Why Should You Include Tax in Your Finance Transformation?

As organisations strive to drive profitability, many are upgrading their finance, (ERP and / or EPM) systems. This presents a significant opportunity for tax functions to improve data quality and operational efficiency. Finance transformations typically occur every 10-15 years, making this a rare chance to optimise your systems.

Involving your tax function early in a finance transformation can be a game-changer. A tax- optimised ERP system supports more effective tax strategies and processes, providing quicker access to accurate data. Integrating tax with a hybrid skillset of technology and tax expertise can generate additional value, reduce overall risk, and uncover potential opportunities or benefits. These advantages extend well beyond the initial implementation phase.

Are there potential cashflow benefits?

Proactive planning through quick access to accurate data can help reduce your organisation’s overall cashflow and Effective Tax Rate (ETR). For instance, VAT savings and optimised wear and tear allowances are achievable. Data analytics and exception reporting can identify anomalies, trends, or errors, thereby lowering the cost of running tax processes day-to-day. This in turn can lead to reduced full-time equivalent (FTE) needs for tax accounting and compliance. Improved cash flow management is another benefit, with efficient tax management through ERP/EPM systems leading to better forecasting and planning. This helps optimise cash flow by accurately accounting for tax liabilities and refunds, and the tax function may be able to better identify R&D credits in those jurisdictions that have such regulations.

And what about efficiencies?

It has been shown that including tax in your finance transformation can save 15-20% of total time spent on reporting & compliance processes, annually. Enhanced efficiency is achieved by automating tax calculations and reporting within the ERP/EPM system, freeing finance and accounting teams to focus on strategic tasks rather than manual data entry. Avoiding costly remediation to address data gaps is another advantage, while having accurate and readily available tax data also reduces audit costs, making audits smoother and less time-consuming. ERP/EPM software provides customisable tax reporting capabilities, enabling businesses to generate comprehensive reports tailored to meet regulatory requirements and internal needs. Maintaining a single source of truth for all tax processes means less work for downstream tax processes.

At the same time, support tax risk mitigation

Incorporating tax into your finance transformation also helps mitigate tax risks. Automated and embedded tax controls lead to better execution and operational effectiveness, with clear audit logs of transactions and tax adjustments. This decreases the time to financial and tax close, and timely access to data allows for quick remediation in response to changing legislation or audits. Furthermore, eliminating the need to extract data from the ERP/EPM for downstream processes reduces the risk of human error. Streamlining tax processes increases compliance with tax regulations, reducing errors, penalties, and reputational damage.

Extending into budgeting & forecasting

Embedding tax in your ERP/EPM allows for better decision-making. Real-time tax data and analytics empower decision-makers with insights into tax implications, facilitating informed strategic decisions, timely identification of trends, more accurate forecasting, and a greater ability to align with organisational strategy.

Tax is not a standalone domain

Tax is a downstream process in finance and interacts with all finance processes, including Record to Report, Procure to Pay, Order to Cash, and Hire to Retire. Retrospectively configuring financial systems for optimal tax reporting can be difficult and expensive. Post-upgrade or implementation, the IT Centre of Excellence or finance functions may be resistant to reconfiguration. If you manage to justify a tax business case, it will likely need its own budget, rather than being included in the finance transformation budget.

So, what if you don’t?

Potential risks of not including tax in your finance transformation include a lack of timely access to detailed data needed for tax compliance and reporting, errors in exporting data from source systems to Excel or other downstream solutions, and human error in manual tax calculations. Delays in responding to audit queries or legislative changes, lack of an audit trail, and inability to scale with organisational growth are additional concerns. Challenges in accurately analysing and processing large volumes of data and limited data analytics capabilities can lead to poor decision support. This increases the risk of interest and penalties, along with potential reputational damage.

The bottom-line is that failing to properly configure tax in your finance transformation can be costly in the long run.