Data analytics, over time, has had an unquestionable impact on how we do business, affecting consumers and the corporations that serve them. The impact on corporations has been both externally and internally focused, and now it’s time for tax departments to get in on the revolution. Data analytics is opening doors for corporate tax departments to extend their reach throughout their organizations.
By definition, data analytics is the process of drawing specific conclusions from large volumes of seemingly disparate, unrelated, and inconsistent data. It’s nothing new, per se. Predicting the weather, a practice that has been around for a long while, is an example of leveraging data analytics. As in weather forecasting, the capabilities of conventional data analytics—capabilities grounded in advances in how data is stored and processed— have exploded, allowing for more accurate and meaningful forecasts.
Today’s technological advances are built on a number of pillars, including the availability of large amounts of data coupled with the technical capability to store, access, process, and connect that data to draw conclusions that are more dynamic, specific, and meaningful. Weather predictions, to use our earlier example, have become far more accurate in recent years, because today analysts can leverage sophisticated and previously unavailable algorithms and datasets to model the environment at a molecular level. That’s light-years ahead of predicting rain based on aches and pains.
Let’s bring the concept a bit closer to home. Corporate data analytics programs, the ones that work as advertised, combine both structured and unstructured data. They also incorporate all of the departments that provide data and, more important, process that data for external consumption. This means tax must be in the mix, and, for tax departments to participate properly, the right platform must be leveraged. The correct platform allows tax departments to develop an automated process to combine structured and unstructured financial data into one consistent, usable format that is compliant and reportable across multiple constituencies.
Data: Structured and Unstructured
Data in enterprise resource planning (ERP) systems and other relationship management tools is structured, whereas data in most spreadsheets, workpapers, and workflow applications such as email and calendars is unstructured. Tax departments use both structured and unstructured data but tend to lack a reason or the capability to combine it.
This is where opportunity lies. Tax teams occupy a unique space within a company’s data hierarchy. They are typically consumers, not originators, of financial data. Furthermore, they are typically responsible for sending a company’s financial data to outside parties such as regulators, auditors, and consulting firms.
Most important, all financial data passes through tax at some point—or at least it should.
Thus, the argument can be made that tax is uniquely positioned to make consistent use of all the data that pertains to a company’s transactions and finances.
Having a single tax platform in place is the first step in this process. One of the biggest challenges facing corporations is knowing where relevant information resides and, once it is “found,” how to analyze it to draw out its true value. A single platform across tax makes it that much easier to locate, analyze, and draw conclusions with the same consistent data across all tax applications and to apply an automated process into the future.
Pursuing the Holy Grail
The Holy Grail for tax teams is to progress from managing data, which they already do, to facilitating the analytical and predictive capabilities that are possible when the right datasets are integrated with the right technology. For instance, analyzing trends in revenue and expense and/or currency fluctuations in the context of different business strategies that are being weighed by the company could yield interesting trends in effective tax rate and cash tax—variables any senior leader of a publicly traded company would want to see. This data could also be used in effective tax-planning strategies, placing tax in the driver’s seat instead of leaving it as a spectator in the stands.
A recent Thomson Reuters ONESOURCE survey revealed that data management is already on the minds of corporate tax (see Perspective in the May/June 2016 issue of Tax Executive). This is a positive finding. Respondents pegged data management as the second-biggest corporate tax challenge. The survey also found these challenges are not exclusively driven by reporting requirements. Twenty-eight percent of respondents said their biggest challenges around data management are disparate systems and data sources, e.g., data that lacks a consistent structure.
The “marrying up” of structured and unstructured data not only takes care of these reported challenges but also facilitates data analytics. It leads to a tax department that can use the same information in different ways at different times—one that offers new, rigorous service to other departments. One powerful use of data analytics in tax could be to inform and influence operational decisions such as whether to build a new manufacturing plant in South Africa or in Taiwan. With data analytics and tax planning, the tax department will be able to help determine the downstream tax impact of where to open up new operations.
Tax professionals should be mindful that the opportunity here is first to seize the mandate of making sure financial data is consistent. Once tax has this control, it can claim ownership of all the information that data analytics efforts provide.
This is how tax can earn a bigger seat at the table and continue to provide strategic value up, down, and across an organization.
This article first appeared in the September issue of Tax Executive.