A number of factors influence the decision to move to an automated tax process:
- Supply Chain Complexity: Typically driven by a corporate tax structure, multinational material sourcing production or distribution processes can increase the tax footprint of an organisation and lead to multiple tax returns. There is also increased complexity around determining the correct tax treatments, and in reporting taxes accurately and on time.
- Tax Authority Audit Trail Requirements: There has been an increased focus on how an organisation derives reported tax numbers. As part of this process, organisations have been seeking to increase the levels of automation of determination in order to reduce the amount of manual work required.
- Shared Service Centres: Significant operational efficiencies can be gained by centralising functions such as financial reporting and accounts payable in a shared service centre, but this can lead to increased complexity around VAT and withholding tax determination, since Accounts Payable staff in a central location is required to understand tax rules in multiple jurisdictions.
- ERP Initiatives: A roll-out of an ERP tool, such as SAP or Oracle, is one of the key drivers for tax automation. When an organisation is implementing such a system, there is a requirement to essentially reconfigure the entire business model, which drives tax compliance requirements. There is a clear need to include tax, and this presents a significant opportunity to automate tax determination and reporting.
The aim of automation is to provide the business with greater confidence in the accounting process - without manual intervention - so that the compliance process can be streamlined and effective, freeing up the in-house tax department to concentrate on other areas.
The Tax Department's Role and Anticipated Benefits
There are two elements to introducing a tax automation process:
- Ongoing Maintenance and Use of the Solution
To ensure an automated solution meets the organisation's requirements, an initial investment of time by tax resources is required; there should be a direct relationship between the investment of time and the effectiveness of the solution deployed.
Broadly, any implementation comprises three phases:
1. In order to automate any process, it is essential to fully understand the business processes and the desired outcome. As the tax function is often reacting to the business model (e.g., a complex supply chain or an ERP implementation), this essentially means assessing the tax impact for each area. This alignment results in documentation that combines the business process from a system and process perspective with the desired tax outcome. This is the requirement / analyse phase of an automation project.
2. The next step is the design / build phase. This is where the automation tool is aligned with the business process and desired tax output. Essentially, this takes the business model, as it is executed from a systems and business process perspective, and aligns it with the capabilities of the tax automation solution.
3. Finally, in order to validate and to release such a solution into day-to-day operations, a test and deploy phase is required. This involves taking representative transactions and business processes and testing them against the requirements identified in the first phase. This ensures that the requirements and design documentation deployed are fit for purpose. In addition to an effective change in control process, this ensures that organisations can be confident the solution deployed reflects the captured requirements.
With collective Tax, IT and Finance organisational approval for each stage above, the net result of these three steps is that the tax function is left with extensive documentation on how the business operates. This includes the tax design that has been put in place to cater to the business model and, finally, how that model and design has been tested. In other words, there is a clear audit trail linking the business model to tax compliance, operationally.
This presents advantages to the business as tax plays a major role in the deployment and realisation of this initiative, thus ensuring maximum compliance, as well as reduced ongoing maintenance / support.
From a tax function's perspective, this results in a detailed view and understanding of how tax policy and compliance is aligned with the business model in day-to-day operations. This does not mean that a tax function needs expertise in ERP systems, such as SAP or Oracle. However, the implementation process necessitates a day-to-day working relationship between Finance, IT and Tax teams, which is not often found in most businesses. The steps above can apply to comprehensive record-to-report projects or discreet end-of-month reporting projects.
From an ongoing use and maintenance perspective, there are a number of benefits:
Improved Tax Determination Accuracy. As with any business process, the reduction of manual intervention will result in increased accuracy. Where a third-party determination or reporting tool is used, this accuracy can be increased due to a reduction in the need for manual intervention of tax treatment coupled with content (i.e., legislative updates) being provided as part of any support agreement with the software vendor.
Reduced End-of-Month Manual Workarounds. Organisations strive to be compliant, yet in order to do so, many finance functions spend significant amounts of time correcting tax reporting data, using MS Excel worksheets, during end-of-month reporting processes. By automating how taxes are calculated during transaction processing and the subsequent reporting of these transactions, there is a decrease in the amount of manual workarounds in place.
Ability to React to a Business Change. Tax, IT and Finance functions are, by their very nature, support functions reacting to the core business of an organisation. Core business changes such as a new supply chain, shared service centre or sales model can have a significant impact on these three functions. By increasing the levels of tax automation in place, Tax, IT and Finance are in better positions to assess the impact of change and react accordingly.
Tax Automation Deployment Types. We are increasingly being asked about methods to implement tax automation or to assist businesses in streamlining their processes and, at the same time, increase accuracy. During a large scale business change, such as an ERP project, there is a clear case for an assessment of an automated record-to-report process. However, as ERP projects are infrequent, businesses are keen to explore alternative ways of deploying a tax automation solution.
The centralisation of a tax reporting functions has also been a key driver due to the need to complete multiple indirect and direct tax returns in numerous taxing jurisdictions. By automating the reporting process, an organisation can meet the local country requirements, whilst ensuring that they benefit from the efficiencies delivered by centralising a function or business process.
Organisations are also rolling out tax automation solutions to specific business units. One example is the launch of a centralised Web store or e-commerce engine that drives the need to calculate value-added taxes in multiple jurisdictions. By automating the calculation of such taxes, a company can keep up-to-date with constantly changing rates and rules without having to invest in tax automation throughout the entire organisation.
Finally, companies are using tax automation in an offline manner. Where there is insufficient IT support for rolling out an automated record and report solution, historic transactions are validated using specialist tools and, where corrective action is needed, source systems are updated accordingly.
Future Trends. Depending on the automation tool deployed, tax functions may well be performing a different role. This role might be a more operational, hands-on one with exceptions and issues being addressed (and, hopefully, prevented) as they arise, as opposed to being remedied during end-of-month processes. For automated tax determination, this involves monitoring non-compliant transactions and working closely with sales, purchasing and logistic functions to ensure that the business model can be executed in a compliant manner. An example of this could be a simple change in how a company organises the transport of goods. This change may make perfect sense to a supply chain specialist, yet to a tax function, this could have a significant impact on VAT registrations, transfer pricing or permanent establishment obligations. By using tax automation to flag such exceptions, Tax can propose alternatives that both meet the organisation's tax compliance needs, as well as its supply chain requirements.
As content (rates and rules) and forms can be included as part of a tax automation solution, tax functions will be spending less time on research and more time on assessing how tax changes impact their organisation.
From an ongoing reporting perspective, where tax reporting is the remit of a finance function, tax automation will be the channel by which tax functions can ensure that compliance requirements are met. In a best practice situation, the communication of tax reporting requirements is conducted using established policies and procedures between Finance and Tax, however, in reality this could be down to ad-hoc e-mail instructions related to manual processes. By having an automated tool for Tax, Finance and IT implemented together, guidelines on the changes and how the changes need to be executed in the automated solution can be given by the tax function.
With regards to the range of automation solutions, there will be an increased consolidation of solutions in the market place. ADP's purchase of Taxware and Thomson Reuters' purchase of Abacus and Sabrix illustrate a growing trend in this regard.
As tax automation is related to the processes associated with tax calculation and reporting, an organisation needs to assess the complexity of such processes and the levels of manual intervention that are currently in place. Tax automation requires an investment, and that investment must be justified through a business case. A key driver of the business case will be the complexity of the compliance process as a whole. When an organisation has a limited number of tax filings, it may have difficulty securing that investment, whereas, multiple filings in numerous tax jurisdictions may merit further assessment.
As a starting point to assess whether or not automation is the right answer, organisations should document the ways in which tax throughput is calculated and reported. This involves documenting tax filings, the methodology and effort to prepare tax filings, and the sources of data for such filings. Where this assessment involves minimal effort, there may already be an indication that tax automation is not a key priority. That being said, when a project warrants conducting this initial assessment, it could be a good indication that automation is an option worth exploring.
Accreditation: first written and published in the International Tax Review March 2010
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