|Keith Brockman is global tax director at Mars. He is also a lecturer, frequent speaker and the author of the Strategizing Multinational Tax Risks blog. In his regular ITR column he provides a practical analysis of some of the more challenging recent developments for corporate taxpayers, looking at how in-house professionals can mitigate new risks and identify effective solutions in an evolving environment.|
Developing and utilising technology are building blocks that will ideally complement the success of a tax department/administration, or hinder its future development. Let's explore additional facets of this important tool.
Accurate and timely data
Irrespective of great processes, the lack of ability to obtain accurate data in a timely manner can lead to failure in terms of substantial compliance efforts and financial costs.
A tax department should consider this factor in all facets of its operation and influence including:
- Legal entity financials;
- Classification of tax sensitive data;
- Characterisation of intercompany services;
- Gross, versus net, amounts for income/expense items;
- Characterisation of investments/loans (debt/equity);
- Tested party information for transfer pricing documentation;
- System (SAP) consistency between business units;
- Information for VAT / sales & use tax reporting; and
- Central repository for intercompany agreements.
The tax function should be an integral element of the IT organisation, with each function highly mindful of its separate roles and responsibilities. Although such functions are separate, there should be best practice meetings on a regular basis to discuss new ways to provide quality data in a timely fashion. Query – how often does this happen in your organisation?
Additionally, new processes and systems should only be performed after a collaborative meeting of minds to discuss efficiencies and learnings that will be put into practice to form win-win opportunities. These meetings will also enhance the skill-sets and creativity factors of tomorrow's tax professional.
The quality of data should be tested on a recurring basis to corroborate its validity. For example, transfer pricing cost-plus applications should ensure the correct cost bases are utilised for which the correct mark-up is applied. Gap analyses should be frequent dashboard items to track potential irregularities. The new norm of transfer pricing profit split measurement will require assurance from multiple data sources to ensure its accuracy.
From an auditor's perspective, electronic data gathering is commonly requested before the commencement of the audit. Data specialists will use test programs and data mining techniques to uncover credit entries in debit types of accounts and so on, for which queries will be developed for the organisation to explain.
Most importantly, the loss of credibility for an organisation resulting from its capability to produce quality data timely may lead to a reluctance from tax auditors to believe that transfer pricing documentation practices are truly embodied in the substance tests for data reporting.
Collaborative work environment
As tax and IT departments plan their priorities for the following year, the focus on data should be an important element in such objectives. Tax should develop a priority list of key data drivers that can improve efficiencies and quality, while IT should embrace such priorities as a part of their operating plan.
Best practice areas include having an IT professional within the tax function, or conversely, to provide a full-time resource for data processes. A subset of this arrangement is to have a key user within the tax department, although recognising that a two-way dialogue between the functions is essential to ensure organisational success.
A tax data warehouse, whereby information is collected once and used seamlessly for tax reporting, is one important key to success. This ideal negates the factor of multiple systems, data bridging between systems, and frequent reclassifications, among others. However, this objective may take several years to achieve, based on the relevant starting point of (in)efficiency.
The most important data points should represent the primary focus area for each sub-process. Documentation of the change process for data reporting is an integral component of these exercises for future reference to comprehend the intent, current state and future state resulting from the change.
The new data environment
How do we contribute to the success of developing and utilising technology? A few ideas include:
- Interim data testing;
- Collaboration of tax and IT on shared data objectives;
- Quality documentation;
- Consistency of reporting in multiple jurisdictions;
- Gap / dashboard indicators for key transfer pricing data points;
- Best practice workshops to enhance future learnings; and
- Data warehousing concepts.
As tax enters the post-BEPS era of additional complexity and subjectivity, the importance of technology and key data cannot be understated. We are all accountable to ensure that key data provided timely is a driver of tomorrow's tax function.
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