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Creating Tomorrow’s Tax Value With Today’s Successes



An introduction to sustainable tax value

Shortly after I was appointed chief tax officer (CTO) of a public company, a local attorney sent me a small congratulatory gift.  It was book called 101 Corporate Tax Loopholes.  That did not sit very well with me.  While “loopholes” may be legally defensible, it just sounds bad.  So, in typical smart-alecky fashion, I put rubber cement on the outside of the pages to bind TFS&O Framework Overviewthe book closed permanently and left it on my bookshelf in the office. It became something of a joke for the team.  Weeks later, our IRS auditors scheduled a meeting to kick off the next audit cycle and I made the mistake of holding the initial meeting in my office.  The seasoned auditor was like a heat-seeking missile to my bookcase, specifically to the tax loopholes book.  I could see him staring at it as he took his seat.  At first, I was flush with embarrassment and feeling a bit defensive.  Then I remembered what I had done with and to the book.  “I see you noticed my book.” I said.  “Would you like to have a look?  It may be helpful for you to see how we’ve approached tax planning…”  He looked quite puzzled and did not have a chance to reply before I went to the bookcase and pulled out the permanently sealed book.  As he realized my point, a smile came to his face and we proceeded to have a productive meeting.  Although we had many difficult issues to work through over the years, the auditor knew, from the first time we met, that “loopholes” were not our style.

Tax planning is often synonymous with strategies that push the edges of the law and morality because of brinksmanship like that found in the book I was given.  I would rather deliver true sustainable value.Einstein Value

In this section of Tax Function Strategy & Operations (TFS&O) I introduce the key categories of tax value and underscore the importance of sustainability. In future posts, specific strategies for delivering sustainable value within each area outlined here will be shared.

Defining Sustainable Tax Value

Successful tax executives intuitively know how to deliver value to the enterprise but they often have trouble defining, articulating and measuring the value they deliver. There are three primary categories of tax value:

  • Tax Savings
  • Risk Mitigation
  • Operational Efficiency

Before diving into the categories of tax savings, a clear understanding of sustainability will serve to link together traditional tax planning to the TFS&O approach. Many tax consultants are of the mindset to create “sustainable fees” versus “sustainable value”.  In other words, the consultants identify the savings opportunity, gather the information and file for the refund.  They do not make any effort identity and correct the root cause of the issue/opportunity because they would like to come back a few periods later to do the same work again.  This is a known strategy in the industry that persists even today.

Although I sound critical of the “sustainable fees” approach, historically there have been valid reasons for it.  Tax professionals, especially those with a legal background, have not always understood the principles and value of process improvement.  Tax technology is only now catching up to the demands of the tax function. Housing the deep level of expertise within small to medium sized tax functions was cost prohibitive.  But times have changed.Demand

Sustainability is well within the reach of the majority of the tax functions. The ability exists to embed tax planning into the day-to-day transactions of the enterprise without disrupting the transaction flow.  Advanced technology enables multi-variant posting determination on a single transaction.  This allows an item to be recorded one way for accounting and another way for tax.  Process improvement, data flows, system landscapes, and workflows are no longer foreign concepts to tax professionals.  Most importantly, tax professional have come to understand the value of addressing opportunities at the source and for the long term, thereby creating ongoing savings for their company versus an ongoing fees for their advisors.

Tax advisors that do not address both technical and operational aspects of tax opportunities are negligent. Dismiss these advisors immediately and instead find an advisor that will deliver value in the short term and fix the problem, at the source, for the long term.  Demand sustainable tax solutions from your team and especially from your advisors!  Sustainable tax value is delivered when precise application of tax law intersects with a disciplined operational environment.  The successes of today’s tax planning must creating long-lasting value for the enterprise.

Tax Savings

Tax savings refers to reducing the tax burden on a company through legal methods. Today tax savings strategies are under heavy scrutiny.

The outcry for corporations to “pay their fair share” or “act with higher tax morals” has never been greater. One of my tax professors began each semester’s coursework with a statement that went something like this:  “Throughout this course we will discuss tax law and how to apply it to business activities.  If you feel the urge to interject your feelings about the morality of applying the law, please do not.  Whether you feel the company should pay more or less taxes, neither opinion has any place in this course.  We are here to learn how to calculate the amount that is most accurate given the current laws.”  In spite of the current environment, I believe there is still safety in simply paying the legally accurate amount of tax, and not a penny more… or less.

Savings can be split into two general buckets based on the type of tax:

Below-the-line taxes (a.k.a., direct taxes) – These savings are defined as those calculated on the income of the business. The basic measure of income taxes is the “effective tax rate” (ETR).  However, depending on the industry, the company and other factors, “cash tax rate” (CTR) can be just as or even more important than ETR.  For this reason, the detailed book-to-tax differences that drive the “taxable income” (TI) calculation are critical whether the differences are permanent or timing.  Other tax areas that impact both ETR and CTR are credits and incentives, legal structure, transfer pricing, etc.  Further complicating the direct tax calculations are the number of jurisdictions that impose taxes on business income including country level or federal taxes, states or provinces and, in some cases, cities and municipalities.

Above-the-line taxes (a.k.a., indirect taxes) – These are savings related to taxes imposed on transactions. There is a wide range of indirect taxes including sales/use, value added, property, excise, customs, duty, payroll, etc.  These taxes are typically treated as general operating expenses and, accordingly, the value of these savings often must be “tax-effected” to account for the loss of the deduction

Risk Mitigation

Every tax position, however mundane, bears a certain amount of risk. Eliminating risk is not a realistic goal for tax executives.  However, risk mitigation is crucial to every tax executive’s success.

Identify and measure risk

The first step to mitigating tax risk is identification and measurement of the risk areas.

For direct tax purposes, at least within the U.S., reporting rules related to uncertain tax benefits (UTBs) force identification and measurement of risk. For purposes of managing the tax function successfully, a deeper look is required.  The rules for reporting UTBs focus on the specific tax positions related to direct tax.  Whether the company is subject to these rules or not, the approach put forward by ASC 740 is useful in identifying and measuring risk.

Like direct tax risks, indirect tax positions include the approach taken to determine and report indirect taxes as defined above. Even though these taxes are “above-the-line”, the value or exposure can be significant.  Consider a minor error in applying a rate on thousands or millions of transactions.  I recently met with a tax executive with a very complicated legal structure, material transfer pricing issues, a global footprint, significant research activity.  One of her top two tax initiatives is the proper determination and reporting of value-added tax (VAT) in a hand full of European countries.  VAT is at the top of the list because of the sheer volume of the transactions not because it is the most complex are technically challenging tax area.

Tax audit risk

Whether considering direct or indirect tax risk, the risk itself will manifest during an audit. Taxing authorities staff to audit taxpayers across virtually every tax type.  The audit process will obviously focus on identifying non-compliance with the various rules across the tax type.  However, in addition to the risk of finding a clear discrepancy in the application of the law, another risk exists.  Many audit adjustments relate to circumstances in which the taxpayer cannot provide sufficient documentation to support the tax positions.  The explosion of data within companies will only serve to reduce auditors’ willingness to except unclear or incomplete documentation.

Financial audit and controls risk

The final area of tax risk is internal controls. When the U.S. Sarbanes-Oxley (S-Ox) Act of 2002 took effect in the U.S., internal controls became increasingly relevant for the entire enterprise including tax.  In the early days of the S-Ox rules, control weaknesses were as prevalent in tax functions as anywhere throughout the organization.  Material Weaknesses and Significant Deficiencies relating to tax continue to plague seemingly strong departments.  Internal control-related risk is difficult to manage and to measure.

Operational Efficiency

The pressure on tax functions to do more with less persists in most companies. In many cases, company leadership is not even aware of the pressures because tax executives do not communicate the operational impact of law changes, additional reporting requirements, and increased tax complexity from business changes.  However, not all the blame for the pressure is outside of the tax function.

Headcount reduction

As mentioned previously, operational matters have not been at the top of most tax executive’s list of priorities. Fear of a mistake is often so great that unwieldy and even wholly inefficient processes persist so as not to disrupt something comfortable or perceived to be safe.  In defense of tax leadership, even if there were an appetite to drive greater efficiency, the knowledge to do so rarely exists in the tax department.  Further, if the knowledge does exist, the value of those changes is difficult to calculate.

When operationally efficiencies are the focus, often one of the first questions asked is, “…are you going to recommend headcount reductions?” This is actually not the right question.  Instead, we should ask, “What sustainable value could I deliver with the capacity gained from efficiencies?” Although reductions in the time to perform a task will increase the capacity of the professional performing the task, the presumption that the tax function can now cut these hours is relatively idealistic.

Capacity redeployment

The presumption to that saving time in tax processes leads to staff reductions is idealistic because it presumes that everything else in the department is getting done and done well.  The list of valuable and sustainable opportunities in tax is virtually endless.  Theoretically, tax executives could foresee a time when the cost-benefit analysis of the opportunities would suggest that staff reduction would make sense.  Each time I hear the question,”…will we need to cut staff?” my response is to revisit the list of valuable yet deferred initiatives and to apply the increased capacity to delivering incremental value to the enterprise in an effort to create a perpetual pathway to tax value.TFS&O Value Path 1

Conclusion

Sustainable tax value is the focus of all successful tax functions. Sustainability is more attainable than ever before due to advances in process improvement, tax technology and awareness of critical role tax plays in the economic and operational success of the enterprise.  Successful tax executives set priorities for the tax function based on the sustainable value delivered to the enterprise.  The next post will outline the tax functions’ available resources to enable value delivery.

Stephen Day

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Stephen Day

With more than 25 years’ experience as a tax executive, in both industry and consultancy, Stephen is accomplished in leading high-performing teams to achieve results. He has the rare ability to deliver tax planning, driven by the business landscape, and to operationalize those tax strategies through creative process and organizational solutions. Simply put, he is passionate about developing and improving tax and finance operations to create value for the enterprise.

Stephen is a graduate of the BYU Marriott School of Management with a Master of Accountancy-Tax. He has completed executive development programs within both EY and Deloitte as well as at Northwestern University’s Kellogg School of Management. Stephen has also completed several tax and accounting software certification programs. While some might accuse him of actually having tax as his hobby, he can be found on the weekends riding his motorcycle in the canyons of Utah and devoting time to his family.

One thought on “Creating Tomorrow’s Tax Value With Today’s Successes

  1. Avatar Florent Gardes says:

    Dear Steven,

    Thank you for your article. It gives the guidelines of Tax directors’position.

    I fully share your views.

    Regards.

    Florent GARDES

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