As we all know, every company is under constant pressure to perfectly manage its financial reporting obligations. For a tax department, its main responsibility for financial reporting is the Effective (income) Tax Rate (“ETR”). Any movement of that rate, in this highly volatile stock market, can cause a negative impact to a company’s stock price. I work with so many tax departments that are doing all they can to manage the ETR. Unfortunately, these efforts are being hampered due to lack of funds and not having control over the information used to calculate the rate.
To meet their obligation, and overcome these obstacles, their work environment includes lots of late nights and weekends. A fair amount of this time, however, is spent putting out the latest fire drill of the day/week/month. I hear all the time about the big project they want to do but cannot get to.
The reactive, random nature of these fire drills prevents many from being able to truly address the concerns over rate management. So, could automation help increase available time? It’s likely it could. But, how do you decide what solution to buy? Or what project is worth a services engagement? Dollars and time are the valued commodities when committing any resources to a project. But a primary factor in evaluating the priority of which project(s) to undertake is to consider what risk this effort poses to the management of the ETR.
As a Director of Tax operations once said to me, “If I cannot explain to my CFO, with great detail and with great confidence, what is behind the ETR, the game is lost. So any work that needs to be done has to be factored against how it impacts the ETR analysis.”
So, companies need to develop a consistent methodology to measure where and how to invest. One methodology is to develop an income tax risk profile. This analysis can be used both on an overall basis to measure a company’s risk profile, as well as for individual tasks or projects.
One of the reasons tax departments are underfunded is that most people outside the tax department do not understand tax. If you try to explain the problem by trying to explain tax to non-tax people, that’s a losing proposition. By developing a risk profile, it will be much easier to explain the problem because you can concentrate on the impacts and not the tax issue. Basically you are developing a universal, relatable language.
Below is an example of a risk profile using basic information:
- How many people touch the data? Too many cooks kill the broth!
- How many source systems supply the information?
- Are those same people and source systems under the command and control of the tax department? Do you trust the information?
- Is the data being used in multiple processes? Invent the wheel once!
- How much time is available to complete the task at hand?
- How much money is at stake? Chasing too many items can be worse than doing nothing.
Once you decide on which criteria to use (you may have other items besides those listed above), assign each a value. Scales can run from 1-10 or 1-100 but the key is developing the right/relevant system for your organization and being consistent. As the number rises, so does the risk profile.
Once this profile is in place, it will be much easier to determine and explain the value of a project. This profile will allow others in the organization to quickly appreciate why a project deserves precious time and money. It’s true that the ETR is not the only important responsibility for the tax department. However, it is one of the few tax items that people outside a company see when reviewing the company’s overall profile and consequently, it is critically important. So developing a risk profile with regards to the ETR will provide an effective and consistent methodology to keep the focus where it belongs.
Example of a Risk Profile: