If taxes aren’t the first thing that come to mind when you think of spending on information technology, you aren’t alone. For example, according to a survey last fall by KPMG LLP and eCFO (the technology- focused cousin of this magazine), 68 percent of CFOs said taxes played little or no role in their decision-making on E-business initiatives.
That spending was certainly lavish. A study published during the first quarter of 2001 by the high-tech research firm Forrester Research found that companies spent an average 3.6 percent of revenue on E- business initiatives last year.
What a difference a few months make. As profits tighten, companies are now looking harder than ever for cash flow from these investments, and, consultants report, that includes maximizing whatever tax benefits apply. After all, for a company taxed at the top corporate rate of 40 percent (federal and state), a $180 million expenditure could translate into a tax benefit of $72 million, all of it perhaps available in the year of outlay.
The same thinking applies to new spending. Although Forrester says some preliminary indicators suggest new spending will fall this year, the experts note that companies just getting around to implementing big IT transformation projects are integrating tax accounting and planning into their plans, boosting the likely aftertax returns from the outset. That, naturally enough, will put those who have already finished new initiatives under even more pressure to find tax savings.
“Applying good tax-planning ideas to E-business initiatives can often produce some significant cost savings and cash-flow benefits, sometimes enough to pay for the entire cost of the initiative itself,” says Michael Burke, a partner at KPMG and leader of the firm’s E-tax- solutions practice. However, he contends there’s plenty of upside for those just getting around to focusing on tax efficiency, though it may require better communication between the IT and finance departments. “Within many companies,” he says, “there’s often a big disconnect between E-business initiatives and the rest of the organization, including the tax department.”
Companies are finding tax savings via two avenues. First, there’s the possibility of accelerating deductions by carefully reviewing and documenting expenses related to any major E-business initiative. Properly categorized, deductions could come from spending on E-commerce development, but also networked business-to-business technologies–such as procurement and accounts-receivable portals–as well as customer relationship management (CRM) projects and some aspects of enterprise resource planning (ERP) implementation. The goal, as with the tax accounting for most technology expenditure programs, is to justify the immediate write-off of as much of the costs as possible.
The second avenue uses E-business as a foil for tax planning, typically by helping shift income from high-tax jurisdictions to those that are relatively low-tax through appropriately structuring expenses and transfer-pricing mechanisms. Although the techniques are based on long-standing tactics involving intellectual property, tax specialists report a surge in interest in applying them to E-business, and claim substantial savings are in the works.
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