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Good, Better, BestThe race to set global standards in tax managementKPMG’s 2009 Tax Department Survey

i i K P M G 2 0 0 9 T A X D E P A R T M E N T S U R V E Y

Contents

introduction 1

Executive Summary 3

Section i: Pressures and Challenges 5

Section ii: Hallmarks of Success 14

Section iii: Driving Tax Performance 29

Conclusion 32

© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 090902


1 The Rising Tide. Regulation and stakeholder pressure on tax departments worldwide. KPMG International 20072 The Wolf is at the Door, the global economic crisis and the public sector. KPMG International 2009

IntroductionIn 2009, as businesses continued to respond to the global recession, KPMG International commissioned a survey of tax directors in 20 countries throughout Europe, Asia Pacific, and the Americas to find out how tax departments are adapting to current challenges. We believe this is one of the largest global surveys of its kind, gathering the opinions of people in charge of tax policy and day-to-day tax opera-tions in 890 companies. The research consisted of 890 blind telephone surveys of tax professionals world-wide, followed by more in-depth interviews with several KPMG member firms clients and tax professionals.

The survey found that since our 2006 research,1 pressure on tax departments has continued. With declining cash flows, caused by the global financial crisis, senior management has looked to tax departments to contribute better cash management, tax planning, and operational efficiency to the bottom line. Tax risk management and governance remain prominent on the tax function agenda within organizations worldwide. Boards, investors, and other stakeholders have turned their attention to the potentially significant impact that tax and the way it is managed can have on their businesses.

Similarly, governments around the world have been under significant pressure to address the need for increased tax revenues, a situation likely to continue long term, with tax authorities continuing to step up efforts to improve global cooperation, reduce tax avoidance and evasion, and improve the efficiency and effectiveness of their approaches to tax audit controversies.2 In this environment, tax departments have found themselves increasingly responsible for maintaining good relations between corporations and a key stakeholder, the tax authorities.

2 K P M G 2 0 0 9 T A X D E P A R T M E N T S U R V E Y


While the survey results showed that tax departments recognize the new pressures they face and are eager to add business value through astute and skillful tax man-agement, many lack the time or opportunity to do so. For many tax departments across the organizational spectrum, the mandate is very clear: do more with less…and do it now.

We believe this research helps point the way to a new way of thinking about tax management: where risk management and responsible value creation go hand in hand, and the known hallmarks of leading practice can be used to benchmark current performance and provide a framework for applying this new perspective.

Number of interviews per country

USA (150)

Brazil (40) Australia (40)

Japan (50)

India (40)

China (50)

Russia (40)

France (30)

Spain (40)

Hong Kong (30)

Singapore (40)

South Korea (30)

Canada (40)

Mexico (30)

Italy (30)

Switzerland (30)

Germany (50)Netherlands (40)

South Africa (40)

United Kingdom (50)

Source: KPMG International 2009

G O O D , B E T T E R , B E S T — T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 3


Executive Summary In this 2009 worldwide survey of tax departments in 20 countries throughout Europe, Asia Pacific, and the Americas, we explore the new challenges facing tax directors, CFOs, and boards of directors (particularly audit committees). This study follows a similar global research project conducted in late 2006, and country-based surveys in both the United Kingdom in 2006 and the United States in 2007, enabling us to identify changes. The research points to leading practices and benchmarks that can help provide a road map for improvement.

In brief, in 2009 businesses were working through their responses to the global recession and, with declining cash flows, senior management was looking to tax departments to contribute better cash management, tax planning, and operational efficiency. At the same time government responses to the global financial crisis around the world suggested there would be a long-term need for increased tax revenues, and tax authorities were stepping up efforts to improve the efficiency and effectiveness of their approaches to tax audit controversies.

Tax risk management and governance remained an integral component of the tax agenda. Yet the challenge in 2009 was about how to do more with less: how to respond to the demand for better tax risk management, provide more proactive and timely support to the business, and handle greater scrutiny by tax authorities, while dealing with the resource constraints affecting their companies in difficult economic times.

• InSectionI,insightintothekeypressuresandchallengesthattoday’staxdepartment face is explored via survey responses.

• InSectionII,thehallmarksofsuccessareidentifiedanddiscussedbylookingmore closely at the survey data and its implications. In particular, the character-istics of high-performing tax functions are examined to identify their ability to succeed despite challenges.

• InSectionIII,“DrivingTaxPerformance”isintroducedasanewwayofthinkingabout tax management. In this framework, risk management and responsible value creation go hand in hand, and the known hallmarks of leading practices can be used to benchmark current performance and to potentially map a new perspective for improved performance.



Section I: Pressures and ChallengesIt’snotsurprisingthatthekeypressuresandchallengesfacingtoday’staxdepart-ments, our survey respondents report, are a continuation of issues noted in our 2006 global survey. However, their relative importance has shifted, reflecting 2009 business concerns.

Those issues include:

• Theneedtofreeupcash

• Changingrelationshipswithtaxauthorities

• Shiftingglobalcontroversypatterns

• Pressureforcontinuedrobustriskmanagement

• Ongoingresourceconstraints

• Theneedforcontinuedfocusoncoreactivities.

The need to free up cash

Intoday’senvironment,everybusinessfunctionisunderpressuretofreeupcashand defer expense as much as possible. The tax function is no exception, our sur-vey results show; 27 percent of survey respondents reported that tax deferral/cash savings has increased in importance within the last 12 months while 39 percent of large companies (US$5 billion +) believe it to be the top priority over the next year.

Management of tax authority audits

Minimizing the effective tax rate

Managing tax risk

Tax return compliance

Accurate/timely financial reporting

Integration with business groups andearly indication of non-routine transactions

Cash tax savings/tax deferral

Are activities more important, less important, or about the same as theywere last year?

Tax process improvement and technology utilization 23%75%2%

23%76%1%

27%71%2%

21%78%1%

21%77%2%

21%76%3%

20%78%3%

17%82%1%

Less important About the same More important




Changing relationships with tax authorities

Since tax administration heads from more than 30 countries first met in Seoul, Korea, in the spring of 2006 and agreed to work together on ways to improve tax administrationandaddressthe“significantandgrowingproblemofinternationalnon-compliancewithnationaltaxrequirements”3 it has been clear that tax authori-ties are looking to work better together, and with other law enforcement agencies, to counter perceived non-compliance.

Subsequent meetings in Cape Town, South Africa (January 2008) and Paris, France (May 2009) focused on how to improve cooperation and transparency between revenue bodies, taxpayers, and tax intermediaries—the so called “enhancedrelationship”—andhighlightedtheneedforeffectiveriskassessmentto better target resources to detect and respond to concerns of aggressive tax planning and tax avoidance.

Survey results reveal traditional tax areas such as auditing corporate income taxes and transfer pricing are still the main focus of tax authority inquiry, but other areas of interest are beginning to emerge.


Auditing payroll related taxes

Reviewing business processes and structures

Transfer pricing

Auditing corporate income taxes

Technology audits

Auditing indirect (sales/use, VAT) taxes

Over the past 12 months have tax authorities become more focused on:

Financial (tax and non-tax) management,process risk and controls

16%25%31%9%20%

16%33%30%11%10%

15%25%27%15%19%

13%23%36%14%14%

9%20%37%19%15%

9%17%32%19%23%

8%24%35%17%17%

1 – Disagree strongly 2 3 4 5 – Agree strongly

For example, a substantial minority of respondents—26 percent—agreed that tax authority audits of technology had increased within the past 12 months. Meanwhile, 32 percent agreed that tax authority audits of financial management, processes and controls had increased during the same period. While tax execu-tives need to consider forward-thinking approaches to effectively manage taxes and fast-evolving tax authority relationships, the underlying question of the speed at which we can expect developments revolves around how quickly and how extensively tax authorities might shift their focus.

“Taxfunctionsaregoingtoneed to be very alert to the changing times across the revenue authorities around the world [while] looking after their home country responsibilities and obligations.…We just have to accept that revenue authorities are essentially oneglobalclubnow.”

—Stephen Green, Head of Tax, Australia and New Zealand

Banking Group

3 OECD Seoul Declaration 15/09/06 (see www.oecd.org)

http://www.oecd.org



Shifting global controversy patterns

Most respondents reported some sort of controversy activity with tax authorities, although the vast majority believed levels remained the same as compared to a year ago.

Based on survey responses, the highest controversy levels exist in the United States, Brazil, the U.K., Canada, and Singapore, while the subjects of greatest controversy involve country-based (federal) corporate income tax, 33 percent, and indirect taxes, 31 percent.

Transfer pricing

Indirect tax (sales/use or VAT)

Country-based (federal) corporate income tax

People taxes (social security, personalincome taxes, benefit plans, etc.)

Local (state) income tax

Customs/duties 12%

17%

18%

26%

31%

33%

In which of the following areas, if any, do you currently have controversyactivity with tax authorities?

0% 10%5% 15% 25%20% 35%30%

Multiple responses allowed.Source: KPMG International 2009

Is there more, less, or about the same controversy activity compared toa year ago?

Less About the same More

9% 12%79%

7% 12%81%

Transfer pricing



People taxes (social security, personalincome taxes, benefit plans, etc.)


Customs/duties

11%82%8%

10%81%9%

7%86%8%

6%87%7%




Large companies—those with US$5 billion in revenues and above—are most likely to be involved in controversy across the board.

In which of the following areas, if any, do you currently have controversyactivity with tax authorities?



Transfer pricing

Customs/duties


People taxes (social security, personal income taxes,benefit plans, etc.)

25

16

11

10

21

13

29

25

15

10

28

16

35

31

21

13

37

17

Numbers shown correspond to percentages of respondents.Colors range from red (lowest percentage) to light green (highest percentage). Multiple responses allowed.Source: KPMG International 2009

10–17 18–35 36–57

$200

M–$

499M

$500

M–$

999M

$1–5

B

Ove

r $5

B

57

47

36

25

48

26

Most respondents believe tax controversy has not escalated over the past year, but there are some interesting country differences. In the area of transfer pricing, controversy increased most over the last year in Spain, Germany, Singapore, and Australia. Indirect taxes in Canada, local taxes in the United States, and corporate income tax in Hong Kong serve as the primary reason for the increase within those countries.

Is there more, less, or about the same controversy activity compared to ayear ago?



Transfer pricing

Customs/duties


People taxes (social security, personal income taxes,benefit plans etc)

18

29

14

6

19

12

13

13

13

7

10

3

18

10

8

5

15

10

8

8

8

8

10

6

10

7

7

17

17

10

10

5

5

8

8

5

3

0

3

0

0

3

3

7

3

7

13

3

13

3

0

0

13

0

8

10

13

10

8

8

8

8

8

0

10

3

2

4

6

2

4

4

6

4

2

4

4

2

7

3

3

3

3

3

Numbers shown correspond to percentages of respondents.Colors range from red (lowest percentage) to light green (highest percentage). Multiple responses allowed.Source: KPMG International 2009

0–8 9–17 18–35

Aus

tral

ia

US

A

Can

ada

Mex

ico

Bra

zil

Uni

ted

Kin

gdom

Fran

ce

Ger

man

y

Net

herl

ands

Sw

itzer

land

Italy

Spa

in

Rus

sia

Sou

th A

fric

aIn

dia

Chi

na

Hon

g K

ong

Sin

gapo

reJa

pan

Sou

th K

orea

8

3

15

8

20

13

22

6

18

6

18

2

23

8

35

8

10

5

20

10

10

7

10

10

15

8

18

8

18

8

18

10

18

5

18

8



Looking to the future, the much expanded public deficit may put strong pres-sure on tax authorities to maximize revenue. Increased controversy seems likely. Loughlin Hickey, Global Head of Tax, KPMG LLP, United Kingdom, observes “Iexpecttoseemorelitigationandcontroversyineverysinglecountry,astaxauthoritiesneedtoraisemorerevenue.”

These country differences may be the harbinger of a trend as tax authorities respond to pressure from their governments for greater tax revenues.

Pressure for continued robust risk management

Risk management continues to be a top priority for companies. The majority of respondents—76 percent—rated managing tax risk a top priority over the next 12 months, and nearly a quarter (23 percent) reported it has increased in impor-tance in the past 12 months. This shows a continued increase from 2006 survey data, in which 60 percent of respondents rated tax risk assessment and man-agementasvaluabletotheirorganization.Asthetablebelowshows,thisyear’sresults substantiate that risk management remains a key priority despite the dust settling following worldwide legislative changes aimed at protecting investors.

Ongoing resource constraints

The challenge to secure sufficient financial and physical resources for tax depart-ments persists. According to survey respondents in 2006, staffing shortages constituted the third largest (39 percent) problem hindering tax departments. In 2009, survey respondents say staffing shortages are the second biggest problem (50 percent), a marked increase from its third place finish only 3 years ago.



Managing tax risk





Tax department priorities: How important is each of the following activitiesin driving your tax department’s overall objectives in the next year?

Tax process improvement and technology utilization

42%34%19%3%2%

62%25%10%2%1%

63%23%10%2%2%

37%30%20%8%5%

37%28%22%7%7%

33%35%24%5%2%

26%33%30%6%5%

24%33%30%9%5%

1 – Not at all important 2 3 4 5 – Extremely important


1 0 K P M G 2 0 0 9 T A X D E P A R T M E N T S U R V E Y


Only 20 percent of recent survey respondents reported having ten or more full-time-equivalent (FTE) resources to manage tax obligations on a world-wide basis.

Moreover, only 11 percent of survey respondents reported that their companies plan to invest in new hires over the next year.

In addition to a shortage of staff, 29 percent of respondents believe that their organization does not have sufficient operating or administrative budgets, and 26 percent believe that investment in process improvement and technology for the tax function is too low.

Exacerbating the problem is ongoing competition for high-level tax talent. Accord-ingtooneAmericansurveyrespondent,“Wecannotaffordthetimetotrainstaffto get them to the level we need. It is increasingly difficult to find candidates who havetheskillstomatchwiththecompany.”

3 to 5

6 to 10

More than 10

Don’t know/refused

1 to 2

None 1%

22%

21%

15%

21%

20%

What would you say is your approximate, current FTE (full-time equivalent)headcount on a global basis in your tax department?

0% 20%15%10%5% 25%


Decrease

Don’t know/refused

Stay the same

Increase 11%

60%

6%

23%

What is your expected change in headcount over the next 12 months?

0% 40%30%20%10% 50% 60% 70%


“Therehasbeenchronicunderinvestment in tax support systems over many years. The constant pressure to reduce staff size has resulted in greater demands on less staff. When you start losing knowledgeable staff, you put pressure on people and theystartmissingthings.”

—Tax Survey Respondent

G O O D , B E T T E R , B E S T — T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 1


Hampering participation

Moreover, the resulting lack of available skilled resources is restricting the tax func-tion’sabilitytoparticipateinmajorbusinessevents.Whenaskediftheircompanywas adequately prepared for a major event such as an acquisition, divestiture busi-ness contraction, reorganization, or resource rationalization that occurred within the past 12 months, respondents reporting unpreparedness attributed it to a lack of resources in general (21 percent), insufficient knowledge (21 percent), and a lack of qualified professional staff (17 percent).

Perhaps even more surprising is the fact that only 28 percent of respondents reported that their companies have ongoing initiatives to address resource and staff constraints.

Lack of qualified/experienced/professional staff

Insufficient knowledge/expertise in-house

Lack of staff/resources in general

Lack of communication/information

Time constraints/change was happening too quickly 10%

13%

17%

21%

21%

What are the top five reasons the tax function was not prepared to addressmajor events?


0% 20%15%10%5% 25%



A continued focus on core activities

As one would expect, the amount of time spent on the core activities of tax return compliance and accurate and timely reporting remains high. In fact, 90 percent of respondents said they spent either a lot or a huge amount of time on tax return compliance. Responses were similar—88 percent—for the amount of time spent on accurate and timely financial reporting. This is significantly higher than 2006 survey results, in which these figures amounted to 79 percent and 78 percent, respectively.



Managing tax risk





How much time will the tax department spend on each of the followingactivities over the next 12 months?


23%30%34%9%4%

23%33%32%8%4%

28%30%32%8%2%

20%26%33%13%8%

20%26%34%13%7%

16%23%37%16%9%

16%22%36%18%7%

12%24%38%16%9%

1 – No time at all 2 3 4 5 – A huge amount of time


Given the current economic environment, the potential for increased audit activity by tax authorities, and continued scrutiny from outside stakeholders of tax as an importantcomponentofoverallmanagement,it’snotsurprisingthattheamountof time spent on these areas increased. Since responses were consistent across all company sizes and regions, indications are that considerable time will be dedi-cated to these areas for the foreseeable future.

The priority-versus-time gap

Interestingly, despite their increasing importance as priorities, less time was reported spent on cash tax planning/tax deferral and minimizing the effective tax rate than might be indicated by their relative priorities. While 65 percent and 67 percent of respondents rated cash tax planning/tax deferral and minimizing the effective tax, respectively, as high priorities, only 46 percent and 39 percent, respectively, reported spending a lot or a huge amount of time on these activities.



The survey results seem to suggest that many tax functions struggle to provide the wider support their companies need because of the heavy demands of providing core compliance and reporting activities. There are many reasons for the allotment of substantial time and effort to compliance and reporting. Typically, these can include:

• Complexordisparateaccountingsystemsthatmayrequiretediousandtime-consuming manual manipulation to produce tax relevant information

• Incompleteorpoorqualitydata

• Non-standardprocessesthatrequireextensivefollow-upandverification

• Catch-uporremediationwherethetaxfunctionis“outoftheloop”onbusi-ness decisions and developments.

These and other circumstances hinder the ability of the tax function to provide widersupportthatenhancestheorganization’scapacitytopredictandrespondtobusiness events. Thus, while the priorities may be understandable given compli-ance obligations, the survey data suggests a mismatch between the importance accorded to tax planning and the time spent on it. Important underlying questions appear to still exist, including:

• Howefficientlyistimebeingspent?

• Shouldtherebeagreatershiftinpriorities?

In an effort to further explore these discrepancies, we set out to assess whether some companies were, based upon survey respondents, succeeding in shifting the balanceofprioritiesand,ifso,tounderstandbetterhowthese“high-performing”taxdepartments not only were managing the change but continuing to improve the bal-ance. To do this required first understanding the characteristics of high-performing tax functions as defined by the survey results. Next, it was important to identify what actions they are taking to succeed in this challenging environment in order to establish the potential underlying drivers of business value that obtained this result. These findings are explored in Section II.



Section II: Hallmarks of SuccessIn this section, we take a closer look at the survey data and its potential meaning in order to try to identify the hallmarks of leading practices and, in particular, the characteristicsthatdistinguish“high-performingtaxdepartments”fromtheirpeers. Respondents reporting strong risk management activities along with high prioritization of value-added activities and extensive participation in company projects outside the tax function were identified as high-performing tax functions. We broke the responses down into quartiles, with those companies within the first quartile deemed to be high-performing tax functions.

Next, based on the survey data, we sought to understand what high performers were doing to help their teams succeed. Once the underlying value drivers were identified, we put them into a contextual framework that offers examples on how to apply these drivers to enhance performance within the tax function.

Overcoming barriers

So how do leading tax functions overcome the pressures on compliance activities andpositionthemselvesaskeypartnerswithbusinessandfinancefunctions?What allows them to balance the management of tax risk and compliance with opportunities to add value from the perspective of both technical tax matters and businessdevelopments?

Based on the survey data, key themes emerged. High-performing tax functions appear more likely:

• Tobefocusedon,andhaveinvestedin,gettingthebasicsrightthroughstan-dardization of processes and technology

• Tohavedeveloped,communicated,andactivelydeployedacoherentanddocumented tax governance and risk strategy that is consistent with broader business governance and risk frameworks

• Toactivelyseekparticipationandinfluenceandmonitortheirperformanceinadding value to the business

• Toactivelyconsiderhowtomatchresourcestorequiredskills,activities,andpriorities.

The data shows that there is little difference between sector or company size in terms of where high-performing tax functions are likely to emerge. Why might this bethecase?Largecompaniesmayhavegreaterresourcestoinvestintechnology,staff, and high-quality advice. On the other hand, large companies often struggle with organizational complexity and legacy systems from acquired companies. There is also the risk that the tax function becomes more remote from operational manage-ment the larger a company becomes. In mid-market companies the tax function is often more closely aligned with the business.

While there may be different drivers for change, the survey data suggests that tax functions that perform well on standardization and risk also perform well on support-ing the business and value added activities. This suggests that high performers rec-ognize that sustained performance improvement is about synergies, not trade-offs.



Getting the basics right—standardization is key

The survey reveals that tax functions in the top tier of good practices are more likely to be highly standardized in tax processes, structure, and reporting lines.

Of the high performing tax functions, 89 percent indicate they have global standards for their tax policies and procedures, compared with 25 percent of the lowest tier.

4 The four quartiles were determined by selecting the companies with the highest (best) composite scores for managing risk, adding value and participating in company initiatives. These companies were ranked in order, from those with the highest scores to those with the lowest scores. Quartile 1 represents the top 222 respondents, Quartile 2 represents the next 223 respondents, Quartile 3 represents the following 222 respondents, and the bottom-Quartile 4, represents the last 223 respondents. Together the four quartile represent the total 890 respondents.

Quartile 2

Quartile 3

Quartile 1

Quartile 4 25%

55%

71%

89%

Do you have global standards related to tax policies/procedures in place?

0% 20% 60%40% 100%80%

The four quartiles are defined in the footnote below.4




High-performing tax functions are also almost twice as likely (69 percent) to have a headquarters tax function that manages and directs tax activities as the lowest quartile (37 percent).

Quartile 2

Quartile 3

Quartile 1

Quartile 4 37%

52%

64%

69%

Does your tax department structure include a headquarters tax functionthat directs, manages or coordinates the global tax function?

0% 20% 60%40% 80%

Refer to footnote 4 to reference the determination of each of the four quartiles.Source: KPMG International 2009

Quartile 2

Quartile 3

Quartile 1

Quartile 4 2.5

3.1

3.3

3.5

To what extent does finance leadership for your company drivestandardization of the global tax function?

0 2 3 41 5

Scale 1–5


1 = Low driver5 = High driver

The data also indicates that high-performing tax functions are more likely to have finance leadership (i.e. CFO, Treasurer, etc.) that drives standardization in the global tax function—with top tier tax functions ranking finance leadership at 3.5 out of a possible 5 (where 5 means they drive it relentlessly) compared with a ranking of 2.5 in the lowest tier.

When asked to rate the level of standardization for their tax function globally in terms of tax personnel responsibilities and lines of reporting, (e.g., all local tax resources report to a regional director, who reports to global tax, etc.), more than 90 percent of top tier tax functions said there was standardization in both respon-sibilities and reporting lines versus 62 percent in the bottom tier.



We also asked survey respondents a series of questions concerning the extent to which various tax processes were standardized across their tax function globally, the results of which are consolidated in the following chart. High-performing tax depart-ments report the highest degree of standardization for the annual income tax accrual or provision process, followed by highly standardized tax compliance and quarterly income tax accrual processes. For all quartiles, standardization of processes related to forecasting tax rates ranked lowest.

Quarterly provision/accrual

Compliance

Provision to return reconciliation

Forecasts of tax payments

Annual provision/accrual

Forecasts of tax rates

Quartile 1 Quartile 2 Quartile 3 Quartile 4

0 1

4.2

4.1

3.8

3.3

4.2

4.0

3.9

3.3

4.4

4.1

4.0

3.3

4.2

4.0

3.8

3.1

4.1

3.9

3.8

3.1

3.9

3.9

3.7

2.9

2 3 4 5

Scale 1–5

1 = Low standardization5 = High standardization


Which processes are standardized across your global tax function?



Finally, in addition to a high level of standardization, top quartile tax departments (97 percent) also rated their processes as better integrated globally, such as using a common source of data and sharing data across processes, than lower quartile tax functions (59 percent) rated theirs.

Quartile 2

Quartile 3

Quartile 1

Quartile 4 2.8

3.4

3.7

3.9

How would you rate the level of integration across these processes foryour tax function globally?

0 2 3 41 5

Scale 1–5


1 = Low integration of processes5 = High integration of processes

“Wehaveamorecomplexstructure [today] and yet we’reabletogetourinternational piece of the tax return a month earlier than normal, because of all the [standardized] processes we’veputinplace.”

—Christopher Thompson, Director, International Tax,

Cooper Industries

Whymightstandardizationbesoimportant?Withoutasolidfoundationinplace,it can be difficult (and arguably unwise) to deliver robust tax planning and other strategic tax initiatives. Jose Aldrich, KPMG LLP U.S. Area Managing Partner, LatinAmericaTaxexplains,“Onceyouhavestandardizedaprocess,theexpectedoutputs are known and it is easy to identify variations or unexpected results. Technologycanbeusedtomonitorresultsandasatooltoinvestigatevariations.”

And, of course, standardized processes help deliver efficiency and free up valuable time necessary for business support and effective tax planning. Standardization also helps facilitate a more complete and accurate understanding and communication of tax matters across global organizations, which in turn can add value by improving timeliness, efficiency and transparency and reducing risk.



3

5 – Eliminates risk

2

4

Based on your experience, do you believe standardization reduces risk?(Rate on a scale of 1 to 5, where 1 = does not reduce risk and5 = eliminates risk.)

1 – Does not reduce risk

25%

42%

24%

5%

4%

0% 20%15%10%5% 30%25% 40%35% 50%45%


Process and technology improvements remain important

Tax departments in general are pursuing process and technology improvements, with 87 percent of survey respondents indicating that tax process and technol-ogy improvements are important or extremely important in driving their tax department’soverallobjectivesinthenextyear.Theseinitiativesmayarisefromstandardization initiatives, the increasing availability of tax-specific software pack-ages or a desire to reduce risks associated with the use of spreadsheet-based computations and reporting.



Managing tax risk





Tax department priorities: How important is each of the following activitiesin driving your tax department’s overall objectives in the next year?


42%34%19%3%2%

62%25%10%2%1%

63%23%10%2%2%

37%30%20%8%5%

37%28%22%7%7%

33%35%24%5%2%

26%33%30%6%5%

24%33%30%9%5%

1 – Not at all important 2 3 4 5 – Extremely important


In fact, notwithstanding that not all tax functions are achieving high degrees of standardization, it is highly valued across the board, with 67 percent of the survey population noting that it significantly reduces or elimates risks.



Quartile 2

Quartile 3

Quartile 1

Quartile 4 3.1

3.3

3.4

3.5

How likely is it that you will pursue process and technology enhancements?

2.8 3 3.1 3.2 3.3 3.4 3.52.9 3.6

Series 1


Furthermore, high-performing tax functions were more likely to pursue process and technology enhancements than those in the lower quartiles.

Whilethisyear’ssurveyshowsamodestchangefromthe2006results(inwhich65 percent of respondents said they were planning tax process improvements and 51 percent planned tax related technology improvements within 12 months), process and technology improvements clearly remain an important priority.

More outsourcing or co-sourcing/loaned staff

Process-related improvements

Better training for existing staff

Other

Technology-related improvements

Refused 3%

6%

21%

58%

62%

65%

Which of the following types of projects are in progress or underconsideration within the tax function?

0% 20%10% 30% 50%40% 70%60%


Overall, 62 percent of respondents say they have, or are planning, process improvement projects and 58 percent have, or are planning, technology-related improvement projects.



Is the level of investment in tax process improvement and technology forthe tax function...?

About right

Too low

Too high

66

34

0

65

35

0

47

37

16

55

13

32

76

24

0

77

23

0

74

24

2

75

25

0

97

3

0

70

27

3

70

30

0

67

33

0

70

30

0

75

23

2

70

30

0

73

17

10

80

15

5

78

22

0

70

27

3

70

30

0

Numbers shown correspond to percentages of respondents.Colors range from red (lowest percentage) to light green (highest percentage).Source: KPMG International 2009.

0–5 6–47 48–97

Aus

tral

ia

US

A

Can

ada

Mex

ico

Bra

zil

Uni

ted

Kin

gdom

Fran

ce

Ger

man

y

Net

herl

ands

Sw

itzer

land

Italy

Spa

in

Rus

sia

Sou

th A

fric

aIn

dia

Chi

na

Hon

g K

ong

Sin

gapo

reJa

pan

Sou

th K

orea

Only 26 percent of the respondents worldwide indicated that level of investment in these projects remains too low although more than one third (33%) of respondents in the United States, Canada, Mexico, and Russia indicated levels as too low. At face value, this suggests there is still some work to do for many companies.

Balancing risk and value

A continuing challenge for tax departments is to balance the potential value from planning opportunities with a proper focus on tax risk management. Survey results reveal that tax functions that perform well in adding value through tax planning and business support also tend to have a clear governance and risk management framework in place. Based on the survey data, these organizations shared the following risk management practices:

• Adocumentedtaxriskmanagementprocess

• Ataxstrategyconsistentwiththeoverallbusinessstrategy

• Guidancefromcorporateleadershipdirectlytothetaxdepartmentregardingtax risk and strategy

• Aformaltaxriskmanagementpolicy,adoptedandreviewedbytheBoardwithin the last 12 months

• Ataxdepartmentrepresentativeonthecompany’sriskmanagementcommittee

• Placingahighvalueonmanagingtaxrisk.

High-performing tax departments outranked their peers across all categories as shown in the table on the next page. In some cases the distinction is marked, for example 93 percent of tax functions in the highest quartile have a documented tax risk management process compared with only 33 percent of the functions in the lowest quartile and 91 percent had a formal tax risk policy adopted by the Board versus only 8 percent in the lowest quartile.



While the high performers outrank the general survey community across all categories, the wider group of respondents also shows good progress in this area over the last three years.

• Overall,managingtaxriskisviewedashavinggreaterimportancethroughoutthe entire survey community. Two-thirds (66 percent) of all respondents have a documented tax risk process—up from just over 50 percent in 2006.

• Morethan50percentofsurveyrespondentsreportedthatBoardsandcorporateleadership also have been more involved on a global basis in providing strategic guidance on tax risk, a considerable jump from the 37 percent reported in 2006.

• Taxistakingamoreprominentroleonriskmanagementcommittees,with50 percent of companies reporting that they have a tax department repre-sentative on their risk management committee today versus only 26 percent three years ago.

91%

59%

39%

9%

57%

33%

20%

16%

85%

89%

71%

55%

25%

91%

59%

34%

8%

98%

94%

87%

58%

93%

83%

55%

33%

65%

38%

16%

Board-adopted risk policy

Provided strategic guidance

Tax representation on Risk Mgt Committee

Board has reviewed tax risk strategy in past 12 months

Consistent strategy

Global standards

Documented process


0% 20%10% 30% 40% 60%50% 70% 80% 90% 100%


Does your current tax function include the following?



Adding value through participation and influence

In addition to focusing on governance and risk, high-performing tax departments were also able to focus on providing value in a turbulent economy.

For leading tax functions, participation and integration with wider business initia-tives appears to be an important goal—with high-performing tax functions placing a high value on integration with the business (95 percent) compared with the lowest quartile (77 percent).

The board has reviewed the company’s tax risk strategy inthe past 12 months

The board and/or corporate leadership has providedstrategic guidance directly to the tax

We have global standards related to tax policies/procedures

The company has a risk management committee

The board has adopted a formal tax risk management policy

A tax department representative is currently on thecompany’s risk management committee

Which of the following statements are true of your company? (all respondents)

We have a tax strategy that is consistent with our overallbusiness strategy

The firm used its external auditor for tax serviceswithin the past 24 months

The tax department has a documented tax riskmanagement process

In the past 24 months, the firm has reduced and/or stoppedthe use of its external auditor for tax services 25%

48%

49%

50%

51%

60%

63%

66%

77%

84%

0% 40%20% 60% 80% 100%


Quartile 2

Quartile 3

Quartile 1

Quartile 4 3.2

3.8

3.7

4.0

0 2 3 41 5

Scale 1–5

How important is business integration and early indication of non-routinetransactions in driving your tax department’s overall objectives in thenext year?


1 = Not important5 = Very important



Thesetaxfunctionsconsistentlycategorizedthemselvesas“integrallyinvolved”in corporate projects such as Enterprise Resource Planning (ERP) implementations or reviews, shared service center implementations, and process improvement initiatives including process and controls documentation and testing, internal audits, mergers and acquisitions, cost control activities, supply chain management, and project management initiatives. Top quartile tax functions participated in 97 percent of such relevant projects compared with less than two-thirds (64 percent) for the lowest tier.

At companies that were less involved in corporate projects, the pressures of reporting, compliance, and managing tax audits may have crowded out the ability to participate—despite the value enterprise system implementations can impart to the tax function. There is also the question of how easy it is for management to understand how much cash has been saved or deferred to a future period by a skilled tax director or to quantify the financial and reputational risks of tax opportu-nities. That can make it difficult to make the case for investment in the area of tax function operations. Many of those we interviewed acknowledged that they strug-gle to communicate complex tax issues in a way that is succinct and clearly articu-lates both tax risks and rewards. Richard G. Fishman, Vice President, Treasurer and ChiefTaxCounselofAlbemarle,says,“[We]knowthevalueofwhatwedo,butitisoftenhardtotranslatethatintolanguageanon-taxpersonunderstands.”

This raises the question of how successful tax functions have been historically in communicating the business value they deliver.

Quartile 2

Quartile 3

Quartile 1

Quartile 4

97%

87%

84%

64%

0% 20% 40% 60% 100%80%

Does your tax function actively participate in major corporate projects?


“Ifthetaxfunctionisgoingto take responsibility for managing items, it will have to have a far more real and direct interface with the operating, finance, and IT departments. Tax people have to go out and actually spend time with thebusiness.”

—Tax Director, a FTSE 100 company



According to the data, however, top quartile tax functions actively identify value drivers for their companies and monitor their performance. Almost 50 percent of top quartile tax functions use internal tools to monitor their performance, another 17 percent use external tools, while 22 percent of these tax functions are in “response”modeandanother11percentaretryingtoidentifymeasurementtools.

22% 50% 17%

8%

8% 18%

14%

16%

11%

36% 14%

39%

29%46%

40%

33%

Quartile 3

Quartile 1

Quartile 4

Quartile 2

What tool/framework do you use to explain and monitor the scope of activitiesthe tax function needs to provide sustainable value to the business?

0% 20% 40% 60% 80% 100%

Looking for toolExternal frameworkInternal toolRespond to questions




Other value drivers included tax deferrals or reductions of cash outlays for taxes, minimizing the effective tax rate, and accurate financial reporting and tax compliance. In terms of the future importance of tax activities, top quartile companies placed more emphasis on allocating future resources and effort to cash tax savings and minimizing effective tax rates than lower tier companies.

4.5

4.2

4.1

3.5

4.0

3.7

3.6

3.1

4.3

4.0

3.9

3.5

4.5

4.1

3.6

3.1

4.4

4.0

3.7

3.2

4.6

4.5

4.4

4.2

4.7

4.5

4.4

4.1

Scale 1–5

1 = Not important5 = Very important

How do you rate the future importance of the following tax activities?

Managing audits

Minimizing effective tax rate

Compliance

Financial reporting

Process and technology improvement

Cash tax savings

Managing risk


0 1 2 3 4 5


When looking at the overall survey results, 87 percent of respondents indicated that maximizing cash flows and minimizing the effective tax rate are important indrivingtheirtaxdepartment’soverallobjectivesinthenextyear;48percentindicated they plan to spend more time on tax planning relative to other regulatory and compliance activities during that same period.



Matching resources to priorities

In the quest to balance the risk-versus-value equation, it is likely that sourcing will playsomeroleinanorganization’sdevelopmentofanactionablecostreduction/business rationalization strategy. Sourcing often can be an effective way to reduce the cost of non-core activity while maintaining access to highly skilled resources.

As tax functions face the potential for resource reductions and cost cutting mea-sures, outsourcing functions for resource scalability or labor arbitrage is growing in popularity; 52 percent of companies with current or ongoing projects in place to address resource constraints outsource some or all of their tax functions.

Accounting service center

Outsourcing/co-sourcing

Other finance resource

None 26%

22%

22%

52%

Which of the following types of projects are in progress or under consideration within the tax function to address resource or staffing constraints?

0% 40%30%20%10% 50% 60%




Quartile 2

Quartile 3

Quartile 1

Quartile 4 45%

51%

51%

60%

0% 20% 40% 60% 80%

Do you use outsourcing/co-sourcing to carry out tax departmentresponsibilities?


Although the survey results are neutral on the issue of increased use—with only 9 percent of respondents indicating they plan to increase the amount of work they outsource/co-source over the next 12 months—KPMG member firms experienced a significant uptick in demand for outsourced tax services in 2009. The demand is being driven by a business need to match permanent full-time equivalent posi-tions to the ongoing strategic needs of the tax department, with the ability to use flexible models for seasonal or periodic resource demands.

When we looked more closely at the data for high-performing tax departments, it appears that those in the top quartile are 10 percent–15 percent more likely to use outsourcing to carry out tax department responsibilities. It appears that companies able to achieve the risk/value balance they seek, look to sourcing as part of their overall strategy to match resources to required skills, activities and priorities.



Section III: Driving Tax PerformanceThe survey data indicates that companies that are successful in managing the bal-ance between risks and opportunities also distinguish themselves by anticipating and preparing for specific pressures directed not just to the tax function but also to the broaderbusiness.Theyhavetheir“eyesabovethehorizon”tochartawayforwardfor the tax function, seeking to efficiently deliver day-to-day compliance and reporting responsibilities while focusing on the right balance between tax risk and value.

Is it possible to derive hallmarks of success that might help others to validate and informtheirownperformanceandplotthewayforwardtoevengreatersuccess?

In the KPMG paper Tax in the Boardroom,5 we noted a trend toward more Board engagement with tax as a key business issue. In The Governance of Tax,6 the paper that followed, we discussed an approach for helping tax functions respond to these changes; in particular, how they needed to take account of a wider group of stakeholder expectations.

This survey and the examples of leading practices the research has revealed (see Section II) give us a solid footing on which to continue turning concept into reality.

With that in mind, we have developed a framework that not only provides a sum-mary of the hallmarks of leading practice—a sense of what can be achieved—but that also helps companies to establish where they want or need to be in relation to leading practice, and thus, which gaps to address first.

5 Tax in the Boardroom—A Discussion Paper, KPMG International, 20046 The Governance of Tax—A Discussion Paper, KPMG International, 2007



Establishing the framework

The starting point is simple: leading organizations achieve a balance between risk and value that matches their strategic approach, and they do so from an operational platform that is effective and efficient. The focus—on efficiency and effectiveness and risk and value—is a constant. It is a platform, not a fixed base but rather an exercise aimed at continuous improvement and rebalancing—as events disturb the equilibrium and new leading practices for performance improvement in tax emerge.

To help achieve and maintain such a balance, some or all of the following building blocks may need to be put in place:

• Thestrategicgoalsandobjectivesofthetaxfunctionneedtobeclearlyalignedwith those of the wider organization so there is a common purpose.

• Thetaxmanagementstrategyneedstobemadeoperationalinawaythatcan be monitored and sustained over the longer term. This can be achieved through embedded processes.


Embeddedprocesses

Timelyand accurateinformation

One view ofperformance

Influencingstakeholders

Enablingtechnologies

High-performingteams

A commonpurpose

CREATING VALUE

MANAGING RISK

Eff

icie

ncy

Effectiven

ess

Driving tax performance

Drivingbusiness

valuethrough

tax



• Effectivetaxmanagementrequiresdatatobeproduced,exchanged,andmadeavailable to the right people, at the right time and in the right format. The requirement is for timely and accurate information.

• Inordertomonitoreffectivetaxmanagementtheremustbeclarityoverwhatis required and how performance will be measured, through agreed KPIs, so that there is one transparent view of performance.

• Taxfunctionsneedtounderstandtheaspirationsandconstraintsofrelevantstakeholders and communicate with them effectively in order to help achieve their goals—this includes the capability to influence stakeholders.

• Gettingthebasicsrightisfundamental,butlaborintensiveprocessescon-sume valuable resources and increase risk. Processes that can be automated should be through the use of enabling technologies, whether that is existing Enterprise Resource Planning (ERP) systems or use of tax software.

• Therightformulaisneeded.Taxiscomplexandrequiresthecarefuljudgmentof trained professionals. Effective tax management needs the right people doing the right things. Those people need the right skills, the right resources, and the right reward.

The Driving Tax Performance framework has particular resonance in view of the implications of the recent economic downturn. These are likely to include a greater ongoing focus on operational taxes and transfer pricing as means to pro-tect and widen the tax base.7 These taxes are embedded in the business opera-tions and financial systems. And it is likely that tax authorities internationally will continue to increase their level of cooperation and focus in shifting the burden of tax assurance onto companies.

We would expect leading organizations to consider and manage the potential implications of these developments, and to influence their course, by integrating their approach to tax into their wider performance driven business models.

“AuditcommitteeswithinBoards are getting more visibility into the tax functionandwhat’sgoingon.Ithinkyou’regoingto see that boardroom connectivity within the tax function will drive behavior to best practices…tax directorswhodon’twantto deal with the audit committee, who want to keep their heads down, may not have that option if thisdirectioncontinues.”

—Greg Engel, Tax Insurance Sector Leader,

Partner, KPMG

7KPMG’sCorporateandIndirectTaxRateSurvey,KPMGInternational,2009



ConclusionAs our survey results show, 2009 was a challenging year for tax departments and companies overall. Reflecting a turbulent economic environment, the key pressures and challenges facing the tax function identified a consistent theme: to accomplish more using fewer resources. Perhaps more than ever before tax departments were called on to elevate their efforts to contribute better cash management, tax plan-ning, and improved operational efficiencies and effectiveness—and to do this on a global scale amid an ever-changing regulatory environment and significant resource constraints. Nevertheless, some companies appeared to successfully achieve a balance between risk management and adding business value. These companies begin to show us what the hallmarks of successful tax management might be, and how successful risk management and responsible value creation can go hand in hand. Their success provides a template others can use to assess their current performance and determine the necessary actions for improvement. We call this template“DrivingTaxPerformance”—aframeworktohelptaxdepartmentsshapeand achieve their business goals.

This survey and its analysis were conducted by the following KPMG tax practices: Global Tax Outsourcing, Global Tax Transformation Services, and Tax Management Services.

Driving Tax Performance in Action

A company had operations in many international locations. As a result of new regulations in the U.K., the group needed to certify that it had established and maintained accounting arrangements capable of supporting accurate tax returns across all the major direct and indi-rect taxes. The group recognized that similar regulatory changes were emerging in China, the Netherlands, and Australia. They needed to be able to respond to a similar problem in multiple loca-tions, each of which possessed its own regulatory nuances.

Using the Driving Tax Performance framework, the group built a common approach that they could adopt across their international operations. It would require fine tuning at the local level to comply with local requirements.

For further information on the data presented in this paper, please contact:

Brad BrownPartner, Global Tax Transformation Services KPMG in the U.S. +1 213 593 6761 [email protected]

Paul Harrison Partner, Tax Management Services KPMG in the U.K. +44 20 (0) 7311-3053 [email protected]

Chris Scott Partner, Global Tax OutsourcingKPMG in the U.K. +44 20 (0) 7311 2820 [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The material contained within draws on the experience of KPMG tax personnel and their knowledge of local tax law in each of the countries covered. While every effort has been made to provide information current at the date of publication, tax laws around the world change constantly. Accordingly, the material should be viewed only as a general guide and should not be relied on without consulting your local KPMG tax adviser for the specific applicationofacountry’staxrulestoyourownsituation.

© 2010 KPMG International Cooperative (“KPMGInternational”),aSwissentity.Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 090902

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.

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