It was dark, and there were only a few of us remaining as a result of increased costs and little expendable budget. We had long since depleted our supplies of food and water. It was beginning to get very warm, and no air was circulating in the stillness of the night. We’d lost connection with the outside world and were staring into the blackness of a monitor, with just a spinning circle to indicate that maybe someone would receive our transmission with only minutes to spare.
This may sound like a story of adventure, perhaps set deep into the Amazon where a group of explorers lost their way. Instead, this scene played out across the United States when companies faced the deadlines to file tax returns on time with the federal and state taxing authorities, following enactment of the Tax Cuts and Jobs Act (TCJA), the most significant overhaul of the tax code in recent history.
The complexities introduced by thousands of pages of tax legislation and related regulations issued since December of 2017 created plenty of opportunities for in-house tax professionals and external tax service providers to develop and apply their tax technical knowledge and skills. However, according to a KPMG survey of over 1,000 corporate multinationals conducted during a KPMG TaxWatch webcast last November (“Tax Reform: 2018 Compliance Debrief and 2019 Outlook”), almost half of company respondents found the new or revised tax technical rules more complex than anticipated, with the second biggest challenge being that they were not equipped with the technology needed to support the compliance process. Further, over half of the respondents indicated that companies spent at least 30% more time (and for many, more than 50%) on tax compliance processes than the prior year. This clearly took a toll on both in-house and external tax preparers. The result? Many companies are undertaking a strategic review of their finance and tax functions, looking for efficiencies in gathering data needed for tax compliance and opportunities to automate tax processes. Others are seeking to outsource their tax compliance to third parties specializing in these services.
For those choosing to stay in the game of tax compliance (applying to both in-house tax departments and vendors specializing in these services), the following are three critical survival skills for tax professionals gearing up for the 2020 tax compliance season: Teamwork and Collaboration, Project Management, and Innovation.
Teamwork and Collaboration
Historically, many disparate tax processes could be isolated and performed by specialists within an organization that had a deep understanding of the data requirements, technical rules, and forms that required completion. For example, the research and development (“R&D”) tax credit requires significant financial and non-financial data, and the rules related to the determination of what activities and expenditures qualify for the tax credit and the documentation requirements are extensive, so specialists in this area performed these analyses and calculations. As a result of tax reform, companies now also may need to identify and document all relevant R&D costs, not just those eligible for the R&D tax credit due to potential impacts on the foreign tax credit, as well as the new foreign-derived intangible income (“FDII”), global intangible low-taxed income (“GILTI”) and base erosion and anti-abuse tax (“BEAT”) calculations, for example. The R&D tax credit professional now must work closely with the international and state tax teams responsible for ascertaining the impact of these R&D allocations and the elections to be made related to the treatment of these costs, not just for federal, but also for state tax purposes.
So how can tax departments better navigate change within their business units to ensure that team members work more closely together so that all information needed to perform all tax processes are considered upfront and tax work papers can be assembled such that they have multiple uses where appropriate?
Consider the following:
- Conduct working group sessions aimed at mapping out the current tax processes with an objective of sharing data inputs and outputs to identify the overlap in data collection and processes.
- Link the sources and uses of common/similar data and ensure that requests made to the finance/business organization are streamlined into one request that can be used for all team members. In the above R&D example, a determination of R&D costs for research credit as well as for deduction/allocation purposes should be an integrated process.
- Ensure team members understand interdependent processes. For example, if GILTI is required on a legal entity basis for state reporting purposes, ensure that the tax models/work papers are designed to accommodate not just federal but state reporting requirements.
- Conduct regular status meetings. Ensure team members share information on the status of their work streams and understand the downstream impact of any delays on other team members.
- Encourage team members to develop temporary solutions to keep processes moving if data elements are missing (utilizing estimates from the year-end provision process or prior year, for example, as a temporary placeholder and flagged for adjustment when complete.)
Were your tax returns filed well before the filing deadlines in 2019? If not, it’s possible that the root cause was not that your teams did not have a handle on the technical requirements of tax reform, but instead it was a function of simply running short on time. Sadly, the stress and amount of hours worked in the days and weeks leading up to the filing deadlines led many tax professionals to their breaking point, resulting in staff turnover within tax departments being higher than past years following the busy tax-filing season.
Looking ahead, some guidance and questions to keep in mind:
- Before the 2020 busy season begins, assess the project management skills within your team and determine if training or external assistance is in order if this critical skillset is missing.
- Are you or members of your team equipped to conduct process reviews to map current processes, assign roles, responsibilities, tasks, milestones and deadlines, and manage these processes to a timeline for the completion of the corporate tax returns? If not, consider hiring an external adviser to facilitate a session.
- Do you have the bandwidth within your organization with the tax department’s other quarterly and/or transactional responsibilities to dedicate resources necessary to complete the returns? If not, consider co-sourcing or outsourcing some or all of these processes.
- Once a process is designed, as mentioned above, regular—and efficient--status meetings and accountability among team members are critical to ensuring your tax processes stay on track.
Innovation – A Better Mousetrap
In speaking with clients across a variety of industries, when asked to name the biggest challenge they are expecting going into the 2020 tax season, the answer is obtaining the data needed from within the organization to perform tax calculations. Further, the rise of global tax disputes and increasing requirements mandated by the Organization for Economic Cooperation and Development (OECD) have made the timely acquisition and retention of data an imperative in order to manage an organization’s tax risk.
The tax departments in most companies do not own the data needed to complete and defend these returns upon later examination by taxing authorities. Some tax leaders have built repositories for their tax data (such as a data warehouse, data lake, or data dictionary that extracts and stores data from financial and nonfinancial systems for tax department use), but many do not have the budget and resources at their disposal to do so. Those that have such budgets hesitate to invest as a result of ongoing, globally led initiatives to upgrade financial systems, including those companies currently utilizing statutory accounting principles and undergoing conversions to new SAP S/4HANA software platforms.
Acquisitions and reorganizations present additional challenges in obtaining information timely, due to disparate systems and/or turnover. Further, many tax departments require data to be extracted many times and in many ways from systems in a time frame that often IT departments struggle to accommodate.
So what can be done before the 2020 busy season begins?
- Conduct a review of those tax processes that are generally the most data intensive and take the most significant amount of time. Based on feedback we’ve obtained, for many multinational companies these often include:
- Tax fixed asset calculations (federal, alternative depreciation system (“ADS”), and state requirements)
- R&D tax expense and credit calculations
- Foreign tax reporting forms (Forms 5471/5472)
- Foreign tax credit-related calculations
- New (and interdependent) calculations required as a result of TCJA, including GILTI, BEAT, and FDII.
- Explore options to automate the above calculations. Many external tools specific to these calculations have been built for each of these.
- Consider advanced tools that may be applicable, including those using robotics for simple, repetitive tasks, or natural language processing and machine learning/artificial intelligence are being applied to more complex tax determinations that often require the analysis of financial and non-financial data existing in multiple formats.
- Give thought to whether your existing tax preparation software platform (such as OneSource or CorpTax) has the capabilities for more in-depth calculations and whether these systems have been optimized.
- Evaluate other data and analytics tools that can process large amounts and multiple inputs of data via the use of workflows such as Alteryx, combined with Tableau or Power BI as visualization tools for deeper analytics, including estimates and/or scenario planning. There is still time--tax software platforms can still be configured, tools can be customized or custom built, and user training can be conducted in time for tax departments to realize the benefits of automation for this tax compliance season.
An adventure to a remote corner of the Amazon may be thrilling to some tax professionals, but my guess is that many would prefer to avoid the challenges of the last tax season. So as you aim for a successful 2020 tax season within your organization, be sure to plan ahead and, in doing so, consider putting into practice the critical survival skills of strong teamwork and collaboration, disciplined project management, and an innovative approach to tax compliance.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Christine Kachinsky (firstname.lastname@example.org) is the New Jersey tax practice leader for KPMG LLP. She is based in Short Hills, N.J.
The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP.