Current and deferred tax are essential components of every balance sheet and income statement, and the effective tax rate (in book and cash terms) is a key measure. Calculating and reporting tax is an integral part of the financial reporting process, and technology plays an increasingly crucial role in supporting tax-related data gathering and computational activities, says Donald Drysdale, FSN contributing author.
Generally accepted accounting principles (GAAP) of individual countries are moving gradually closer to International Financial Reporting Standards (IFRS), but this convergence is bringing accounting standards closer – not making them all identical. Differences remain, creating the need for multinational businesses to understand and take account of local GAAPs and adapt group consolidated tax numbers to support local reporting.
Jim Robertson, Vice President Tax East at Shell International, explains how some accounting requirements go much further: “Section 404 of the Sarbanes-Oxley Act regulates tax reporting for any company with a US listing – not only direct tax but also indirect tax. US GAAP includes FIN 48, which requires quantification and reporting of uncertain tax positions. And the Dodd-Frank Act imposes country by country reporting of tax charges – a possibility which is also now being considered by the EU.”
Proprietary financial reporting software, ERP systems and other consolidation and business reporting solutions are not available ‘off the peg’ to meet the tax reporting needs of businesses operating on a global basis. IT systems developed for a dominant market such as the US, if applied in another environment with different tax rules and reporting requirements, may require costly tailoring to meet local needs.
“Some tax reporting packages work well for US groups but don’t adapt readily,” says Lesley Greenlees, Head of Tax at Aggreko.
Even where financial reporting systems contain tax numbers, they may not incorporate functionality to calculate these. Instead they may provide the necessary inputs from the business and store the computed tax answers, while failing to provide an audit trail.
Finance functions can face significant challenges in gathering and consolidating data needed for tax reporting – particularly where commercial operations are diverse and widely dispersed. Where specialist in-house tax departments exist, the timetables and pressures they face and those imposed on the wider finance team do not always coincide.
Good forward planning can help, but tax reporting is dependent on the business results. “Final changes of the underlying accounting numbers will require a flow through the tax reporting package,” explains Iain Stewart, Head of Tax at Damco. “The alternative is to produce side calculations measuring the difference, increasing risk and compromising the audit trail.”
Tax is often overlooked when new financial reporting software installations are designed and implemented, perhaps on grounds that tax is too specialised or complex, or simply because the needs of the tax function are neither recognised nor understood by external systems integrators.
When IT projects are prioritised, senior management look for tasks which differentiate the business within its marketplace. Inventing better ways to produce tax computations will not gain customers or increase market share, so tax technology can remain a relatively neglected niche.
XBRL (eXtensible Business Reporting Language) has emerged as a new technology format that can revolutionise financial reporting processes for those who prepare or use financial data. Use of XBRL has been driven by mandation in the US by the Securities and Exchange Commission (SEC), and in the UK by Inline XBRL (iXBRL) for online corporation tax filing.
There is scope for many large organisations to streamline internal or intra-group processes for recording, gathering and interpreting the data needed for tax reporting purposes. XBRL may be an element but in most cases no more than an aspiration. More immediately, efforts to collect data needed for tax reporting can be aided by measures to ‘tax sensitise’ data as early as possible in the accounting process. This can then support appropriate information flows to deliver such data to the tax personnel and, as Iain Stewart points out, can provide increased levels of confidence to tax authorities in the course of enquiry or tax audit.
Typically, finance and in-house tax department workloads are driven by quarterly, half-yearly and annual reporting cycles, depending upon the jurisdiction and the size of entity and, according to Paul Morton, Head of Group Tax at Reed Elsevier Group plc, tax directors spend an increasing amount of their time on reporting matters. Pressures to increase the frequency of reporting in future could have a dire impact on the already time-consuming processes of gathering tax information from individual companies (which in some jurisdictions are taxed as separate entities) and consolidating these into group tax charges.
In their tax reporting, many in-house tax departments rely heavily on spreadsheets. For tax personnel who may lack advanced IT skills, spreadsheets can be relatively easy to create and maintain, offering the user wide-ranging functionality and flexibility in manipulating data. Tax specialists generally welcome the power that this gives them, but in the wrong hands it can be dangerous.
Much has been written elsewhere about the flexibility of spreadsheets. They can be a godsend, for example, for gathering tax data from individual companies or divisions and compiling group tax figures. However, some tax departments discover to their cost that there are practical limits to the reliability of spreadsheets. It can be difficult to control the quality of multiple spreadsheets and provide appropriate audit trails.
Paul Morton picks up this point: “Good spreadsheet discipline is essential – separating inputs from calculations, forbidding small tweaks embedded in calculation sheets, and adequate segregation of duties and review.”
Shortcomings in spreadsheet maintenance can lead to unexpected crises and embarrassing accounting inaccuracies. Spreadsheets used by one individual may be indecipherable and virtually useless to anyone else, rendering the organisation vulnerable if the originator is redeployed or leaves. Spreadsheets used by a team may be created, used and maintained inconsistently by different users, leading to unexpected and irreconcilable errors.
Alternative database systems to manage the flow of tax work can provide a safer tax reporting environment – with loss of flexibility more than compensated by improved quality control. However, as Paul Morton points out, they can be expensive to implement and maintain and in some cases this can be prohibitive for medium sized tax departments.
There are ‘off-the-shelf’ database systems that can be configured to meet particular tax reporting requirements, but these do not always provide the answer. Lesley Greenlees comments: “We have looked at options for further automation to reduce our reliance on spreadsheets, but many tax reporting packages are expensive and too ‘one size fits all’.”
Bespoke database systems, tailored to meet the particular needs of the organisation, often provide the best overall solution. Indeed, for tax reporting within a large and disparate group, a tailored database-driven solution may offer distinct advantages – giving the appropriate balance of flexibility and control.
Databases can be used to bring together group tax figures, or manage related aspects such as tracking the tax histories of heritable properties and other fixed assets to calculate deferred tax liabilities. These can put tax departments in a stronger position to cope, for example, with new accounting standards or ever tighter timescales for financial reporting. Database-driven systems can also offer advantages over their spreadsheet equivalents. For example, they can provide secure multi-user access across networks, structured user level security, effective validation of data input and trouble-free carry forward of figures from one year to the next. Overall, they promise a more secure working environment which can be crucial in minimising perceived tax compliance risk.
Change is never popular, and the task of migrating an in-house tax department from a myriad of spreadsheets to a new workflow system can be daunting. Lesley Greenlees speaks of the advantages to be gained from an external review of tax reporting systems to spot gaps and identify remedial action. The task of undertaking such a review is one that many Heads of Tax might be tempted to postpone, or even avoid altogether, on grounds that the upfront costs would be prohibitive. However, the costs of not exploring and implementing such options might prove even higher.
