Elevating function productivity with an “efficiency dividend”

Automating the flow of tax information through greater leverage of your company’s enterprise IT investment August 2011

At a glance The tax function faces an increasingly difficult operational environment given today’s challenges. There is a broad grass roots effort underway at many companies to boost productivity, but it’s not always easy to know where to start. Introduction Tax functions are being asked to do more with either flat or fewer resources, but practical solutions exist. A tailored data management strategic plan that embraces technology and systems already in use by your company can transform a high-pressure environment into an integrated ecosystem that drives improvements in productivity, quality, and risk.

The challenge

There is a broad grass roots effort Insiders know that tax functions underway at many companies to are not always top of mind when increase productivity in the tax organizations design large-scale function. Consistent with recent technology improvements and years, the ever-increasing regulatory upgrades. Compounding the burden coupled with tight budgets, operational challenges are trends like unprecedented collaboration having systems in place that are so among domestic and foreign taxing disconnected, only tenured personnel jurisdictions, and the unshakably know how things work, or maintaining high threshold to consistently a proliferation of spreadsheets that produce timely and accurate tax have become unnecessarily complex have contributed to a over the years. This can lead to an difficult operational environment for operation burdened with inefficiency, the tax function. We believe there is low productivity, and unnecessary risk. an important and largely untapped opportunity that, if executed well, Investments in tax systems and process can significantly boost tax function improvements are lagging behind productivity. The keystone to this those deployed for use by groups opportunity is a tailored data such as financial reporting, treasury management strategic plan that and FP&A in the face of an escalating embraces technology and systems regulatory agenda and increasingly, a already in use by your company, but complex global business environment not yet deployed in a way to support — something has to give. the requirements of the tax function.

2 Elevating tax function productivity with an “efficiency dividend” We believe there is an important and largely untapped opportunity that, if executed well, can significantly boost tax function productivity

How things work today

“Tax departments are being asked Left to their own devices, tax functions to do more with either flat or fewer leverage their extensive knowledge resources in an environment where of and comfort with spreadsheets there’s no room for error,” explains to build their own spreadsheet- Mark Schutzman, a tax partner with based technology environment to PwC U.S. and leader of PwC U.S.’s Tax drive automation. However, these Function Effectiveness practice. But mission-critical, complex spreadsheets error is precisely what happens when typically depend on a single user and companies rely too much on commonly lack an audit trail, as well as quality used ad hoc tools for data collection and version control. Such a fragile and information exchange, such as environment may be unsettling to (1) email, (2) undocumented phone companies trying to decide how and conversations, and (3) spreadsheets where to drive automation without that, over time, grow in size and breaking something — including complexity. this year’s budget. To further complicate matters, the movement to Information necessary for the tax new operating models, such as off- function is typically decentralized and shoring and shared service centers, buried within systems tailored for is impacting the flow of information financial and management reporting. within an organization that requires a This requires a significant effort to response from company tax leaders. restructure the information for use by tax personnel — a task that often falls to tax personnel themselves.

3 The “efficiency dividend”

Still, practical solutions exist for systems, with financial reporting those willing to break away from the source systems is, today, only a loosely status quo and leverage technology pursued data management strategy, already embedded in the broader yet it may be the best way to realize the organization. Automating “efficiency dividend” by substantially tax operations by integrating reducing the effort to (1) collect, (2) well-established tax tools, such as manipulate, and (3) validate data. compliance and tax accounting

“The so-called trinity of tax technology — ETL + database + BI — represents the core architectural components for many point solutions, or “accelerators” that can be integrated into an overall vision to transform a high-pressure environment into an integrated ecosystem that drives improvements in productivity, quality, and risk”

4 Elevating tax function productivity with an “efficiency dividend” Tax systems integration

When looking for existing technology “We often find tax organizations have • Improved data quality by reducing assets, a good place to begin is within not properly configured their existing dependency on controllers, the company’s enterprise resource ERP or related modules to automate spreadsheets, and email by going planning system (ERP) and related extraction of information needed directly to source systems modules. Most finance departments for tax reporting and planning. The • On-demand access to data required have invested heavily in their ERP use of extract, transform, and load for compliance, planning and systems but with little input from their (ETL) tools and business intelligence forecasting, in the format needed tax colleagues, perhaps except for (BI) platforms to eliminate manual those responsible for sales/use and processes is often overlooked,” says “Combining the power of data VAT . This is a very significant Fernando Murias, tax partner in PwC extraction tools, a robust accelerator missed opportunity. We are seeing a U.S.’s Tax Function Effectiveness library, and a powerful work flow dramatic uptick in those tax functions practice. Furthermore, Murias tool to drive process improvement seeking to leverage enterprise explains, opportunities exist to and transparency can dramatically technologies such as ERP systems and replace spreadsheets with so-called, transform a tax department’s efficiency related tools to significantly reduce “accelerators” (meaning, commonly and is a big part of what we see as time spent on data management licensed enterprise tools configured the tax department ecosystem of and, thereby, enable mission-critical to enable complex book/tax the future,” advises Steve Cranford, objectives, such as (1) speed-to-close, computations or critical processes) that PwC U.S.’s national leader for Tax (2) agility to model the tax effect of can be configured to achieve benefits Information Management. Further, M&A activity, (3) agility to forecast such as: Cranford advocates having an overall the tax implications associated with a vision for how the company would new product release, (4) Effective Tax • Reduced single-user limitations and like to see its tax function contribute Rate (ETR) and tax forecasting, key-person dependency value in the context of its data (5) stronger tax controllership, and • Greater efficiency by integrating the management strategy, admittedly (6) greater visibility into global tax compliance and provision processes something most senior tax executives operations. are not thinking about today. • A formal architecture (e.g., ETL, Afterwards, he says, company leaders database, and BI reporting) should learn everything possible that promotes faster data about how technology can help drive collection, automation, and data enterprise value. management efficiency “Technology is a rapidly moving area,” Cranford acknowledged. His recommendation when seeking advice is to bring in someone who isn’t thrown off by industry buzzwords — someone who not only understands the technology, but also the application “The broader finance function of technology to the technical and regulatory compliance responsibilities can look at the tax department as a tax department faces every day. a great opportunity to do a proof of concept around creating an integrated ecosystem”

5 “The broader finance function can look at the tax department as a Accelerators are industrial-grade, web- The benefits typically associated with based technology tools configured to using an “accelerator” strategy to great opportunity to do a proof of enable the most data-intensive, labor- enable complex computations and concept around creating an integrated intensive, and high-risk computations processes include: ecosystem,” Cranford suggests. and processes within your tax function. • Automated data collection used for “Utilizing tools that provide a For example: computation of specific book/tax collaborative workspace to exchange differences • /cost allocations data, drive work flow, and provide • Improved quality from less reliance on • Foreign Tax access to documents in an organized, spreadsheet-based processes • Foreign Information Reporting controlled way significantly improves • Greater agility to model changes in • R&D Credit the efficiencies of how information the business • FS moves through the tax function and • Reduced tax accounting year-end/ • E&P Tracking really drives the potential to realize the quarter-close cycle time and • Section 199 improved productivity efficiency dividend,” says Cranford. • IDR Management • Increased analysis of permanent and • 986/987 temporary differences resulting in “The so-called trinity of tax technology better quality and risk management — ETL + database + BI — represents the core architectural components for many point solutions, or “accelerators” that can be integrated into an overall vision to transform a high-pressure “Combining the power of data extraction tools, environment into an integrated a robust accelerator library, and a powerful ecosystem that drives improvements in productivity, quality, and risk,” work flow tool to drive process improvement Schutzman counsels. His advice: and transparency can dramatically transform “I encourage senior tax executives a tax department’s efficiency and is a big part to increase their understanding of enterprise-grade technologies like of what we see as the tax department ecosystem ETL and BI to better understand of the future” the value they can bring to the tax organization, then really think through a multi-year road map for technology and where their priorities should be.” The tax department is rife with opportunities for improvement — improvement in terms of its ability to (1) forecast, (2) model how changes in the business may impact transfer pricing, (3) automate collection and documentation of R&D credit data, (4) migrate to real-time audits, bringing greater certainty to tax accounting results, and (5) support the business with bona fide predictive tax analytics. We know from experience that these ambitious goals are supported by pursuing an aggressive tax data management strategy.

6 Elevating tax function productivity with an “efficiency dividend” A CFO-ready message

Having the time to perform more and There is little doubt that most better analytics is the value associated companies can realize significant with realizing the “efficiency dividend.” financial benefit by embarking on a Our informal survey of hundreds of tax well-thought-out tax data management functions across the United States have plan and create value by realizing led us to conclude that, in most cases, the “efficiency dividend.” However, tax personnel spend roughly 40% of it will require senior tax executives their year on data management tasks, to venture into unfamiliar territory which takes them away from true tax that will test their leadership skills analytic and risk management activities by forming coalitions of dual-domain — a significant opportunity cost by specialists (tax and technology) and any measure . to think creatively in ways that have not traditionally been part of their This challenge represents an responsibilities. The tools are there, the opportunity for tax functions to technology is there, the opportunity is reduce time spent on data collection, there — the ability to transform rests manipulation, and validation by 50% squarely on vision and leadership. — giving back 15%–20% of the year (the efficiency dividend) through technology and process improvements — by leveraging existing investments in enterprise systems. This is a proposition CFOs embrace, since implicit is improvement to ROI on sunk IT costs coupled with a relatively small incremental investment.

Tax personnel spend roughly 40% of their year on data management tasks, which takes them away from true tax analytic and risk management activities — a significant opportunity cost by any measure

7 www.pwc.com/tfe

To have a deeper conversation about how this subject may affect your business, please contact:

Steve Cranford PwC U.S.’s Tax Information Management Leader 202 346 5207 [email protected]

Fernando Murias PwC U.S. Tax Partner, Tax Function Effectiveness 703 918 3022 [email protected]

Mark Schutzman PwC U.S.’s Tax Function Effectiveness Leader 646 471 5305 [email protected]

© 2011 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. DC-12-0014. Rr.