Oct. 2 --Companies seeking to streamline operations due to budget constraints or preparing to implement new tax regulations, such as the recently issued final tangible property rules, should strive for greater technological integration between tax and finance departments, practitioners said recently.
“The tax department cannot be off to the side and separated” from a company's finance and information technology departments, Michael Burak, U.S. and Global Industrial Products Tax leader at PricewaterhouseCoopers LLP, told Bloomberg BNA Oct. 2.
Using technology in a strategic way may help companies draw the greatest benefit out of their tax departments, he said. “There are some departments that spend up to 60 percent of their time gathering and manipulating data to be fed into the systems,” Burak said.
Better tax technology may help businesses shift from spending the majority of their time gathering, sorting and analyzing data to using that data to more efficiently calculate tax returns, close book and tax accounting differences, calculate how tax provisions will affect them and reduce costs, he said.
A September survey by PwC and the Manufacturers Alliance for Productivity and Innovation (MAPI) found that 77 percent of the 100 companies surveyed didn't have a tax technology strategy in place, but that close to 85 percent listed improved technology and integration as among their top strategies for increasing tax effectiveness.
One reason for so many companies' disconnect between wanting to use more tax technology and not having any policies or plans in place to do so has been a focus on reaching short-term goals, Burak said.
Spending constraints are another factor, he said. “You've got organizations that are trying to watch their spending, and I think it's difficult for tax departments to get out ahead of the game and go from specific deliverables,” Burak said.
“They've been finding these specific solutions, but nothing that really ties together all of the critical aspects of what a tax department is able to offer a company,” he said.
A crisis can often serve as a catalyst for more investment in tax technology, Burak said. Problems don't necessarily arise from the tax department, but “it often relates to key areas of tax that also have an overlap with the finance organization,” he said.
Frequently there are misunderstandings regarding which department is responsible for key elements of a tax provision, he said. “There can be a gap between what Tax needs to own and drive, and the information and input that Finance has into that area,” he said.
“It's through these crises with issues around tax provisions that Finance understands the risk is something they need to better manage, and that technology is a solution,” he said.
Companies might consider modifications or completely new technology for their tax systems if they are facing new critical tax regulations going into effect, Daren Campbell, Tax Technology Services leader at EY, said Oct. 1.
A number of industries with significant tangible assets, such as aviation, manufacturing, hospitality and retail, will be affected by accounting changes for repairs and replacements in final tangible property rules, issued Sept. 13 .
“There's a lot of information that's required to comply with the tangible property regulations that's stored in systems” owned or maintained outside of tax departments, Campbell said during an EY Domestic Tax Quarterly webcast.
Companies might “cut hundreds of hours out of their implementation” by understanding which departments have which data, and how their data systems function, he said.
The two most important data types include source and ledger data, Campbell said. The first generally tracks the nature of an expense and helps determine whether a cost was expensed or capitalized, a critical element of the so-called repair regs, he said.
“Generally Finance owns the source data systems and process. This is a new area that a lot of times, Tax is not familiar with,” Campbell said. Source data is “critically important because it's often the detail required on audit to support your determination of whether to capitalize or expense a cost,” he said.
Data typically then moves to a general or book ledger, depending on whether a cost was expensed or capitalized--most frequently to the latter, Campbell said.
As data moves from one area of operations to another, “understanding the specifics of how data moves through your systems, what data's available at each point in the process, and who owns the system is going to be critical to efficiently implementing the tangible property regulations,” he said.
The technology that helps transfer this data, however, can also be one of the most overlooked IT systems in a company, Campbell said. “I think this is where the most opportunity is to drive efficiency” and eliminate unnecessary or time-consuming activities as companies implement the rules, he said.
Companies might benefit most from using electronic, automated or batch processing systems to download records out of source systems and input them into ledger systems, he said. “We're often seeing companies take a manual approach to retrieval of invoice details, even if stored electronically,” he said.
Tax technology at this stage might help businesses pull in additional detail that is often overlooked when helping determine a cost attribute, Campbell said. “In supporting detail, there's additional identifying information that in many cases aren't transferred to the fixed asset ledger,” he said. These include commodity codes, vendor names and description fields.
Retaining that data in the accounting software systems can help filter out the costs with straightforward tax treatment and focus instead “where we need to spend a manual process in reviewing data,” Campbell said.
Taxpayers should expect to make changes to their fixed asset systems as they move forward with implementing the regulations, Campbell said. The rules take effect Jan. 1, 2014, though they are also available for early adoption and retroactive application.
Site schedules that help compute bonus or to maintain repairs or cost segregation will likely be affected during the implementation process, he said. Site schedules are typically set up by a prior fixed asset study and used to calculate tax depreciation for assets at multiple locations.
“Understanding your fixed asset ledgers will provide you with options for considering how best to adopt the regulations,” including fine-tuning taxpayers may need to make in terms of how data flows through into their ledgers, Campbell said.
The critical juncture between book and tax accounting, where many tax attributes are applied, is “where you might need to make some changes in the data that's moving into the book system from the source system, as well as the coding that's taking place as your fixed asset ledgers are set up,” he said.
The processes that allow data to move through a ledger system will remain important beyond the initial adoption phase of the repair regulations, Campbell said, and will help companies establish tax and book processes “you can carry forward efficiently year to year.”
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