Users turn to technology to help minimize tax costs

Corporate tax departments have often been the last in line for big boosts in IT investments, since the process of preparing taxes is so labor-intensive that it’s seen by many companies as a fixed cost. But that’s beginning to change as some users look to leverage technology to help reduce the taxman’s bite.

For example, some companies are starting to automate their entire tax processes – from collecting the data in a central repository to using sophisticated computer modeling software that can simulate different scenarios for minimizing tax burdens. Their goals include shortening tax preparation times and improving tax planning.

“We’ve got members from across the spectrum looking to use technology to ease their tax-related burdens – making payments, collecting records, even filing returns,” said Timothy McCormally, general counsel and director of tax affairs at Tax Executives Institute Inc., a Washington-based association of tax professionals that has members from about 2,800 U.S. companies.

But those efforts don’t always come easy when they include the installation of new databases and applications. “One of the biggest challenges that companies face is the ability to access data from prior years when they move to relational databases and [enterprise resource planning] systems,” McCormally said.

Cooperative of American Physicians Inc., a Los Angeles-based insurance firm that offers malpractice coverage to California doctors, is a case in point. Accountants at the firm continue to manually re-enter tax data into spreadsheets or cut and paste tax information from data screens in different systems. “We do it the old-fashioned way,” said David Preimesberger, the cooperative’s chief financial officer.

Tax departments historically have trailed behind other parts of companies when IT funding is parceled out, said Bob Huff, a consultant at KPMG Consulting LLC in New York. Ironically, he and others noted, IT investments elsewhere in a company can make the tax planning process more difficult.

“One of the common omissions is that when you change … from a legacy accounting system to a new ERP [system], you frequently forget to do the right things that would support a tax audit that may be auditing three or four years back,” said Jim Hatch, CIO at Pactiv Corp., the Lake Forest, Ill.-based maker of Hefty-brand trash bags. “That complicates life for the tax people.”

That can also lead to even more serious consequences. For example, companies that fail to align their ERP initiatives with tax planning may end up paying more in taxes than they should, according to Steven Rainey, a partner at KPMG International’s e-tax solutions practice in New York. Netherlands-based KPMG is the parent company of KPMG Consulting.

The potential tax savings that users can reap by turning to technology are also noteworthy. Huff said one large company that KPMG Consulting is currently working with has estimated that the use of automated tools to more accurately assess its tax rates could help save US$120 million annually.

There are other steps that companies can take as well. For example, KPMG Consulting is working with six large corporations to develop internal tax portals – central warehouses of tax-related data that allow companies to collect the information in real time and then use it to make planning decisions.

According to Huff, a typical tax portal project takes six to 12 months to complete and can cost from $250,000 to a hefty $8 million to develop and deploy. But most tax portals can be operational within 90 days with the most critical functionality in place, he said.

And the potential return on investment (ROI) makes the price tag worthwhile, Huff added. “Even with the most conservative numbers, the ROI easily approaches 350 per cent with a payback period of a little over a year,” he said.

The savings from such portals can be achieved in several ways, Rainey said. For starters, there’s a reduction in the tax compliance cycle – the time it takes to gather information, summarize it, collate it and file it with the appropriate government entities.

In addition, decision-makers can use the tax portals to weigh, say, the tax implications of locating specific business units in different geographical areas, Rainey added.