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Leading tax department change
2013 Domestic tax conference
Leading tax department change1
Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & YoungGlobal Limited located in the US.This presentation is ©2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party.The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP.
Leading tax department change2
Circular 230 disclaimer
Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.
Leading tax department change3
Today’s presenters
Gary Paice – ModeratorEmilio AmalfitanoMelanie DowlingFaranak Naghavi
Leading tax department change4
Agenda
► Drivers shaping tax leadership► Focus of high-performing tax
function activities:► Legislative► Business► Operational
► Conclusions
Leading tax department change5
Drivers shaping tax leadership
► Ever-increasing use of corporate officer liability/responsible person provisions (e.g., collect unpaid taxes, accountability for controls)
► Movements in taxing philosophies around direct and indirect taxes; timing/transparency
► Technology moving beyond the foundational
► Execution models for tax outside of HQ have not progressed significantly
► Greater international exposure —revenues and costs
► Focus on cost control is critical when revenues are restrained
Legislative
Operational
Business
Drivers
Leading tax department change6
Legislative drivers
► Completing a tax risk profile
► Establishing responsibilities in and outside of tax
► Increased controls using technology where appropriate
► Improved monitoring
Ever-increasing use of corporate officer liability/responsible person provisions
► Indirect taxes including VAT regimes and transfer pricing changing the tax dollars to individuals with less tax experience so tax approach to bringing tax insights also changing
► Timing of reporting is increasingly shifting to contemporary reporting so companies shifting processes and technology (e.g., supply chain systems)
► Tax changes requiring significant operational support
Movements in taxing philosophies around direct and indirect taxes; timing/transparency
Driv
ers
Approaches at leading com
paniesLegislative
Operational
Business
Drivers
Leading tax department change7
Corporate officer liability responses
► Examples of officer liability:► States: CA, KY, NY all have personal responsibility statutes► Countries: Senior Account Officer in the UK, Brazil, Netherlands, etc.
► What you should be doing to lead change:► Know your risks and set up the vehicles for monitoring/acting► Techniques to use:
► Technology — e.g., workflow► Process — clear delineation of responsibilities
► Why now:► Legislation reflects higher degree of scrutiny across many countries; expect
attention to remain high
► The value:► Reputational risk mitigation, better deployment of resources and clearer line of sight
Leading tax department change8
Simplified exampleSignificant transaction workflow
Significant transaction
identified prior to implementation
Documents collected► Excel projection► Emails► Transaction memo
Update or generate additional documents► Excel projection► Emails► Transaction memo
Update or generate additional documents► Excel projection► Emails► Transaction memo► Elections/filings
Over $$ ?Get approval from
VP of tax(SOX control)
End workflow and mark documents
final
YesNo
Planner
Taxaccounting
Taxcompliance
Provide tax accounting analysis
Provide tax compliance
analysis
Yes
Ready for broader analysis?
Leading tax department change9
Examples of available technologies(examples-not a comprehensive list)
► General:► Pure play — Pegasystems, Appian, Progress [Savvion (Progress Software)]► Integrated with document management — IBM Filenet, Documentum,
Open Text [Livelink]
► Tax: ► Corptax Office (based on SharePoint)► ONESOURCE Workflow Manager
► Others:► SharePoint from Microsoft► Task managers
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Observations about reducing corporate officer liability
► Technology and process require a cross-functional activity especially on an international implementation.► Don’t underestimate the number of people involved.► Consider the impact of “occasional” users on the workflow design.► Is there already a finance workflow tool?
► Workflow solutions may look deceptively simple.► Consider an integrated document management and workflow solution that has
sufficient reporting and integration capabilities.► Security and user control can be very time consuming. Don’t over think this!
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Changes in taxes, timing and transparency
► Indirect taxes and taxes computed at more detailed levels (e.g., purchase order) becoming a bigger part of the overall pie yet the number of dedicated tax resources devoted is very small.► Illustration:
► Income tax — typically HQ and regional tax professionals with dedicated tax preparers doing compliance
► Transfer pricing — small number of tax professionals that set policy with the execution being primarily done with non-tax professionals
► Indirect tax — maybe a global leader but with many non-tax professionals and/or third parties doing the execution
► What should you be doing to lead change?► Partner with business to establish leadership► Implement technology/process that addresses new possibilities
Leading tax department change12
Improving timing and transparencyTransfer pricing (TP) example
TP data analytics and reportingPlanning, budgeting and forecasting Intercompany processing
Demand planning
Other
Prospective transfer pricesBudgets and forecasts are prepared at a level
needed to set and adjust transfer prices periodically to achieve target margins by end of year
Intercompany agreements and document managementIdentification of intercompany relationships and maintenance of legal agreements and transfer pricing studies
Real-time monitoringAccumulation of data into a centralized repository
to produce operating margin exception reports and determine transfer pricing adjustments
Integrated processesStandardized and automated intercompany
accounting to support statutory and consolidated financial reporting
Master data managementTransfer pricing-sensitive data definitions and governance to support data quality
Generalledger
Transaction processing
Data warehouse
Intercompany cross-charges
Profitability analysis
TP analytics
TP adjustments
TP governance and managed workflowDefined roles and responsibilities with visibility and control over all transfer pricing processes
Businessprocess
management
Consolidation
Supply chain
Financial planningand analysis (FP&A)
Leading tax department change13
Tools for operational transfer pricing
Analytics and reporting software Vendor Brief descriptionSAP Profitability and Cost Management (PCM)
SAP ► Flexible and user-driven modeling and reporting tool
► Open architecture to bring in data from multiple sources
► Create and run financial models to monitor transfer prices
► Powerful what-if analysis and simulation capabilities
ONESOURCE Operational Transfer Pricing (OOXP)
Thomson Reuters
► Provides a centralized system for all intercompany activity reviews (tangible goods, services, intangibles) to automate and enable better control over your processes and data
► Generates standard and ad hoc reporting to produce journal entries, invoices or other management reports
Transfer Pricing for Hyperion (HTP) Pebble Age (Oracle Gold Partner)
► Runs using leading Oracle Financial Management (HFM) solution as the main database and can be integrated to almost any ERP system
► Visual user interface to build computations and reporting
Longview Transfer Pricing Longview Solutions
► Prototype developed on the Longview Tax and financial reporting platform
► More information and announcement to follow
Shared Services Analyzer (SSA) Ernst & Young ► Transfer pricing analysis of complex services and intellectual property
► SSA platform automates the allocation process and can consolidate multiple services analyses into one tool
Enterprise Resource Planning (ERP) / Data warehouse (internal)
Various ► Custom reporting solutions leveraging ERP and BPM platforms from SAP, Oracle, etc.
Leading tax department change14
A SAP view
SAP NetWeaver BW, ERP, GL, DW,CRM, TRX
Application layer
SAP Profitability and Cost Management
Presentation layer
End user data entry, query & analysisWeb or LANWork management Shipped with application
Model buildersModel structure / rules
Data layerSingle open databaseOracle or MS SQL
Data BridgeFlat file or Relational
SAP Financial Information Management
Export calculated results
External Data Warehouse
Bulk Data LoaderTable to table
SAP Business Objects BI solutions
SAP BusinessObjects
UniverseCreate UniverseStatic
SAP Business Objects Analysis and other 3rd party OLAP clients
EPM add-in for Microsoft OfficeShipped with application
MDX ConnectorDynamic
SAP Financial Information Management
Other SAP EPM solutions
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Observations about changing taxes, timing and transparency
► Why now:► Technology solutions coming of age just in time for ramp up in
audit needs
► The value:► Fewer audit risks and lower overall cash taxes paid.► Be prepared for instantaneous reporting (e.g., Brazil’s SPED).
► The bottom line:► Whether it is indirect tax or transfer pricing, change is possible but these projects
take time — so, start now. If there is an issue, the fix will not be simple or fast.► Leadership means participation across functions.► Be prepared for CFO-level business case to explain and budget for change.
Leading tax department change16
Business drivers
► Starting to see movement in companies focusing specifically on improving the international data and collecting it closer to real time
► More granular forecasting, at least in key countries or operational segments
Greater international exposure —revenues and costs
► Most companies are sustaining profitability through cost control
► Finance transformations will continue to put pressure on the organizations to become increasingly efficient
► Getting tax-sensitized data out of systems controlled by finance is one of the key factors in achieving efficiencies within tax; VPs who get aggressive in this area achieve two things:► First, they capture finance
technology/transformation spend► Second, they create efficiencies
without increasing risk
Focus on cost control is critical when revenues are restrained
Driv
ers
Approaches at leading com
paniesLegislative
Operational
Business
Drivers
Leading tax department change17
Greater international exposure
► As the percentage of income/expenses outside of HQ increases and more elaborate tax planning is implemented:► Decentralized nature of non-US data becomes more problematic► Budgeting and forecasting issues with data (not the tools) drive uncertainty► Complexity and timing of calculations create risk
► Solution is to focus on areas that improve international reporting —organization, process and technology► Why now:
► Trend is to continue to increase exposure (e.g., BRIC)► The value:
► Reduce risk and provide better planning
► Example:► Company redesigned process/data so international calculations mostly known in the
first two months of the close rather than in six months, and for the acceleration of statutory filings
Leading tax department change18
Focus on long-term costs control via finance transformation
► Cost of finance, speed and accuracy is a key driver of change leading companies to make significant investments► Often huge budgets► Tax can provide an excellent business case if cash taxes, risk and value are
assessed and included in project scope
► Opportunity for change► Creates environment to reevaluate current approach► Since tax needs were often not built into current approach, this is almost all upside► More global standards help tax departments
► Change isn’t always positive► Stable resources and tasks might be replaced► Data elements might be summarized in a way that prevents good tax analysis
Leading tax department change19
Engaging in finance transformationPotential benefits for tax from finance improvement
Finance trends Tax function potential ramifications Tax function potential opportunitiesImprove use of IT systems
► Systems changes may impact current data sources and lead to more data rework and data gathering
► Customized reports for tax may no longer be available
► Leverage finance systems to generate tax-sensitive information
► Consolidate multiple sources of tax information to streamline data collection
Standardize financial and management reporting and improve forecasting
► Shorter close cycle places additional pressure on the tax-provision process
► Improved financial reports and forecasts may be optimized for management and oversight needed for legal entity reporting
► Redesign and automate tax financial close to support shorter close with increased accuracy
► Work closely with finance to “tax-sensitize” forecasting processes and systems to improve accuracy and efficiency of tax reporting and planning
Simplify finance organization structure; leverage shared services
► Fewer local finance resources available to support international tax compliance and provision reporting or manage service providers
► Functions performed by “shadow tax” resources may be altered and/or need to be assumed by the tax function
► Centralize tax activities across business units and geographies to reduce costs
► Consider how to migrate activities to achieve cost efficiencies without increased tax risk or lost tax opportunities
Leading tax department change20
Sub-projects within finance transformationsMore potential benefits to tax
Project types Potential tax benefitERP consolidation/standard chart of account (COA) implementations
► Improve tax provision and compliance accuracy through greater automation► Leverage the ability for automation in tax technology tools► Reduce manipulation of ERP data► Improve visibility into intercompany transactions and transfer pricing issues
Shared service implementation ► Improve the consistency, timing and access of key tax inputs such as statutory accounts preparation
► Reevaluate tax personnel roles and deployment and use of outside providers
Process and sub-process redesigns ► Reduce overall effort by both tax and accounting personnel by incorporating tax sensitization decisions at the source of recording
► Increase ability to automate manual tasks resulting in significant time savings
Data warehouse and archival management strategies
► Increase the availability, accessibility and standardization of data required for tax calculations and tax authority audit purposes
► Provide/create central repository for business transaction data
Business performance management initiatives, including management reporting and decision-making
► Improve the quality of the financial data available for tax forecasting and tax planning
► Enable quicker tax responses to business planning inquiries
Leading tax department change21
Tax data marts
Example of where companies can be today
Source systems Enterprisedata warehouse
Manufacturing
Job profitability
Procurement
Legal entitieshierarchies
Transfer pricing
Fixed assets
General ledger
System 1(SAP)
System 2(Oracle)
System 3 (Other)
Cons/Elims (Hyperion)
Entity profiles(shared tax and legal)
Transactionmart
Fixed assetmart
Transferpricing
mart
Other data collection tools
Interfaces
Tax provision Tax compliance Tax planning/analysis
Accountmart
Leading tax department change22
End-to-end view
► Capture► Tax sensitize — the ability for the financial system to have the means to provide
tax-level information without manual adjustments► Monitor the key accounts so what is regularly booked is of sufficient quality
► Move► Develop the reporting and interfaces to drive other systems
► Use► Utilize available mechanisms to bring data into third-party tools
(e.g., provision, compliance)► Develop reconciling mechanisms to validate against captured data
Leading tax department change23
Tax need (example: fixed assets)
Tax needs the ability to evaluate the assets that were placed in service during a given year or period of theyear and potentially change the depreciation method used to compute depreciation for that year (e.g., USmid-quarter convention, where assets that are placed in service take a half year of depreciation in the firstyear, except when more than 40% of the assets placed in service during the year occur in the last quarter of the year).
Capturing data requires multidimensional thinking (SAP Examples from Ernst & Young requirements database)
Successful data capture requires identifying the tax needs, the systems impacts and the process impacts. Each play a role in ensuring success.
Systems (example: transfer pricing)
Profitability segments will be objects used to capture costs and revenues in the CO-PA ledger. In an operating concern, a profitability segment is defined by a combination of characteristic values. Characteristics may be already available in the SAP System (customer, product, sales organization), or can be defined based upon customized data elements.
Process (example: fixed assets)
When an asset record is created in the SAP Fixed Asset system through cost settlement from the SAP Project system or direct capitalization, a user must select the appropriate asset class. While this setting is the SAP default setting, it is recommended that based on predefined rules, the asset class is auto populated for each addition.
Leading tax department change24
Transactionfacts and
factattributes
Tax data marts
Capturing data in a data warehouse
Period
DataSource
Cost center
Profit center
Currency
Fact
Dimension
Hierarchy/roll-up structure
TradingPartner
Company/AC
Responsibilitycenter
Primejob
Co/Prm Job/RC Location
Co/Wrk Ord/RC Location
Sourceaccount
WorkOrder
Document
Fact attributes
G&A tax type
DocumentItem
Line item
Billingtype
Vendor
Posting key
Transactiontype
Customer(sold to)
Subfieldcontents
Calendar/fiscal
Common Profit
Center
Common Cost
Center
Tax AcctHiers and
Attribs
AcctHiers and
Attribs
Resp Ctr to Dept to BU
Hier and Attribs
Co to Legal Entity Hier and Attribs
Transactionmart
Fixed assetmart
Transfer pricing mart
Accountmart
Leading tax department change25
Using: end result of well-engineered data
► High degree of book tax difference automation► Early sign-offs of amounts requiring no further adjustment between provision
and compliance► Reduction or elimination of most tax packages► Fewer data correction activities (e.g., finance/accounting people use the
correct codes for tax since it is monitored and reconciled regularly)► Personnel in tax or who work with tax have an understanding of the data,
where it resides and how to effectively access it
Leading tax department change26
Operational drivers
► Basics:
► Tools — compliance and provision integrated; basic indirect tax tools
► Data — G/L level feeds; monthly indirect feeds
► Next:
► Tools — budget/planning; global indirect tax tools; transfer pricing; workflow
► Data — detailed feeds expand to all major financial feeder systems; monthly reporting
Technology moving beyond the foundational
► Beyond just off-shoring — regional hubs, near-shoring
► Shifting away from quarter-only or annual-only analysis
► Career path for personnel
► Clear ownership
Execution models for tax outside of HQ have not progressed significantly
Driv
ers
Approaches at leading com
paniesLegislative
Operational
Business
Drivers
Leading tax department change27
Technology moving beyond foundational
► Early 2000s► Compliance tools with simple trial balance import► Vertex or Taxware indirect tax engine for US only► Simple storage for documents (e.g., shared directory)
► Today — tools have evolved► Integrated compliance and provision (global rollout) for income tax► Global ONESOURCE (formerly, Sabrix) or Vertex for indirect tax► Workflow and document management for multiple processes► Global tax calendars with internal and external assignments► Leverage of finance tools (entity management, finance data warehouse,
planning/forecasting, controls sign-off)
Leading tax department change28
Technology moves beyond foundationalEarly 2000s
Indirect tax
ERP system
US bolt on for mostly sales tax (some use tax)
Limited transaction
history
Order entrybilling accounts
receivable
Tax ratesTax
determinationTax calculation
Good movementfixed asset
transfer
Accounts payablePurchase order
Direct tax
Simple Excel work papers
Transaction history and audit
archive
UScompliance tool
G/L and consolidations
Multidisciplined
Shared drive
US state tax calendar
Numerous spreadsheets
Other systems
Leading tax department change29
Technology moves beyond foundationalNow
Indirect tax
ERP system
Order entrybilling accounts
receivable
Tax ratesTax
determinationTax calculation
Good movementfixed asset
transfer
Accounts payablePurchase order
Transfer pricing
Planning budgeting and
forecasting
Data analytics and reporting
Intercompany transaction processing
Direct tax
GAAP/stat/tax work papers
Audit and planning analysis
Provision and multicountrycompliance
G/L and consolidations Other systems
Multidisciplined
Global tax rates
Transaction history
Global tax logic
Multicountryreporting and
data transmission
Workflow and document
management
Global tax calendars
Entity management
tools
Fewer spreadsheets
Finance or tax data warehouse
Transaction history and
audit archive
US bolt on for mostly sales tax (some use tax)
Limited transaction
history
Simple Excel work papers
UScompliance tool
Shared drive
US state tax calendar
Numerous spreadsheets
Finance or tax data warehouse
and archive
Leading tax department change30
A look at the interfaces driving automationDirect tax examples
Interface from Description of need/benefitFixed asset module Drives high-value book-tax differences for tax depreciation, gain/loss, etc. on provision as well as
providing details for compliance activities such as fixed asset computations and state A&A determinations.
Taxes payable account detail
Automatically populates tax payments, refunds and adjustments entered in transactions at both the headquarters and local country level, providing detailed visibility to tax provision preparers and allowing for a rapidly accelerated tax account reconciliation process.
Consolidation software Ability to compare final consolidated tax results with consolidated book results at the desired level of detail. Also extraction of hierarchies and entities for meta data.
Local country trial balances
Drives automation of low-complexity, high-volume book/tax difference across the globalenterprise allowing for an accelerated close timeline and increased management attention to more material differences.
Select transaction-level detail
Drives automation of specific book/tax difference analysis and other specialized compliance information (e.g., foreign sourcing) based on detail not otherwise available at a trial balance level of detail.
Tax compliance software
Allows for tight integration of compliance and accrual process, enabling a sped-up filing and return-to-provision process.
Reports/balance checks
Various customized report interfaces used for driving detailed compliance activities, specifically for state and international compliance. Also, validations across systems.
State planning reports Allows for a tighter, more granular estimation of blended state rate leading to lower state RTAs.
Leading tax department change31
Technology moving beyond foundational
► Many companies haven’t positioned themselves to take advantage (e.g., lack of tax tech people)
► Why now:► Companies need to rethink many of the challenges for new focus points including
global control, regional centers, better data and more sophisticated solutions
► What is the value:► Speed and planning are leading to better planning and risk mitigation
Leading tax department change32
Execution model
► While finance models for execution are evolving (e.g., regional hubs, centers of excellence), tax’s models mostly have not
► Examples of disconnects:► Client moves to finance regional hub in LATAM country but no redesign of tax
processes, controls, training or instructions ► Tax not involved in hiring and no true job descriptions available► No rethinking of processes and how more of a monthly process is actually more
consistent with the regional model than a quarterly or annual process (e.g., are there activities such as account reconciliations or tax sensitive account reviews that can be formalized and adopted regionally?)
► No redesign of organization around tax audit defense and business unit planning that likely remains even with a regional hub
Leading tax department change33
Illustration of current challengesHow US multinationals manage global VAT
Undermanaged► Only about 1/3 of large
multinational corporations (MNC) have either a global or regional VAT leader
Under staffed► Most large MNCs have fewer
than 10 tax personnel worldwide dedicated to VAT
► Many have no global indirect tax resources in the tax department
Under measured► Most large MNCs do not have
clearly defined metrics to measure the effectiveness of indirect tax performance
Over-focused on EMEIA► MNCs are three times as likely
to have a regional VAT leader in EMEIA than in LATAM or Asia
► Fewer than one in seven MNCs have written indirect tax policies in place outside of EMEIA
Indirect tax
function
Leading tax department change34
VAT: a global trend with local impact
► Indirect taxes represent the largest share of global business tax outlays
► New global and regional tax functions are being created in order to manage the volume and complexities of all the new challenges
► IT departments continue to push for a reduction in the number of ERP systems and a “single source of truth”
► New/upgraded system deployments require in-depth knowledge of global supply chains, sales/use tax and VAT legislation in each individual jurisdiction
OECD business tax revenue shares (% of total business tax revenue)
Corporate Income taxes
Payroll Taxes
Property taxes
Goods and Services taxes
VAT and SUT
Most frequent reasons for tax adjustments
$
41%
23%16%
10%
10%Formal mistakes (e.g., missing or incomplete invoices, receipts)
Incorrect qualification of turnover (e.g., incorrect tax rate, exempt instead of taxableIncorrect calculation of input VAT pro-rata
Inconsistencies between declared VAT and annual financial statementsOther
Leading tax department change35
A new organization model is needed to support the new demands
► Principal accountabilities for an integrated, global indirect tax function:► Statutory compliance/right to operate► Cash and earnings planning/creation► Internal control guidance► Audit/legal dispute oversight► Business planning/advisory► Operational cost minimization
► Benefits of an integrated function:► Increased transparency► Focused accountability ► Standardization
► Principal accountabilities for a regional indirect tax function:► Lobbying/legislative analysis, planning
and advisory► Audit and legal dispute support► Data analysis and compliance support► Coordinate with global IT and finance centers
CFO
VP tax
Region tax directors
Country tax managers
Regional taxIndirect taxManagers
Global head of indirect tax
Reorganized
Leading tax department change36
Example of a changeIndirect taxes
► Execution model changes away from decentralized model due to better technology and more standardization
► Leadership► Software updates► Planning support
► Education► Data analysis► Accounting entries► Compliance support► Audit response
► Audit representation
► Leadership► Software updates► Planning support
► Education► Data analysis► Accounting entries► Compliance support► Audit response
► Audit representation
► Leadership► Software updates► Planning support
► Education► Data analysis► Accounting entries► Compliance support► Audit response
► Audit representation
LATAM
Country A
Country B
Country C
LATAM
Regional hub
Central
Local country
Support including local third parties
Leading tax department change37
Execution model
► Why now:► Whether for direct or indirect taxes, changes in models are multiyear ventures and
having an idea as to what you want and experimenting with what works cannot be underestimated
► The value:► Risk mitigation and cost containment are both key aspects to changes in the
execution models
► What functions need to be involved:► Finance, tax and key operational leaders who oversee worldwide operations
Leading tax department change38
Conclusions
► More leadership/participation by tax in finance initiatives to improve: ► Data► Ownership/monitoring► Designing the future
operating model
Positioning future tax departments
► More focus on: ► Tax significant technologies
and the resources to maintain and optimize
► Matching analysis with activity throughout the year
► Creating vehicles in the organization that can deliver complex tax change
Questions and answers
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