As the leader of the largest tax practice in the U.S., I often speak to chief financial officers. And — no surprise — they ask for my opinion on improving their tax department. My answer: Don’t just look at your tax function with an eye toward minimizing risk; look at it as a place where you can create value for your business.
I am not suggesting CFOs overlook the former for the latter. Identifying, analyzing and mitigating tax risk can and should be a critical role for a tax department. But CFOs must concurrently seek to deliver value from the tax function. This is a difficult balance: I find that most companies focus primarily on mitigating risk and neglect the opportunity to create real value from their investment in tax.
In a recent PwC study of tax departments, we found that tax personnel spend roughly 40 percent to 60 percent of their time on data-management tasks. Not surprisingly, a majority acknowledged they spend less than 30 percent of their time on strategic analysis.
Many CFOs historically have paid scant attention to tax as an area for improvement. Instead, they concentrate on improving their supply chain or business services functions. In addition, unlike in most other departments, little investment has been made to automate and technology-enable the tax function. The result:
- Much work still is done manually and in spreadsheets;
- There is a lack of transparency into underlying business-unit data; and
- Precious little time is spent on strategic analysis and analytics.
Those can prove to be crucial errors. Regulatory complexity has been increasing, putting pressure on businesses’ compliance responsibilities and tax-reporting burdens. Regulatory scrutiny, emanating from tax audits and disputes, has also been intensifying. In this environment, companies cannot afford to make errors.
The answer to solving this issue and truly unlocking the value of the tax department is to simply use the same approach you did to transform other segments of the business. Challenge leaders to transform the way they think about people, processes, data and technology. The most telling statistic in our recent study was that more than half the companies surveyed (55 percent) admitted they do not have a long-term plan related to tax technology nor any plans to develop one.
How can that be? If a CFO told that to the Securities and Exchange Commission or an auditor about their accounting department, it would be a real problem. Why do CFOs allow tax departments to use a combination of spreadsheets and licensed tools to perform such a high-risk compliance function?
Tax departments cannot do the job without an investment in technology. CFOs have a part to play in helping enterprise technologies support their tax strategy. If technologies already employed in other parts of the business are extended to the tax function, companies will create efficiencies and decrease risk by reducing the number of redundant activities. This isn’t a short-term effort; it must be part of a long-term strategy to integrate enterprise technologies with tax.
Technology, however, represents just one element to consider. Those who oversee the tax department must consider overhauling manual and disjointed processes that do more harm than good. They must make the investment in an environment that brings data, documents and workflow together. This enables multiple people to collaborate and share information, and gives visibility into processes, which enables identification of bottlenecks or inefficiencies.
In an increasingly complex regulatory environment, it is tempting to focus solely on compliance and data manipulation. But CFOs who decide to take their companies a step further should not underestimate the “people” side of transforming a tax department. In an environment in which people are increasingly mobile, an investment in collaboration tools improves their efficiency and effectiveness. One benefit often emerges: Tax professionals who spend more time on strategic analysis often are more satisfied and engaged employees.
For CFOs eager to lead the most forward-thinking businesses, one last step can make a profound difference in the transformation process: converting tax data into strategic information for driving forecasting and modeling. For instance, a company might use data to consider the tax implications of an acquisition or a financing transaction. It also might model the effect of tax law changes on planned business activities.
You can make best decisions only when you possess good data and good analytics. This becomes reality with a transformed tax function.
Mark Mendola is a vice chairman of PricewaterhouseCoopers and the U.S. tax leader. He is responsible for the network of tax practices across the Americas and guides the strategic direction of the practice with respect to client service, quality and talent development. Mendola has advised a wide range of multinational companies in a variety of industries, including automotive, industrial products, and retail and consumer products.