research Finance Views CFO on the Tax Dimension research ......About this Report In late 2013, CFO...

A report prepared by CFO Research in collaboration with Vertex Inc.

Finance Viewson the Tax Dimensionof Strategic Decision Making

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

CFOresearch

Finance Views on the Tax Dimensionof Strategic Decision Making

Contents

Executive Summary .............................................................................. 2

About this Report .................................................................................. 3

Preparing for the Future: The Business Value of Tax Planning .................................................. 4

Growing Smart: The Advantage of the Tax-Aware Company .................................... 6

It’s Hard—But It’s Worth It ................................................................... 7

Looking Up from the Spreadsheet: Expanding Vistas for the Tax Professional ...................................... 9

Living with Complexity ......................................................................10

Less Time Checking for Errors, More Time Adding Value ..........11

Sponsor’s Perspective ........................................................................15

1 CFO PUBLISHING LLC


Executive SummaryIs your tax function helping your company prepare for renewed growth, or is it sitting by the sidelines? This is the central question that CFO Research and Vertex Inc. set about exploring in a recent research study. In conducting a survey of more than 100 senior finance executives and a series of in-depth interviews, we found that finance executives do, indeed, draw a direct line between tax consider-ations and better business results. In an interview, Jim Lusk, EVP and CFO at the facilities solutions firm ABM, confirms, “I view taxes as an integral part of operations. Tax is a consideration in every system and process change we make.”

Eight out of ten finance executives taking our survey agree that their companies could benefit substantially by better incorporating tax consider-ations into strategic decisions. The most important benefits of improving the tax function include supporting better business decision making, as well as lowering tax rates and boosting earnings per share (EPS).

Some companies in our survey have already made substantial progress in bringing the tax function together with business and strategic teams. These “tax-aware” companies report that it’s routine for them to consider tax implications in business-re-lated activities, and nearly all of them say that their companies have taken explicit steps to better incor-porate tax considerations. The largest number of the tax-aware report that, by better integrating tax with operations, they’ve been able to derive more value from expansion of their operating activities into new countries and regions.

For other companies, just acknowledging that there is a problem can remove one of the biggest obsta-cles to solving it. The greatest challenges cited by respondents from companies other than the tax-aware are a lack of recognition of the tax function’s ability to contribute to corporate strategy and a lack of collaboration among tax, finance, and operations staff.

The finance function often is ideally positioned to provide the bridge between the technical financial and reporting requirements of the tax function and the strategic considerations of business manage-ment. When other managers understand how tax considerations can impact performance, they can use that knowledge to protect and enhance value in operational and strategic decisions.

Making better use of technology can also help companies focus on the value they derive from their tax functions. Giovanni Pacelli, the Director of Global Tax and Regional Controller for Freescale Semiconductor, notes, “We want to reduce the num-ber 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.”

Effective use of technology can reduce the man-ual effort required in collecting and reporting tax information, reduce the risk of human error, and increase the accuracy and quality of tax data. But half of the respondents in our survey report that they aren’t at that point yet. They cite the problems they still need to overcome: a lack of integration among information systems, a lack of standardized approaches, and inadequate technology.

Mr. Lusk at ABM neatly sums up the payoff his company gets from bringing tax into the fold: “The constant goal is always to move up the value chain from pure compliance to providing value and strengthening the company’s competitive position.”

Finance execu-tives agree that, by better incorporating tax consid-erations into strategic decisions, their companies can improve decision making, as well as lower tax rates and boost EPS.

“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.”

—GIOVANNI PACELLI, DIRECTOR OF GLOBAL

TAX AND REGIONAL CONTROLLER, FREESCALE

SEMICONDUCTOR



About this ReportIn late 2013, CFO Research conducted a survey among senior finance executives at large U.S. companies. We also interviewed executives at large companies in the U.S. and Europe to provide addi-tional depth and insight into the survey findings. Through this research, we sought to explore the ways that finance executives can help their compa-nies maximize the value of business decisions—and ultimately, financial performance—by incorporating tax considerations more effectively. We were espe-cially interested in how companies that incorpo-rated tax considerations achieved better business results. We gathered a total of 105 responses from compa-nies with revenues of more than $1 billion per year, representing a range of industries.

We would like to thank the finance and tax execu-tives from the following companies who contrib-uted to our interview program:

ABMAtlas CopcoConstellation BrandsFedEx CorporationFreescale SemiconductorNational Grid USVodafone Group

TITLE Director of finance 17%Controller 15%VP of finance 14%Senior finance manager 9%Chief financial officer 8%Director of financial planning and analysis 5%Other senior executive with finance responsibilities 5%Other finance executive 4%EVP or SVP of finance 4%Treasurer 3%CEO, president, or managing director 1%Director of tax 8%VP of tax 5%Chief tax executive/officer 2%Other tax executive 1%Other 1% REVENUE $1 billion – $5 billion 39%$5 billion – $10 billion 16%$10 billion – $20 billion 14%More than $20 billion 31% INDUSTRY Financial services/Real estate/Insurance 29%Auto/Industrial/Manufacturing 14%Business/Professional services 7%Chemicals/Energy/Utilities 7%Media/Entertainment/Travel/Leisure 7%Telecommunications 7%Wholesale/Retail trade 7%Health care 6%Food/Beverages/Consumer packaged goods 4%Pharmaceuticals/Biotechnology/ Life sciences 4%Hardware/Software/Networking 3%Aerospace/Defense 2%Construction 2%Natural resources/Mining 2%Transportation/Warehousing 1%

Note: Percentages may not total 100%, due to rounding.



Preparing for the Future: The Business Value of Tax PlanningOver the years, CFOs have been expanding their reach beyond traditional compliance, accounting, transactional efficiency, and cost control. These days, they are more likely than ever before to be integrally involved with business performance, operational decision making, and strategy develop-ment and execution. From this position, they also find themselves ideally suited to bring together one of the most specialized functions—tax—with the operational and strategic decisions that are at the core of any business’s success.

In an altered global business landscape, what value do finance executives find in their tax functions, and how are they ensuring that value is captured effec-tively in business and strategic decision making? In a project sponsored by Vertex Inc., CFO Research deployed an online survey to senior finance execu-tives working at large ($1B+) U.S. companies to look into the ways that companies incorporate tax con-siderations into strategic decisions most effectively, and deliver bottom-line results in the process. To augment the survey findings, we also interviewed senior finance executives at a number of large companies based in the United States or Europe.

Historically, tax has tended to be segregated from the mainstream of business decision making, due at least in part to its highly technical and complex nature. Bob Ryder, CFO at the wine, beer, and spir-its company Constellation Brands, says, “The tax function itself is very complicated, very difficult, and almost impossible to explain. It’s not intuitive whatsoever.” According to Mr. Ryder, this creates the risk that tax “won’t get its proper time of day, and management won’t really want to talk to the tax department because they can’t understand what they’re even talking about.”

But most large companies can ill afford to keep these kinds of silos in place as they start to plan for renewed growth in a slowly recovering, but still dynamic, global economy. John Merino, Chief Accounting Officer at FedEx Corporation, notes, “As the world becomes more global, and more and more companies engage in international commerce, the complexity of the tax issues will continue to compound.” In this new world, he says, it’s critical to factor in tax when conducting commerce on a global scale.

John Connors, Group Tax Director for the UK-based mobile telecommunications firm Vodafone, com-ments on the evolution of the tax function at his company: “Over a number of years, we have worked very hard to ensure that tax is fully integrated into the commercial decision-making process and is an


Figure 1In your opinion, what are the most valuable benefits your company could realize by improving the performance of its tax function?

47% Lower effective tax rate/Higher EPS

30% Better business decision making

Greater certainty with tax liabilities Lower audit risk Improved financial performance Lower financial risk

Greater accuracy in financial reportingLower enterprise or strategic risk Faster consolidation and close Lower reputational risk

20%-30%

<20%


integral part of decision support. Maybe ten years or so ago, tax was seen as something of a back-of-fice, back-room function, sometimes for better, sometimes for worse. But I think as far as we’re concerned, tax really has to be integral to all of the commercial decisions, whether it’s billing systems, location decisions, or anything else.”

And Charles DeRosa, Vice President, Tax, for the utility National Grid US, says, “I think it’s vitally important to have tax at the table. 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 other-wise be expecting.”

Finance executives recognize that they can put their specialized tax expertise to better use in sup-porting the commercial side of the business—30% of respondents place better business decision making among the top three benefits of improving their tax functions, making it second in importance only to lowering effective tax rates. (See Figure 1, previous page.)

Fully 80% of the survey respondents say that, over the next two years, their companies could benefit substantially by better incorporating tax consid-erations into strategic decisions. (See Figure 2.) An effective tax function helps business managers grasp the whole picture; a CFO writes in the survey that his company’s efforts to better incorporate tax considerations into strategic decisions has yielded “financial analysis of alternatives [that] is more robust and realistic.” The survey respondents recognize that their tax experts can make valuable contributions across a range of business activities, not simply accounting and compliance.

Mr. Merino insists that the tax function at FedEx must be “strategically managed” because it is a “big value driver,” as he puts it. Mr. Merino provides some examples of that value: “It shows up in your effective tax rate. It shows up in your ability to defend your tax positions upon audit. It shows up in your transaction-structuring, so that you are opti-mizing tax implications on the front end.”

For public companies, lowering the company’s effective tax rate can directly boost earnings per share (EPS), as indicated in Figure 1. The largest number of survey respondents—nearly half (47%)—identify this as one of the most valuable benefits their companies would realize by improving the performance of the tax function.

Mr. DeRosa points out that tax savings are an important source of capital for a company like National Grid US: “There is a direct relationship between the tax planning I do, saving money on the tax line, and the amount of money [available] to run the business…. Sometimes when we bring in tax savings, that means that we can just do more expansion projects.”

The value of an efficient and effective tax team isn’t limited to preparing accurate financial statements or developing appropriate financing facilities. An effective tax function also can count for a lot in managing the customer experience. Vodafone’s Mr. Connors notes, for example, that “making sure that all the relevant VAT information is accurate, com-plete, and fully recorded enables us to manage our statutory payments on a more efficient and effective basis.” For that reason, he says, “We need to be as involved as the IT teams or the commercial teams in developing new billing systems, so that they

“As the world becomes more global … the complexity of the tax issues will continue to compound.”

—JOHN MERINO, CHIEF ACCOUNTING

OFFICER, FEDEX CORPORATION


Figure 2“Over the next two years, my company could benefit substantially by better incorporating tax considerations into strategic decisions.”

80%

18%

Agree

Disagree

Not sure3%

Note: Percentages do not total 100% due to rounding


talk to us early in the process and understand that there’s an implication in the way, for instance, that bundled services or credits are provided and billed for tax purposes, the benefit or detriment of which ultimately is conveyed to our consumers.”

Or, as Jim Lusk, Executive Vice President and Chief Financial Officer of the facilities solutions firm ABM, puts it plainly, “They’re making sure that what we bill to customers is in fact what we’re sup-posed to bill to customers.”

That’s one place where Lee Eckert, the CFO of National Grid US, relies on the skills that his tax executive, Mr. DeRosa, brings to the business. “We are fortunate to have Charles [DeRosa],” Mr. Eckert says, “in that he’s got very good relationships with our jurisdictional presidents. He is working with them to help them understand current tax policy and future tax policy, and then making sure that policy is being written to the benefit of our customers.”

Growing Smart: The Advantage of the Tax-Aware CompanyGrowth is a key strategic objective for almost any company, and finance executives in our survey

associate value from the tax function with both organic and inorganic growth. By better incorpo-rating tax into strategic decisions, say respondents, their companies have most frequently been able to derive greater value from business expansion (30%), as well as from M&A activity (28%).

Not surprisingly, the largest number of respondents believes that tax implications should be taken into account regularly for M&A decisions (67%) and in committing to major transactions (70%). But nearly as many finance executives are thinking about tax in terms of growth initiatives: 66% advocate for includ-ing tax considerations as they expand operating activities into one or more new countries or regions; 63% say that tax implications should be considered regularly in making major operating decisions.

Some companies in our survey can be charac-terized as “tax-aware” enterprises—companies that have already made substantial progress in bringing the tax function together with business and strategic teams. These “tax-aware” companies report that it’s a matter of routine for them to con-sider tax implications in business-related activities, as seen in Table 1. For example, virtually all of the respondents from these companies (97%) say that they account for tax implications before making major operating decisions.

Finance executives associate tax value with business growth.


“Tax-Aware” Companies

OtherCompanies

Making major operating decisions 97% 14%

Committing to major transactions 90% 25%

Making M&A decisions 87% 33%

Developing new products/services 74% 4%

Intensifying companywide efforts to manage risk 66% 1%

Expanding marketing activities to new types of customers 58% 4%

Table 1Does your company regularly take tax implications into account before committing to the following types of decisions?


According to Giovanni Pacelli, the Director of Global Tax and Regional Controller for Freescale Semiconductor, “It’s critical to risk mitigation that tax have a full line of sight into the deci-sion-making process. Looking at the value side, it really has to be integrated with the business and with our corporate strategy, and the only way to have that is to have a seat at the table when busi-ness decisions are being made.”

In response to another survey question, the same large percentage of executives from the tax-aware companies (97%) confirm that senior decision makers at their companies do, indeed, effectively incorporate tax considerations into strategic decisions. And the finance executives from these companies draw a direct line between better inte-gration of tax information and business results; they identify improved financial performance and higher EPS as the top benefits following from improvements in the performance of their tax functions.

Bob Ryder, the CFO at Constellation Brands, pro-vides an example: “Just this last quarter we brought our tax rate, for at least the next two or three years, down from 37% to 32%. That’s worth enormous

amounts of money, so if you reduce your effective tax rate, your earnings per share goes up. You also reduce your cash tax rate, which essentially are checks you cut to the tax authorities. If you do that, your cash flow and cash flow per share also go up.”

It’s Hard—But It’s Worth ItIt hasn’t come easily, even for the tax-aware compa-nies—or perhaps, especially for those companies. Tax-aware companies tend to be among the largest represented in our survey, and they are present in many different countries and tax jurisdictions. Forty-five percent (45%) of the tax-aware companies are in the largest category we surveyed, which are companies with more than $20 billion in annual rev-enue. By contrast, the same percentage of the other companies (45%) fall in the smallest category, with less than $5 billion in revenue.

As a result, it comes as little surprise that six out of ten respondents from these tax-aware companies (61%) identify their companies’ highly complex tax profiles as one of the greatest challenges to incorpo-rating tax into strategic decisions. (See Figure 3.)

The “tax-aware” companies in our survey effectively incorporate tax considerations into strategic decisions, and they identify improved financial performance and higher EPS as the top benefits of their efforts to improve their tax functions.


Figure 3In your opinion, which of the following are the greatest obstacles (aside from resource scarcity) to better incorporating tax into strategic decisions at your company?

Highly complex tax profile (e.g., many legal entities, multiple tax jurisdictions)

Lack of recognition for the tax function’s ability to contribute

to business strategy

Lack of collaboration among tax, finance, and/or

operations staff

“Tax-aware”companies

Other companies

High Complexity

Lack of Recognition Lack of Collaboration

61%

41% 45%

23%

43%

13%


The greatest challenges cited by respondents from other companies are a lack of recognition for the tax function’s ability to contribute to corporate strategy (45%) and a lack of collabo-ration among tax, finance, and operations staff (43%). Another survey respondent points out the consequences of failing to consider tax implica-tions early enough: “On major transactions, the tax department is involved at the tail end, if at all, in the process, even though time and time again

tax considerations have made a significant impact on the structuring of the transaction.”

The tax-aware companies have worked at making sure that tax is accounted for in operational and strategic decisions. By far, most of the tax-aware companies (84%) report that they have actively taken steps within the past two years to better incorporate tax considerations. (See Figure 4.)

“I view taxes as an integral part of operations. Tax is a consid-eration in every system and process change we make.”

—JIM LUSK, EVP AND CFO, ABM


0%

25%

50%

Our efforts to better incorporate tax into strategic decisions improved our ability to derive value from ___________ .

Figure 4Over the past two years, has your company taken steps to better incorporate tax considerations into strategic decisions?

Expansion of operating activities

into one or more countries/regions

M&A activity New product/service

development

Expansion of marketing activities

to new types of customers

“Tax-aware” companies Other companies

Yes

Not sure

No

45% 29% 23% 19%23% 27% 16% 16%

6%“Tax-aware” companies

Other companies

10% 84%

57%19%24%


The payoff from these efforts has clearly supported these companies’ growth ambitions. As Figure 4 shows (previous page), the primary benefit from their initiatives, according to the largest number of the tax-aware (45%), has been the ability to derive more value from expansion of operating activities into new countries and regions.

The tax-aware company also benefits from increased flexibility and analytical capacity. Relatively high numbers of the executives from the tax-aware com-panies (42%) give themselves top marks—a rating of “excellent”—for their tax functions’ ability to adapt to the increasing demands of tax enforcement. A mere 10% of the other companies make the same claim. In fact, the largest number of respondents from the less tax-aware companies (41%) rate themselves as only “fair.” And 58% of the tax-aware rate their tax func-tions’ overall performance as “excellent,” while only 19% of the other companies do so.

Looking Up from the Spreadsheet: Expanding Vistas for the Tax ProfessionalThese tax-aware companies are setting the bar for the others. In our survey, eight out of ten finance executives overall agree that their companies could

benefit substantially by better incorporating tax considerations into strategic decisions. The best way to go about doing that, however, is the key question. Mr. Lusk at ABM says, “I view taxes as an integral part of operations. Tax is a consideration in every system and process change we make.” The challenge, he continues, is in figuring out, “How do you leverage the skills and the rules to drive the best bottom-line behavior? That’s kind of the secret sauce.”

In fact, three-quarters of respondents (74%) say that senior management at their companies need to have a better understanding of the implications of tax information in order to use it most effectively. (See Figure 5.)

Fostering the kind of collaboration and commu-nication that underlies success, as interviewees point out, is a two-way street. Both operations managers and tax executives need to understand how tax considerations impact business deci-sions. Mr. Merino at FedEx says, “One of the important learnings we’ve had is that we can’t, as either finance or accounting or business experts, possibly know all this ourselves. So there’s an awareness that decision makers need to be able to say, ‘You know what? This might be a tax issue.’ That awareness then helps you determine whether or not you have the expertise internally or whether you need some specialized expert.”


Figure 5To the extent that senior decision makers at your company could do a better job of incorporating tax considerations into strategic decisions, which of the following changes would be most likely to help them improve?

74% Better understanding of the implications of tax information

Better access to tax information

Higher quality tax information

13%

10%

The key question, according to Jim Lusk, EVP and CFO at ABM, is, “How do you leverage the skills and the rules to drive the best bottom-line behavior?”


A respondent writing in our survey offers similar advice: “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.” And Mr. Pacelli at Freescale Semiconductor tells us, “You have to simplify tax. Tax is very complicated.”

In the end, says Mr. Merino, “The tax people really need to be a key member of the team at the table, and they understand their role. 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. It’s a skill set, where there’s a balance.”

For Mr. Merino, the most effective process is also a two-way street. He explains, “When you bring in the internal tax people and they become accus-tomed to working on strategic initiatives, it also helps them grow in terms of their business acu-men and their capability. That way, not everything is a hair-on-fire major tax problem. It improves their business acumen to have more exposure to transactions.”

Tax expertise needs to be incorporated into decision-making processes early and often, so that business leaders can understand the impact tax considerations have on initiatives. In turn, in order to provide targeted information and focused advice, tax experts need to be able to understand the business.

This is where CFOs can take advantage of their newly strategic vantage point, acting as the fulcrum between the business and the tax function. Finance increasingly is called upon to help translate the highly specialized knowledge resident in the tax function into performance impacts that inform operational and strategic decision making. The finance function can fill a key role in facilitating that communication, providing a bridge between the highly technical financial and reporting require-ments of the tax function and the strategic con-siderations of business management. For example,

Mr. Merino says of FedEx, “One of the really telling components of our organization is that our CFO is very savvy in terms of potential implications of tax and accounting issues on any transaction. So early and often the question comes up, ‘What are the tax implications?’”

Education is important for opening up the lanes going down the other side of the street, as well. Mr. Connors says that, at Vodafone, tax has been part of a focused internal training and education program. The benefit, he notes, is that “it makes my life easier, and it makes the tax team’s life easier, if the commercial teams understand the tax implications of what they are doing. We have tried to educate and inform our commercial, and mainly finance, business partners … and we’ve certainly invested a fair bit of time, effort, and energy in developing our tax team skills to be effective business partners.”

Mr. Ryder, the CFO at Constellation Brands, advises, “If you can find people in tax who actually have broad business backgrounds and understand how business works, and how treasury works and how accounting works, that really helps because they can speak a common language.”

Living with ComplexityGaining the certainty that you need in your tax information in order to make sound business decisions, however, is no easy task, given the complexity that comes with operating in hun-dreds of different tax jurisdictions at the local and national levels. Nearly half of the finance executives surveyed (48%) point to their com-panies’ growth plans—expansion of operating activities into one or more new countries or regions—as the driver behind the need to inte-grate tax considerations into decision making. A survey respondent writes: “[We are] trying to go into Canada—completely uninformed about what tax risk/issues there are.” As companies expand sales, operations, and supply chains into new jurisdictions, they must be able to get up to speed


Tax expertise needs to be in-corporated into decision-making processes early and often, so that business leaders can understand the impact that tax considerations have on initiatives.

“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.”

—SURVEY RESPONDENT


on both local and national tax requirements and the financial obligations those entail.

Another survey respondent notes: “They [i.e., man-agement] have a good handle on the tax issues at a macro level; however, at times they forget about the local accounting constraints that our international local teams face with the local tax authorities.” He continues: “We did some intercompany loans that looked great on paper but conflicted with the local tax treatment of such loans... . The result was that most of the expected tax benefit didn’t happen.”

In fact, a company’s size and growth prospects are among the leading challenges companies face in better incorporating tax into strategic decisions. A little fewer than half the respondents (47%) list a highly complex tax profile (e.g., many legal entities, multiple tax jurisdictions) among their greatest obstacles. Nearly half of the respondents (48.5%) say that their tax functions will need to continue to get better at adapting to changes in tax legislation—which have been increasing rapidly as cash-strapped governments, at both the local and national levels, aggressively pursue new sources of revenue.

But it can be worth the effort. Mr. Ryder at Constellation Brands comments, “As odd as the tax function is and as crazy as the rules are, it can save you enormous amounts of money if you speak to tax before you actually make a business transaction.”

Mr. Merino from FedEx also chimes in: “Virtually every transaction that I can think of—of any con-sequence—has some tax implications to it. Even if they may not be great all the time, they are still there.” He goes on to provide some examples: “It could mean buying equipment in a certain way. If you buy equipment and it moves around before the title changes, or before it gets deployed, it can have tax implications that might not be otherwise appar-ent to someone. There are always sales tax issues with acquiring merchandise. There’s tax-abatement potentials for developing real estate projects in var-ious jurisdictions—that if you get in on early could have financial consequences to the project.”

And, in the worst-case scenario, says Mr. Merino, “Sometimes these tax exposures can be so prolific that if they go the wrong way, they can wipe out all the value that might otherwise accrue from this idea or project.”

Less Time Checking for Errors, More Time Adding ValueAs companies gain increasingly better control over tax processes, finance executives are able to devote more attention to tax value. Greater certainty with tax liabilities is seen as an important benefit by 29% of respondents, which is virtually the same number who consider the tax function’s contribution to better business planning as one of the top three benefits. And improving tax planning and decision support is the top reason survey respondents are invested in upgrading tax-management technology. (See Figure 6, next page.)

Having confidence in the accuracy and quality of the tax data means you can spend less time on reporting and compliance, and more time on add-ing value to the business. Mr. Pacelli at Freescale Semiconductor says, “It comes down to having reliable data and spending less time managing and manipulating data to understand it, so that I can sit back and look at a report or a roll-up and determine what strategic implications it may have, whether that’s in the next quarter or in the next year.”

Others we interviewed agree. Mr. DeRosa, the Vice President, Tax, at National Grid US, says, “There really has been a sea change in the last two years for us, where the demands of my time to be upfront, which I am enjoying a lot, are far greater than they were three to four years ago.”

The more technology can help you on the com-pliance side, the more expertise you can apply on the strategic side. Says Mr. Merino at FedEx, “Over time, our tax function has become much more strategic, and much more engaged on the front end,


“When you bring in the internal tax people and they become accustomed to working on strategic initiatives, it also helps them grow in terms of their business acumen and their capability.”

—JOHN MERINO,CHIEF ACCOUNTING


“As odd as the tax function is and as crazy as the rules are, it can save you enormous amounts of money if you speak to tax before you actually make a business transaction.”

—BOB RYDER, CFO, CONSTELLATION

BRANDS

“Sometimes these tax exposures can be so prolific that if they go the wrong way, they can wipe out all the value that might otherwise accrue from this idea or project.”

—JOHN MERINO, CHIEF ACCOUNTING OFFI-

CER, FEDEX CORPORATION


much more focused on planning than on compli-ance. There’s a balance in the tax organization of being involved in tax planning and tax advocacy, versus just preparing all of the tax filings that have to be done. I think progressive companies have shifted more resources into the higher-level tax functions, and tended to try to automate, or out-source, more of the lower-level functions.”

However, half of the respondents in our survey list one or more of the following among the greatest obstacles to better incorporating tax into strategic decisions:

n Lack of integration between financial reporting systems and tax reporting systems

n Lack of a standardized approach to tax planning and compliance across the company

n Inadequate technology systems/overreliance on spreadsheets and manual processes

Each of these increases the demands on tax staff simply to collect and scrub tax data, ensuring its accuracy. Collecting and calculating tax data with spreadsheets, conforming different processes and standards across a company’s many tax jurisdic-tions, and ensuring that the data is entered cor-rectly into the company’s financial management and reporting systems all are critical tasks, and all are extremely resource-intensive.

The potential for error also increases, and compa-nies find themselves spending an inordinate—and unproductive—amount of time making up for the mistakes of the past, as they are dragged through lengthy tax cases. Doing so means you are forced to look backwards, instead of planning forwards. As Constellation Brands’ Mr. Ryder comments wryly, “Everything is five years ago. Everybody thinks they’re in 2013, but in the tax world it’s more like you’re still in 2008 or 2009.”


0% 20% 40% 60%

Figure 6 Over the next two years, we will seek better technology for tax management primarily to improve our ability to _____________.

Improve tax planning/tax-related decision support

Improve management of tax-related risk/Decrease audit risk

Reduce costs and promote efficiency in tax administration

Reduce effective tax rate/Increase EPS

Identify permanent tax-savings opportunities

Increase retention of employees within the tax function

Reduce headcount within the tax function

51%

44%

43%

36%

26%

9%

4%

“It comes down to having reli-able data and spending less time managing and manipulating data to under-stand it, so that I can sit back and … determine what strategic implications it may have.”

—GIOVANNI PACELLI, DIRECTOR OF GLOBAL

TAX AND REGIONAL CONTROLLER, FREESCALE

SEMICONDUCTOR


Vodafone’s Mr. Connors says his company is actively targeting improvements in exactly these areas to gain greater accuracy and greater efficiency in the tax function. “In the coming years,” he says, “I would like to achieve greater automation, greater centralization, and standard-ization of the financial reporting, so that there is less capability of there being a human error in the structure and a greater ability to mine and analyze the data. If people are entering data on spreadsheets, there is always the opportunity for human error. So I will always look [toward automation].”

A plurality of respondents (35%) report that they use a variety of applications from different vendors for tax management, and another 19% rely primarily on spreadsheets and manual processes. Either case is more resource-intensive than a dedicated single solution for tax management (employed by only 14% of respondents), or a financial application module within their ERP system (21%). (See Figure 7.)

At this time, however, a little more than half of the respondents (53%) report that their tax functions currently are under-resourced, and they can ill afford to tie up all their resources just with manual error-checking. Yet, two-thirds of the respondents (66%) say that their companies will not change the level of resources allocated to tax.

These findings suggest greater opportunities for improved technologies to fill the gap. As Mr. Pacelli at Freescale Semiconductor notes, “We want to reduce the number of hours spent with data aggre-gation or data manipulation, so that we can move past reporting and get the team focused on more value-added activities.”

Mr. Lusk at ABM comments, “The constant goal is always to move up the value chain from pure com-pliance to providing value and strengthening the company’s competitive position. It’s always looking at whether there are other tax credits out there, are we looking at legal entities the right way, are there


“[With] greater automation, greater cen-tralization, and standardization of the finan-cial reporting, [there is less] human error ... and a greater ability to mine and analyze the data. If people are entering data on spread-sheets, there is always the opportunity for human error.”

—JOHN CONNORS, GROUP TAX DIRECTOR,

VODAFONE

0% 20% 40%

Figure 7Which of the following statements best describes your company’s IT systems for tax management?

A variety of applications from different vendors

Financial application module of an ERP system

Primarily spreadsheets and manual processes

Dedicated single solution for tax management

Not sure

Other

35%

21%

19%

14%

10%

2%


things that we don’t know. It’s getting the individ-uals in the tax group to really think up the value chain and away from pure compliance.”

The technology is available today to streamline tax data collection, tracking, and processing. Automating processes can allow finance executives to take better advantage of the tax expertise they have available, focusing it on business and strategic issues rather than simply compliance. FedEx’s Mr. Merino sums up the value he sees from automating the more routine processes: “The advent of the integrated ERP systems has substantially improved the ability to get, for compliance purposes, the information organized and analyzed in a way that facilitates the compliance process. The tax-prepa-ration packages that are out nowadays work much better with the financial systems that are out. It has really markedly changed the mix of time that a tax organization spends between compliance and more value-generating activities.”

Indeed, finance executives give equal weight to improving tax expertise within their companies and improving the technology supporting tax manage-ment. The leading solutions for improving the qual-ity of tax information are improving human-capital management within the tax function (e.g., hiring, training, cross-training, retaining talent)—selected by 25% of respondents—and improving information systems—selected by 27%. A survey respondent offers this dual advice: “Hire experienced peo-ple; make sure your g/l system will output usable information.” And another respondent writes, “Start with data quality at the transactional level. Once standards are adopted across systems, significant tax resource can be focused on planning and func-tional/business outreach.”

Mr. DeRosa at National Grid US comments on the benefits his company is seeing from the relatively recent implementation of a corporate-wide ERP system: “It’s much, much easier with this ERP system for me to get to data, and to get accurate data. With this ready access, it’s less about building relationships, or getting into someone’s work plan to send me a report. Now, I can get to it fast, and

it’s creating a lot more confidence in what we do as well as efficiency in the process.”

Companies using multiple vendors or spreadsheets have to rely more heavily on the expertise of their tax functions than on technology. Those employ-ing either a variety of systems or spreadsheets see technology primarily as a means for improving tax planning and support (63%) or for reducing costs and increasing efficiency (52%). Those whose com-panies already have an ERP system or a dedicated tax solution are more likely to be looking for better business results from tax management technology, primarily by lowering the effective tax rate and increasing EPS (44%), while also improving tax planning (42%). Perhaps because they’ve already gained efficiencies through automation, they can now focus more on the higher-value benefits offered by tax technology. The underlying issue may not be the quality or vol-ume of the tax data that is available, but rather, how readily available the tax data is for management. The survey results suggest that technology can be used effectively to get the right information into the right hands, at the right time. More than half (54%) of those using multiple vendors or spreadsheets say that their companies’ highly complex tax profiles are major obstacles to incorporating tax consider-ations into strategic decisions. Only 39% of those with dedicated solutions or with tax integrated with their ERP systems see complexity as an obstacle. The more time the specialists in your tax function can spend away from their spreadsheets, the more time they have to sit down with their operations and strategy colleagues to become better integrated into the company’s core decision making. The payoffs can be enormous. FedEx’s Mr. Merino provides what may be the ultimate incentive for making the effort, when he concludes, “Any tax guy who reads this article is going to go, ‘I’ve been saying for years, get us involved early and we will prevent a big disaster.’” What the tax function needs now is the commitment, the time, and the resources that will allow them to do just that.


The more time the specialists in your tax function can spend away from their spreadsheets, the more time they have to sit down with their operations and strategy colleagues.

“Any tax guy who reads this article is going to go, ‘I’ve been saying for years, get us involved early and we will prevent a big disaster.’”

—JOHN MERINO, CHIEF ACCOUNTING



Sponsor’s PerspectiveBy Nancy Manzano and Bernadette PinamontChief Tax OfficeVertex Inc.

It is gratifying to see from this study that finance professionals are increasingly recognizing the crit-ical role that in-house corporate tax professionals can play in strategic business decisions.

For too many years, experienced and knowledge-able in-house tax professionals have been bogged down in the administrative tasks of their roles, performing quarterly and annual tax provision cal-culations and compliance filings, as well as manag-ing complex, detailed tax audits. In addition, these tax professionals have had to cope with financial accounting systems that are disconnected from the company’s overall income tax processes. These rou-tine responsibilities, coupled with financial system and data management issues, have left little time to focus on proactive strategic planning and analy-sis. As a result, in some companies the tax team may be an untapped resource that, with the use of technology, could gain efficiencies in their routine tasks. More important, they could be leveraged as a trusted business partner advising on tax consider-ations of all business decisions while driving value to overall earnings per share (“EPS”).

Bottom-Line ImpactFor many companies, taxes are the single largest expense on the income statement in any given year, and may also be the largest item on the balance sheet. Lowering the effective tax rate (“ETR”) and corresponding tax expense can make a tremendous difference in the company’s bottom-line EPS, and could potentially increase cash on hand for future business growth and reinvestment.

Lowering taxes is not something a company can do overnight. It is the result of careful planning at every level of the enterprise, which is why a growing number of companies are involving tax professionals in key decisions at every level of the organization.

A Perfect WorldIn a perfect world, the tax team would be trusted advisors at every level of the business, proac-tively advising on the tax impact of decisions at the earliest stages. Rather than remaining in their offices performing routine functions, they would be engaged throughout the company to 1) gain a broader understanding of the current business operations and strategic business plans, 2) build relationships with key business unit personnel in supply chain, business development, finance, and legal, to name just a few, and 3) ensure that all busi-ness decisions have considered the tax impact of the strategy or strategies. In addition, with today’s tax planning technology tools, tax professionals could present their colleagues with a variety of what-if scenarios so that a “go vs. no go” strategic decision can be made on an after-tax value to the business.

This world exists at a growing number of com-panies. And we believe it will eventually become the norm as more sophisticated tax technology—designed to enhance productivity and provide valuable planning tools—becomes available. This technology is key to unlocking the strategic advan-tages of tax-aware companies outlined in the report.

Expectations of a New GenerationIt is worth noting that the new generation of tax professionals—the so-called millennials—expects to be more involved in business planning, and expects technology to manage everyday functions. To them, spreadsheets and manual processes are as archaic as adding machines and pocket protectors. These new-generation tax professionals will want to be challenged. Ensuring that they have the opportu-nity for career development via participating in tax planning opportunities is an objective that best-in-class tax leaders must have today. One way to ensure the development of the new generation is to

15


review the use of technology in tax processes today, and leverage their tech-savvy expertise to lead a project to implement new technology—a win-win for the entire tax team!

A Seat at the TableWith the help of technology, the future value of the corporate tax professional will not be in performing rote provision and compliance calculations, but in being a trusted and value-added business partner providing expert tax guidance on the impact of business decisions.

As this future unfolds, CFOs and corporations as a whole will increasingly realize the full value of this previously untapped resource, and will give the tax professional a well-deserved seat at the table where strategic decisions are made. This will ultimately benefit the reputation of the in-house tax team as a valued resource that can help deliver increased EPS.

Nancy Manzano and Bernadette Pinamont are both Directors in the Chief Tax Office at Vertex Inc., providing insight regarding in-house corporate tax department operations and working on the develop-ment of the company’s income tax solutions under Vertex Enterprise. During their 25-year corporate tax careers, each has led tax departments of mul-tinational Fortune 500 companies. Ms. Manzano is a licensed Certified Public Accountant and has a Master of Science in Taxation from Widener University. Ms. Pinamont earned a Juris Doctor from Seton Hall University School of Law and is also a licensed Certified Public Accountant.

For more information about Vertex, visit www.vertexinc.com

16

Finance Views on the Tax Dimension of Strategic Decision Making is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA 02210. Please direct inquiries to Linda Klockner at 617-790-3248 or [email protected].

CFO Research and Vertex Inc. developed the hypotheses for this research jointly. Vertex funded the research and publication of our findings. At CFO Research, David W. Owens directed the research and wrote the report.

CFO Research is the sponsored research group within CFO Publishing LLC, which includes CFO magazine, CFO Conferences, and CFO.com.

About the SponsorVertex is the leading provider of corporate tax software and services worldwide. Founded in 1978, Vertex helps companies realize the full strategic potential of corporate tax by serving every major line of business tax including: income, sales and use, value added, and payroll. The company’s offerings are showcased by Vertex® Enterprise, a data-driven, open-architecture approach to tax technology that integrates all direct and indirect tax processes and technologies on a single platform.www.vertexinc.com

April 2014

Copyright © 2014 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.

research Finance Views CFO on the Tax Dimension research ......About this Report In late 2013, CFO...

Documents

Transcript of research Finance Views CFO on the Tax Dimension research ......About this Report In late 2013, CFO...