Getting strategic value from your tax function

Often underused, tax functions can have a big impact

In ideal business scenarios, tax leaders play pivotal roles in strategic decisions for the organization.

Empowered tax functions do much more than prepare statutory tax and regulatory filings. When the company is launching new products, expanding into new geographies, considering M&A opportunities, or seeking strategic opportunities presented by new tax legislation, tax professionals can provide analysis that can make a substantial contribution to the business.

Ultimately, tapping into tax professionals’ knowledge of how to reduce the “T” in EBITDA can be just as impactful as pursuing other functions’ strategies for how to increase the “E.”

Grant Thornton tax professionals say that although many of their clients welcome the input of tax professionals and get significant value from their tax functions, others have the opportunity to get more contributions from their tax teams.

“I think most tax groups would tell you that they know their business very well and have valuable insight. I would agree with that,” said Grant Thornton International Tax Service Practice National Managing Partner David Sites. “Whether an organization’s non-tax functions and C-suites always access that value is another story.”

Succeeding in optimizing tax function contributions to the business requires four discrete actions:

Moving into an advisory role

The activities within a typical tax function have evolved significantly due to technological advancements and process innovation, with further changes on the horizon.

“Historically, tax professionals put numbers in boxes on forms by hand and performed calculations,” Schenkenberg said. “Then we developed tax return preparation software that performed calculations after people entered the numbers. In the next evolution, people aren’t going to enter numbers in the boxes. The software will be plugged into source financial systems to get the numbers, and the calculations will be done by the software.”

With technology doing the data entry and calculations, tax professionals need to be ready to make the transition to a more collaborative role with the business. Some of the tax work will involve programming the software to make sure the transfer from ERP, point-of-sale (POS) and other systems is entered properly and to train the software to make calculations in a way that complies with rules and regulations.

The evolution of the tax function will include providing strategic guidance by interpreting data and communicating opportunities for savings on tax, including assessing future business plans and how changes in global, federal, state and local tax laws can affect those plans.

“It is imperative that tax professionals lean in to emerging technologies to keep up to date with the constantly changing landscape of local and global tax laws,” Lance said. “Having a strategic voice requires staying ahead of the curve when it comes to these changes.”

Where tax professionals deliver value

One of the biggest mistakes organizations make is in focusing their tax considerations and resources almost exclusively on income tax, while not focusing enough on other taxes such as property, sales and use, and other transaction taxes.

“Non-income taxes are frequently the biggest tax liabilities of organizations, and they also typically have enormous volumes of data associated with their proper management and regulatory reporting,” Clarke said.

While income tax is naturally more variable, property tax can often be a strategic factor related to facility and office space, and sales and use taxes have become increasingly complicated as a result of the emergence of e-commerce. A strategically focused organization holistically concentrates on all tax types and their respective impacts on the enterprise.

Meanwhile, as technology becomes more pervasive, tax leaders also need to make sure the right data is being captured and imported. In a very simple example, if a business receives an invoice for $107, of which $7 is tax, the recipient’s financial systems need to separate the $100 for the product from the $7 paid in tax, as well as the jurisdiction to which the tax was paid. By capturing that data for all vendor invoices appropriately, the tax department saves itself many hours of costs downstream as well as providing management with visibility into whether the right amount of tax is being paid in the correct jurisdictions.

Another simple example involves including the correct amount of sales tax in each POS transaction. Having transaction tax technology in place that is integrated with a POS system, especially for a large, cross-jurisdictional or complex enterprise, is vital to charging customers the correct tax amount for proper reporting.

“If you do not have the correct transaction tax on your customer receipts or invoices and have collected the proper amount, when the state comes to audit, you likely have made your tax audit substantially more complicated and far more costly,” Clarke said. “You’re going to get a massive assessment with interest and penalties that directly affect your bottom line.”

Some of the best tax functions even act as leaders in technology implementation for the entire organization. Tax sometimes is the first department in the organization to perfect data extraction, data visualization and even predictive modeling techniques that are implemented later by the rest of the organization.

“The systems and models that tax professionals use are often portable to other functions around the organization,” Sites said. “This adds tremendous value for the C-suite if it knows that tax has the capability to take three disparate data sets from three different ERP systems and put them into one data lake to be aligned for predictive and quantitative analysis. That’s incredibly powerful, not only for tax, but also for financial planning, treasury and trade compliance.”

But unless the tax function has a seat at the C-suite table, it may be developing all these capabilities in isolation without helping other departments improve.

Making the connection

To unlock the vast knowledge contained in the tax function, organizations need two complementary forces to connect.

First, CFOs and the rest of the C-suite need to actively seek out the expertise of tax professionals on a consistent and recurring basis. Tax leaders, meanwhile, need to advocate for themselves and their functions.

From the C-suite standpoint, seeking tax’s input can start with including tax in key performance indicators.

“When organizations select KPIs, they are measuring progress on key initiatives,” Sites said. “Tax needs to be part of the equation. Leaving tax aside may create a gap between perceived progress and actual progress.”

For example, one organization Sites once worked with implemented a new product distribution plan that reduced the order-to-delivery life cycle, which was the KPI they were measuring. But the plan didn’t measure tax-related KPIs, and the corresponding unmeasured tax impacts had detrimental effects on several other KPIs that were not anticipated.

Meanwhile, Clarke said tax leaders need first to engender the trust of the whole organization by establishing a department that enables:

• Visibility into data and tax processes so that management has real-time insights
• Efficiency in execution through effective use of standardized processes and technology tools
• Accuracy of results for proper jurisdictional reporting

Backed by that foundation of competence, tax leaders can advocate for inclusion in strategic decisions because their input inevitably can provide tangible benefits and a substantial difference in the bottom line.

“Some larger companies may have exposure to over 10,000 taxing jurisdictions, including property, sales and use tax,” Clarke said. “The volume of it is daunting, but it also means there are an incredible number of opportunities. For a company that doesn’t look at tax as needing a seat at the table, that’s a huge miss.”