Companies routinely consider the effect of taxes on their financial performance, but how often do they incorporate tax considerations into their strategic decision making? Not nearly as often as they should, according to senior finance executives who responded to a recent study by CFO Research.
Tax departments are already under pressure from aggressive tax enforcement, heightened demands for transparency in tax reporting, and ongoing resource scarcity. Even as they deal with all this, CFOs say, it’s important for the tax function to provide insightful tax planning and decision-support services to business-unit managers. Fostering an effective and efficient working relationship between tax and the business not only leads to lower tax rates, but also is vital for avoiding the kinds of tax mistakes that can turn a bold strategic move into a financial disaster.
In its study, “Finance Views on the Tax Dimension of Strategic Decision Making,” sponsored by Vertex Inc., CFO Research surveyed and interviewed more than 100 senior finance executives on the ways that finance executives can help their companies maximize the value of business decisions — and, ultimately, boost financial performance — by incorporating tax considerations more effectively. The results were clear: Eighty percent of survey respondents agreed with the statement, “Over the next two years, my company could benefit substantially by better incorporating tax considerations into strategic decisions.”
Survey respondents were asked to identify the most valuable benefits they thought their companies could realize by improving the performance of their tax functions. Topping the list were a lower effective tax rate and higher earnings per share (named by 47% of respondents), followed by better business decision making (30%). These responses outstripped the more traditional and indirect benefits of tax planning, such as greater accuracy in financial reporting or faster consolidation and close. (See Figure 1, below.)
Executives interviewed for the study emphasized the value of including tax specialists in important business decisions. Says Charles de Rosa, vice president of tax for National Grid, the large utility company, “We could be making a decision that has tax consequences that, if the business doesn’t know about them, could result in a different yield than the business would otherwise be expecting.”
John Merino, chief accounting officer at FedEx, agrees that tax specialists should have a seat at the strategy table. At FedEx, he says, “they understand that we won’t have the tax tail wagging the dog — but it’s amazing how many problems or potential problems can be identified early on in the planning process when you have the right person sitting at the table.”
Wrote another survey respondent: “A highly trained tax team needs to be at the table during strategic discussions, offering a simplified view of potential tax issues/implications on strategic changes.”
Intentions and Reality
While finance executives are generally united in their belief that incorporating tax consequences into strategic decisions creates value, they are less consistent in acting on that belief.
The study asked respondents to estimate how often their companies take tax implications into account before committing to various major decisions — and how often their companies should take tax implications into account before making those decisions. For activities that clearly contribute to corporate growth — making major operating decisions, expanding marketing activities to new types of customers, or expanding operating activities into one or more new countries or regions — the gap between doers and dreamers was more than 20 percentage points. For another growth strategy, developing new products and services, the gap was 18 percentage points. (See Figure 2, below.)
Of course, as with any good intention, developing a strategic tax function is easier said than done. Wrote one survey respondent, “We need to maintain the progress we’ve made in the tax area, but other areas are currently demanding more focused attention.” Even with an understanding of tax’s importance, more than half of all respondents to the survey — 53% — agree that their company’s tax function is under-resourced and will require additional resources to fulfill its mandate. At the same time, two-thirds of respondents have no plans to increase tax resources. So how can companies bridge the gap?
Tax technology and automation is one proven way, by creating efficiencies and enabling tax teams to devote more time to growth-oriented, strategic activities. “We want to reduce the number of hours spent with data aggregation or data manipulation, so that we can move past reporting and get the team focused on more value-added activities,” says Giovanni Pacelli, global tax and regional controller at Freescale Semiconductor, who hopes that new tax software will help his team do just that.
Finance executives like Pacelli know where their firms need to go with their tax functions, and why. But getting there is another matter. At many companies, much work remains to be done before tax can truly be a business driver for growth.