Tax Risk And Process Re Engineering General Presentation 121609

Tax Risk: Process Re-engineering &

Technology Integration Services

2

Tax Risk & Process Re-engineering

What is tax risk?

3

Total Tax Function Risk Defined

TTFR = (FR + OR + TTR) IR

TTFR = Total Tax Function Risk

FR = Finance Risk

OR (Operational Risk) = Process Risk + Knowledge Risk + Technology Risk

TTR = Tax Technical Risk

IR = Integration Risk

4

Total Tax Function Risk Defined (cont’d)

Finance Risk: The quality and accuracy of data from accounting in accordance with existing financial reporting standards

Process Risk: The failure points in existing processes

Knowledge Risk: The risk of the loss of business intelligence and human error

Technology Risk: Improper or poor utilization of technology

Tax Technical Risk: The risk of misinterpreting or incorrectly applying tax statutes, regulations, case law, and financial reporting standards

Integration Risk: The failure to properly link and manage the flow of information

5

Total Tax Function Risk Defined (cont’d)

The elements of tax risk must be evaluated in the context of the following:

Strategic Plan & Risk Profile

Operational Management– Resources and technological assets used and

available to tax function

Scope of Tax Processes & Key Activities– Tax sub-processes (e.g. Tax accounting;

income tax; sales & use; etc.)– Key Activities (e.g. compliance; audit

management; planning; etc.)

Integration– Internal and external integration – Workflow &

communication

Data Management– Sources, outputs and archiving

6

Matrix View of Total Tax Function Risk

Strategic Alignment Risk Profile

Operational Management

Tax Sub-Processes Key Activities

Technologies & Automation

Workflow Management

Data Management

Finance Risk

Process Risk

Knowledge Risk

Technology Risk

Tax Technical Risk

Integration Risk


7

Examples of Finance Risk

Inaccurate Income Statement due to incorrect legal entity reporting

Poorly implemented transfer pricing study resulting in the misapplication of income and expenses

Overly summarized financial data not provided in the level of detail for tax (non-tax sensitized ERP systems)

Inadequate intercompany accounting

Incorrect application of GAAP or IFRS

Poorly integrated acquisition resulting in inaccurate or unavailable financial data

Finance Risk: The

quality and accuracy of data from accounting

in accordance

with existing financial reporting standards

8

Examples of Process Risk

Process documentation nonexistent or dated

Critical institutional knowledge known only to key personnel, not documented

Controls established only for SOX relevant sub-processes

No milestones or signoffs other than on end product

No process for periodic review of calculations and data sources (SALY)

No retention of accounting data at the time of compliance

Paper binder based document retention

Process Risk: The

failure points in existing

processes

9

Examples of Knowledge Risk

Resource constrained or turnover problems

Existing resources lack necessary skill-set to effectively execute tax function responsibilities

Inability to find skilled resources

“Hit by a Bus Syndrome” - weak processes result in reliance on the critical institutional knowledge that resides within a resource’s brain

Tax function not fully integrated with finance

CFO and senior leadership do not recognize or appreciate the critical role tax plays in the day-to-day operations, strategic direction and risk management for the overall organization

Knowledge Risk:

The risk of the loss of business

intelligence and human

error

10

Examples of Technology Risk

Excessive use of spreadsheets for manipulating data

Redundant data and processes with the same data cut and pasted from other spreadsheets or pulled from different sources resulting multiple versions of the truth

Version control issues

Little to no optimization of enterprise technologies or tax specific technologies

Using email for secure communication and workflow

Utilizing technology for the wrong purpose

Technology Risk:

Improper or poor

utilization of

technology

11

Examples of Tax Technical Risk

Non-filing nexus

Incorrect application of sales factor sourcing

Inadvertent accounting method changes without 3115

Incorrect depreciation methods

Not filing in countries where company has permanent establishment

Miscalculation of foreign tax credits

Not complying with Section 482

Not adequately tracking tax basis or E&P

Misapplication of tax attributes

Improper application or out of date of UNICAP rules

Tax Technical

Risk: The risk of misinterpre

ting or incorrectly applying

tax statutes,

regulations, case law,

and financial reporting standards

12

Examples of Integration Risk

No work flow management in place

Coordination dependent on meetings and emails between the tax professionals

Lack of transparency of work progress resulted in deadline driven work flow

Management could not easily tell what capacity existed for special projects

Tasks transferred via email resulting in multiple versions of the same document and version control issues

Little to no connection between workflow and deliverables and supporting documentation

Integration Risk:

The failure to properly

link and manage the

flow of information

13


What factors are driving tax risk?

14

The Complexity of the Global Tax Environment

External Factors Driving Tax RiskGlobalization & velocity of business

Increasingly complex transactions and organizational structures

Heightened demand for accuracy

Increased enforcement by taxing jurisdictions and regulatory bodies

Drive toward currency

Current and forecasted shortages of qualified personnel

15

The Complexity of the Global Tax Environment (cont’d)

Internal Factors Driving Tax RiskResource constrained, turnover, or inability to attract tax professionals

Not a contributor to strategic priorities of business (reactive)

Management reporting versus legal entity reporting

Lack of process and technology

Lack of control over data inputs

Insufficient internal communication

Poorly implemented or out of date planning or structures

16

The Measure of an Effective Tax Function

The measure of an effective tax function is a tax function that:

Effectively manages tax risk

Operates efficiently

Ensure compliance with tax laws and reporting requirements

Provides value to the organization by minimizing the tax profile and providing business intelligence leveraged throughout the organization

Can scale to accommodate future business needs

Copyright 2009 – True Partners Consulting, LLC ©

17

Corporate Perspective on Tax Risk

Results from TGI Tax Risk Survey, April 2009

28%

27%

31%

8%6%

Key Tax Risks

Increased regulatory requirements

Accuracy of the tax provision

Increased possibility of audit by the taxing authorities

Overpayment of taxes

Exposure to potential penalties

What is the most significant tax risk facing your company today?

18


15%

32%

23%

20%

10%

Average Tax Function UtilizationTax Audits

Routine Compliance

Tax Financial Reporting

Planning

Other - Cost Reductions, Knowledge Sharing, etc.

19


0 0.1 0.2 0.3 0.4 0.5

5 or Fewer

6 to 25

25 to 50

More than 50

Number of Employees in the Tax Function

20


12%

28%

48%

12%

Tax Resourcing Issues

Increased

Decreased

Stayed the Same

Don't Know

During the past 6 months, your company’s tax resources have changed how?

Results from TGI Tax Risk Survey, April

2009

21


What are some root causes of increased tax

risk?

22

Root Causes of Tax Risk

Examples of activities that can exacerbate tax risk:

Decentralized tax activities

Implementing new ERP systems and operational systems

Mergers & acquisitions

Restructuring of head office or administrative functions

Launch of new business venture in a new jurisdiction

Expansions & contractions

Product line changes & new marketing initiatives

Resource constrained tax functions

23

The Challenge

A tax department which for years has been configured to minimize tax costs may not in fact be best placed to optimize performance in a more process and control-driven environment.

Tax departments are no strangers to resource and staffing challenges. However, they may not realize that over-reliance on one individual or lack of access to specific skill sets may result in internal control deficiencies.

Decentralization divides tax knowledge from the rest of the organization.


24

The Challenge

Many tax professionals come from a background which recognizes and rewards technical skill and creativity over organizational ability.

Communication and negotiation skills have always been needed, but now they have to be turned outwards from the tax department.

World class tax departments consider new operations and process skills to complement the high technical ability of their existing people.


25


How does a company effectively

identify and measure tax

risk?

26

Means for Identifying & Measuring Risk

Financial reporting risk measurement standards ASC 740-10 (FIN 48) ASC 450-10 (FAS 5) SOX 302 and 404

Transactional risk measurement mechanisms Due diligence and transaction reviews

Operational risk measurement mechanisms Benchmarks Operational efficiencies analysis

27

Tax Risk – Process Definition

Map all tax processes to identify:– All source data– Outputs of each step of the process– Actors in the process– Users and consumers of the process– Process weaknesses– Automation points– Financial and tax technical risk

Interview all key stakeholders to develop desired state:– Tax function – Accounting and finance– Internal audit– IT function– Management & operations– External consultants


28

Tax Risk – Process Design

Develop risk profile incorporating:– Identified risk– Management’s risk tolerance– Cost benefit analysis– Prioritization of objectives

Re-engineer tax function based on:– Process mapping– Requirements established in stakeholder interview process– Risk profile– Best practices


29

Tax Risk – Tax Function Re-engineered

Execute re-engineering plan:– Develop formal plan– Validate with key stakeholders– Obtain funding– Identify technology enablers– Work with leadership to communicate

vision

Manage user acceptance of new process:– Change management communication

plan– Deployment– Training– Follow-up validation of user acceptance


30


What are some approaches to

effectively managing tax

risk?

31

Approaches to Data and Workflow Management

Develop data repositories – accounting and tax data stores– Maintains integrity of the data for as long as tax

needs it– Provides a single source for all tax processes –

only one version of the truth– Integrated with ERP systems and other

enterprise technologies

Automate as many repeatable tasks as possible– Allows the tax function to focus on higher value

activities and less on compliance activities

Implement a tax portal– Single entry point for all tax function process

tools and data– Integrated tax processes and process

documentation– Single repository for all tax documentation

Eliminate the use of spreadsheets for analytics through OLAP and BI toolsCopyright 2009 – True Partners Consulting, LLC ©

Proven Practice Data Architecture

Metadata

Data

Staging

Operational Systems

Analytic Applications

General Ledger

Fixed Assets

Analysis

Scorecards

Dashboards

Reports

Bu

siness In

tellig

en

ce S

oftw

are

Apportionment

Financial Accounting

Compliance

Budgeting

Accounts Receivable

AccountsPayable

Inventory

Data Mart

Data Warehouse

ConformedDimension

Table

Fact Table

ConformedDimension

Table

ConformedDimension

Table

DimensionTable

DimensionTable

ConformedDimension

Table

Fact Table

DimensionTable

DimensionTable

ConformedDimension

Table

ConformedDimension

Table

FactTable

ConformedDimension

Table

DimensionTable

ConformedDimension

Table

Data Mart Data Mart

Data Mart

Data Marts

OLAP Cubes

Load

Tran

sfo

rmExtrac

t

Data

base

Man

ag

em

ent S

yste

m

33

Data-Centric Tax Processes

The development of a central data repository with appropriate reports, dashboards and views allows you to review and manage your data in new and novel ways:– Data dashboards that provide views of

multiple data sources simultaneously.– Intelligent reports that indicate

exception conditions– Drill down to detail from multiple

sources


34

Integration of Tax Function –Enhance Analytic Capabilities

Implement OLAP Analytics and Reports– Separate data from calculations– Calculations are secure and auditable– Reports are standard and provide drill down– Provides rapid analytics– Provides integration with compliance tools – Reporting and analytics available across all tax

lifecycles– Complete transparency to source accounting and

tax data – Reduced ramp up time for new personnel by

eliminating the need to understand spreadsheets– Allows tax to slice the data and look at the

business the way operations looks at the business

Provides the tax function the ability to harness the data and provide business intelligence to the rest of the organization


Example of a Dashboard

Example of a Dashboard

Example of reports from Report Library with drill down capabilities.

Example of a Dashboard - Analytics


Example of a Dashboard – Drill Down Capabilities


42

Automated Workflow Tools

Captures your detailed processes to reduce knowledge risk caused by loss of key personnel

Built in navigation to tools necessary to perform task

Built in control points and signoffs

Clear visual indication of progress


43

Example of Workflow Tool

44

Example of Workflow Tool (cont’d)

45

Example of Workflow Tool (cont’d)

46

Integration of Tax Function – Tax Portal

Embedded tax document repository– Tax data categorization and taxonomy

implementation– Search across projects, documents, tasks,

attachments, messages– Application, Project, Document Access control

and Field Level Security– Access Logs for SOX Compliance

Embedded tax project management– Assignment of tasks to tax professionals – Visibility on progress on tasks and capacity of tax

department Personalized (Dashboards) for customization Tax calendar for tracking filing deadlines & milestonesCentralized communication & messagingPublish tax department specific content Links to internal, external web pages and tax tools


47


What are the latest innovative

technologies that can be

leveraged by a tax function?

48

Why Consider Cloud Computing?

Tax Functions fall into two groups:– Those that have strong IT

infrastructure support and investment

– Those that must get along with what they have or develop inefficient alternative means to accomplish their tasks and injecting higher levels of tax risk into the organization

This condition leads to a huge and growing gap between “best in class” performance and average or “typical” tax function performance


http://images.google.com/imgres?imgurl=http://www.allhatnocattle.net/haves-have-nots.jpg&imgrefurl=http://www.allhatnocattle.net/2-20-09_haves_have_nots.htm&usg=__f9ClC_0nzGC4l07fqE8sp-Cf3dA=&h=333&w=500&sz=19&hl=en&start=3&tbnid=_dDr0ioDVCNpIM:&tbnh=87&tbnw=130&prev=/images?q=haves+and+have+nots&gbv=2&hl=en

49

Why Consider Cloud Computing? (cont’d)

Cloud computing levels the playing field by treating technology as the commodity:– Technology and technology assets

provided as a utility rather than investment

– Cost based on consumption, not on ability to pay

– Spreads the cost of technology across a large number of customers

– Makes latest technology available to all

– Efficient means to deal with spikes in IT demand caused by intermittent nature of work-load within tax function


50

What is Cloud Computing?

Cloud computing is a general term for anything that involves delivering hosted services over the Internet

Cloud computing consists of:– Infrastructure as Service (IaaS)– Platform as Service (PaaS)– Software as Service (SaaS)


http://images.google.com/imgres?imgurl=http://axiscreativegrp.com/blog/wp-content/uploads/2008/08/cloud-computing.jpg&imgrefurl=http://axiscreativegrp.com/blog/2008/08/25/so-what-exactly-is-cloud-computing/&usg=__LRV7ugiIkYs4k2S5eRTz-kVDDyQ=&h=265&w=500&sz=85&hl=en&start=17&tbnid=BsJuAEYipU-KrM:&tbnh=69&tbnw=130&prev=/images?q=cloud+computing&gbv=2&hl=en

51

Isn’t that just Hosted Solutions?

A cloud service has three distinct characteristics that differentiate it from traditional hosting:

– It is sold on demand - typically by the minute or the hour

– It is elastic - a user can have as much or as little of a service as they want at any given time

– It can be configured to run any number of applications and connect to any number of networks



52

Benefits of moving to the Cloud

Maintain control of your data compared to hosted solutions

Secure integration with your intranet

No need to purchase hardware for peak demand

Computing power and bandwidth scales to demand

Lower technology costs

Improved return on investment


53

Does it fit the Tax Function?

Certain characteristics of the tax function closely match the benefits of “moving to the cloud”:– Computing demands of tax are not fixed

and constant• Tax computing demands increase and

decrease in monthly, quarterly and annual cycles

– Tax function has the need to integrate a large number of diverse systems

• Accounting ERP systems• Tax compliance systems• Tax research services• Local and “home grown” solutions

– Tax function has the need to store, instantly locate and use amount of data and documents

• Tax function has significant archiving and retrieval needs for audit management

– Tax function has large technology needs but typically lacks deep technology pockets


54

Who is Supporting the Cloud?

Microsoft

– Massive investment in data centers to host cloud

– Microsoft Azure platform– Microsoft Office Live for Business

Google

– Massive investment in data centers

– Google Business SolutionsAmazon

– One of the earliest entries



55

Who is currently in the Cloud?

Capgemini

Genetech

Motorola Mobile Devices Division

District of Columbia Government

Hamilton Beach

Fairchild Semiconductor

And many more actively moving or considering a movement to cloud technologies


56

The Next Generation of Global Tax Management

The implementation of a tax portal and enterprise data store would position a tax function to scale for growth and expanded capabilities

A enterprise system would eliminate volume and data constraints that exist within MS Access, Excel and similar applications

A enterprise system would eliminate the performance issues encountered when running reports from existing transactional systems (OLTP)

The addition of a workflow tool would reduce risk by automating controls around existing procedures

The addition of a workflow tool would provide the means to instantly disseminate process improvements

57

The Next Generation of Global Tax Management


By looking at tax risk in a holistic manner incorporating all components driving risk for a tax function, the next level of tax risk management can be achieved

It is the proper alignment of people, process, technology within the tax function effectively integrated with all business processes that will allow an organization to achieve the next generation of global tax management


58


Andrea L. GronenthalService Line Leader & Managing Director -

ChicagoPhone: (312)[email protected]

Joseph R. OchoaSenior Manager – TampaPhone: (813)[email protected]

Sara NeffSenior Manager – ChicagoPhone: (312)[email protected]

mailto:[email protected]



Documents

Tax Risk And Process Re Engineering General Presentation 121609