Managing the Tax Function “Managing the tax function in today’s complex and changing environment requires more than filing returns and dealing with audits. Tax management must achieve the company’s tax savings and compliance objectives in a resource-constrained environment. Managing the tax function is a more sophisticated process, and goal setting and evaluation of professional tax staff are parts of this process. The use of consultants and the role of outsourcing are also part of the equation.”1 Managing the Tax Function Jim Quinn & Diana Stevens of the TaxGroupTM While the above statement was made in 1998 it is truer today than it was then. In today’s work environment the work force is leaner than perhaps at any time in history. This necessitates working smarter. Managing the tax function is a balancing act. It requires the ability to prioritize work, the ability to manage the workload with limited resources and the ability to communicate vertically as well as horizontally throughout the organization. THE TAX FUNCTION IS STRATEGIC 1. The Evolution of the Tax Function The Tax Function in the corporate world today has evolved from being viewed as primarily a compliance function to being considered an integral part of the “Team”. As part of this evolution process the composition of the corporate tax department has changed from people involved only in the preparation of tax returns to people involved in all aspects of planning. Tax no longer stays at home but rather is out selling its services to the operating groups within an organization. 2. What Management Expects As management’s perception of the tax function has changed so have their expectations for that function. While the qualities of tax people are described more fully later in this paper management has come to expect tax people to have the communication skills and networking contacts to get the job done and to make tax understandable. As tax has become strategic there is a need for someone with finance and accounting skills to complement their tax skills. Management wants results and the results must be practical and understandable. Management does not want to hear the section of the Act or the court cases that are relevant and they do not want to hear that something cannot be done. Rather it is incumbent on the tax function to determine how some project is to be done. 3. Tax is Strategic Tax has become a strategic part of the corporate world. The companies that treat tax as a strategic function are reaping the benefits. When tax considerations are brought to the forefront of corporate strategy the company is able to capitalize on value opportunities that are often not available further down the development road. Tax strategizing will also allow the company to minimize its exposures to unforeseen tax liabilities. In short, a well-managed tax function should be viewed as a significant value contributor rather than as an overhead group that merely completes the dirty deed of filing tax returns. GOAL SETTING AND PERFORMANCE MEASURES Perhaps the single most important way that a tax function can demonstrate its strategic nature is to have clear, concise and measurable goals. By aligning these goals with the corporate goals it ensures that the tax function is in sync with the corporation. Goal setting also serves to keep the members of a tax group on the same page. Goals can be condensed into two broad categories: cost savings or value creation and effective tax services. In order for goal setting to be an effective tool it is necessary that they be expressed in a concrete and measurable form. For example the cost savings should be expressed in terms of $X during a calendar year. If an outstanding appeal is part of the ongoing workload of the tax group then its satisfactory resolution could also be a goal. The following are examples of goals that can be set for a tax function. While they are generic in nature they can be modified to fit your specific situation and can be made into concise and measurable performance tools. 1. Tax Savings Tax savings can take two forms. They may be either in the form of: • • cash savings, or earnings improvements. Attached to this paper is the definition of tax savings that has been used in the past. The purpose in having a definition is to have parameters within which the savings can be recognized and measured. It should be noted that tax costs can count against you if a mistake is made that results in a higher tax liability. It is important to note two points with respect to this definition. Firstly, when dealing with tax savings the numbers can get very large very quickly. Care must be taken to ensure that when you say to management that you have saved them a million dollars that the million dollars was all that there was to save, i.e., that the savings should not have been more. Secondly, the time value of money needs to be included. The deferral of tax is preferable to paying it right away and also provides the opportunity to eventually eliminate that tax. Once tax is paid it becomes extremely difficult to get it back. 2. Lack of Surprises While reassessments are a way of life for tax people a reassessment should never be a surprise, particularly to upper management. There are a number of ways in which proper goal setting will minimize the risk of a surprise: • Adequate documentation — this will reduce the risk of errors. • Assessment of high-risk areas — know where the risks exist. • Managing the audit process — requests and responses should be written. • Participating in industry committees — know what the issues are. • Know when to get help — If you do not have the expertise ask for it or buy it. Management should always be kept informed on any issue when it comes to the forefront whether it is an issue raised by the auditor or is an issue that you were made aware of through casual conversation with your industry contacts. Status reports on issues raised should also be maintained. 3. Measurable Tax Project Objectives There are two types of tax projects: • an idea that has been brought forward from another part of the organization that has tax as a significant component, e.g., a double dip on interest or a corporate reorganization initiated for corporate reasons; or • a project initiated by taxation, e.g., a reorganization initiated for tax reasons or the litigation of an outstanding appeal. Goals can be set to be project specific or as a general pool of tax savings to be achieved from projects that come up over the year. 4. Quality of Tax Saving Ideas Some tax savings ideas are better than others. A quality tax saving idea would be an idea that was initiated by taxation that provides tax enhancements or benefits that significantly exceed the costs to the company. The quality ideas come when the following goals are met: • Acting proactively and increasing awareness of tax issues so that you are at the table when new issues are being discussed. • Know the Big Picture. What is your organization’s goal? This is easily achieved through regular liaison meetings with pension management (operating, marketing and financial) within your organization and marketing personal within your organization. 5. More Specific Goals • Stay within departmental budget. • Minimize staff turnover. • Minimize the time spent by consultants (not necessarily the use of). • Minimize the effective tax rate (i.e., resource allowance issues; taking full advantage of the M&P deduction). THE TAX WORKLOAD In order to address the issue of managing the tax function it would be useful to analyze the function to identify the work that must be performed during any particular year. 1. The Tax Cycle Each taxation year has a life cycle that begins before the year commences and ends when the final appeal issue is settled. This can be decades after the year ends. The life cycle begins with the planning stages that can be comprised of tax planning for specific projects, tax horizon estimates and determining the tax component of corporate financial plans and budgets. During the taxation year the tax provisions are calculated, instalments are paid and the estimated tax situation for the year is monitored. Shortly after the taxation year ends the tax returns are prepared and filed and the assessments are received. In subsequent years the audit cycle for a particular year begins and will end within four years after the assessment date. Some issues may proceed to the appeals stage and that cycle can continue for an indefinite number of years. The challenge of the person responsible for the tax function is to manage numerous taxation years at different points in their life cycles throughout any one calendar year. 2. The Phases of the Tax Cycle The corporate tax life cycle can be broken down into four main phases - planning which occurs before a year ends; provisions which occur as a year progresses; compliance, which takes place after a period or year ends; and finally, the audit/appeal stage which starts when the various jurisdictions’ auditors commence their work. Some of the tasks included in each area are detailed below. a. Planning • Specific project work — tax structuring for, determining the tax treatments of different elements of modelling and reviewing cash and book tax impacts in project modelling for special projects such as mergers, acquisitions, divestitures and financing. • Tax horizon planning — involves tracking taxable income by entity to determine which year cash taxes will become payable. This is necessary to ensure that the taxability between entities is balanced. • Instalment planning — prudent cash management to ensure minimum instalments are paid. • Year end cash tax planning — Large Corporation and Capital Tax planning and other year end adjustments that are required. • Tax component of financial plans and budgets — involvement with the corporate budget and planning activities to ensure the tax component is reflected correctly. b. Tax Provisions for Financial Reporting • Monthly, quarterly and annual — provision models that calculate the tax expense and payable amounts in an efficient and materially accurate manner. Close communication with the financial accounting activities is essential to ensure that all issues are addressed. c. Compliance • Tracking of key dates — a good system is required to ensure that all filing deadlines are met. • Instalment payments — communication with the corporation treasury activities is important. • GST monthly returns — this is an annoying but necessary function. Use automation as much as possible to minimize the work involved. • Information requirements for returns — timely communication with those responsible for providing the financial information is key. Continually look for ways to streamline the requests and use automation as much as possible. • Corporate returns — Canadian and Foreign return filings require significant co-ordination. A detailed work plan is useful for this function to determine the effect of critical path breakdowns when information is not available as requested. • Foreign reporting — the necessity to receive information from foreign operations can make this a difficult management area. Working closely with foreign offices well in advance of the deadline to work out the most efficient way of gathering the information can be very useful. • Transfer pricing — this is an area where outside experts are used because of the specific technical nature. An in-house person is then assigned to manage the process. • Information reporting requirements — information reporting can include reporting on non-resident payments, limited partnerships, trusts and support for employee benefits, among other things. Often some of these tasks are handled by those involved directly with making the payments but the tax function is responsible for ensuring that all requirements are made. d. Audit/Appeals • Tracking of key dates — it is critical to have a good system to ensure that all appeal deadlines are met. • Management of CCRA and other jurisdictions audits — the audit process can have many unexpected peaks and valleys. Depending on the level of audit activity at a particular organization this can be an ongoing task or periodic management issue. • Responding to audit queries — understanding of requirements and CCRA powers is essential. Various response deadlines must be managed. Requests for information usually have to be co-ordinated with other parts of the organization and can sometimes require communication with foreign offices. Constant communication with CCRA on the status of queries is important. • Researching issues — as CCRA brings to light new interpretations on filing positions issues will have to be researched. • Tracking adjustments and interest — when dealing with multiple years and issues it is important to have a system that will explain the overall tax position after proposed and actual adjustments. Refund and arrears interest calculations can often be complicated such that CCRA figures have to be verified. • Negotiating issues — often the outcome of issues is determined through negotiation with CCRA and must be handled by a knowledgeable individual. • Appeals, Court — if issues are not resolved at the audit stage they might be taken to the appeal level or even onto the litigation stage. It should be noted that while this paper is written from an income tax perspective most of the tasks could also apply to Commodity and Property Tax as well. 3. Work Plan Calendar The phases of the tax cycle for multiple taxation years are spread over a calendar year. The tasks for each phase, the resource that will be used to accomplish the task and the timing and duration of the task must be mapped out over the year. It is important to consider the corporate calendar when planning the tax function for the year. This calendaring process allows the person responsible for the tax function to structure the function and budget the resources accordingly. All resources including the external resources that will be required should be included on this calendar. STRUCTURING THE TAX FUNCTION 1. Organization Most large corporations have a separate tax department. If a company is large enough the tax department might consist of a director, tax planners, tax analysts and administrative support and the workload might be divided along the lines outlined in the chart below. The tax department in largest organizations may have a vice president of tax and a number of directors and managers. Planning Provision Compliance Audit/Appeal •Strategies •Major project management •Major Issues •Sign off •Sign off, review •Strategy •Negotiations Planner •Major project research and implementation •Minor project management •Planning, supervision, review, research •Planning, supervision, review, research •Planning, supervision, review, research Analyst/ Information •Minor project research and implementation •Preparation •Preparation •Gathering of information Technician •Prep of budget & tax horizon models •Research •Research Admin. •Monitoring of external info •Tracking of dates •Tracking of dates, printing, assembling Director •Tracking of objection •and appeals dates There are many ways that these departments can be organized. Some are managed along functional lines, such as compliance, planning, etc. and some by type of tax. Often a combination of these two types is used. Some companies will be organized using a structure that is similar to the corporate organization (i.e., along the lines of business units). No one method is correct. The choice will be dependent upon many factors such as corporate requirements, size of the organization and sophistication of resources required for particular areas as well as the qualifications of staff available. One important consideration in the organization of the tax function is the development of the staff. The structure should be set up in such a manner that fosters the continual progression of staff members as well as promoting a co-operative team atmosphere. 2. Positioning the Tax Department Regardless of the structure of the tax function in order for it to be effective it should report to a senior position within the organization. The majority of the senior tax people report to the Chief Financial Officer. Other positions that tax may report to include the Treasurer, Controller and VP of Finance. The senior tax person should work closely with senior finance, development operations and marketing people to ensure that tax issues remain strategically positioned. RESOURCING THE TAX FUNCTION 1. Factors to Consider Regardless of the size of the organization the decision on how to resource the tax function will involve reviewing the same factors although the smaller organizations must bring to bear a number of unique challenges. How much attention is required to be given to the tax function is dependent upon some of the following factors: • volume of compliance requirements; • complexity of domestic issues; • complexity of corporate structure; • level of merger and acquisition activity; • level of international activity, • level of audit issues. 2. Development of the Tax Function The smaller corporation usually has assigned a finance person to be responsible for tax as part of a broader list of responsibilities. Often an organization will start with the finance person handling all of the tax issues as well as preparing the tax returns. This person will often rely heavily on his outside tax lawyers or accounting firm to research issues and review some of the work. This usually works well until the company grows in size and complexity. Sometimes the organization will add a full-time or part-time dedicated tax person with the main focus on compliance of tax legislation. This will be sufficient up to a certain point but as the organization continues to grow, especially if it expands outside the Canadian borders or is involved with mergers and acquisitions, the number and complexity of the tax issues can become overwhelming. By necessity the tax function becomes more reactionary than strategic calling in outside support when things start getting unwieldy. The difficulty with this approach is that significant value can be lost in the rush to meet the tax requirements as quickly as possible in the face of looming deadlines. Also, the individuals in the organization with the tax responsibilities usually do not have extensive tax backgrounds and may be unaware of potential tax exposures that may have been created. 3. Resource Alternatives a) Employees, Consultants and Outsourcing — Once the organization has determined that there is a tax resource need that requires filling they must determine the extent and level of the tax position. Some questions to ask when determining the type of resource that is required follow. • Will the position be dedicated exclusively to tax or will the position be designed to cover responsibilities in other areas as well? • Will the person be required to cover senior level tax strategy work as well as compliancebased work? • Does this person have to be familiar with tax from an in-house industry perspective or would the experience obtained in public practice alone be sufficient? • Is there a specific technical area that must be covered? Obtaining the right tax personnel is forever the challenge of all organizations. There seems to be a chronic shortage of talented and experienced tax people particularly in certain experience bands. The most difficult to find are those with solid industry and international experience. In addition it is difficult to find a senior level tax person that is also at an experienced senior level in other finance areas. The reason is probably because the length of time and involvement that it takes to develop a senior tax person usually requires a full-time commitment for a number of years. One solution could be to outsource all or a portion of the tax function to a firm that provides this service. b) Technology — Technology is an important resource for the tax function and should not be overlooked when determining how many people are required. Before the glorious dawn of computers the tax function involved a lot of mind-numbing number crunching and tedious research. Communication with foreign offices was slow and cumbersome and documentation of transactions was labourious and slow. Computers have made the tax function a much more interesting place to be but have also increased the speed at which we are required to respond. Tax research products are expensive but repay themselves many times over. They are for the most part simple to use and can save you a hefty fee from an outsider tax provider for a simple question. The tax function is unique from most other areas of the organization because it continually deals in the past, present and the future. Tax also uses information from all parts of the organization. This leads to the necessity of managing vast amounts of information and many critical and varying deadlines. Databases are designed to manage volumes of information and are very useful in effectively managing the tax function. It is also advantageous to import electronic data wherever possible and practical. Complicated spread sheeting is also used extensively to manage the exposures and assets in the tax function. Although products specific to managing the corporate tax functions have been developed in the United States little beyond the tax return preparation software has appeared in Canada to date. 4. Staffing Issues a) Hiring — The qualities to look for in a good tax person whether employed directly or outsourced are: • Depth of experience — strategic or reactionary. • Presence in the tax community — many benefits come from having a tax person who is plugged into the tax community. A lot of tax treatments are not published in traditional sources and are negotiated by industry groups and specific taxpayers. • Breadth of experience — income and other taxes, domestic, international, industry specific, legal background. • Solid finance and accounting backgrounds — it is imperative that tax people have a solid grounding in finance and financial accounting. • Detail aware — much tax work still requires sifting through mountains of details to come to the best conclusion for a company. • Strategic thinker — there is often a tendency to look at a specific tax issue in isolation of other factors but the isolated technical answer may not be the correct strategic answer. • Out-going and personable — a tax person must be a sales person and service provider. Often the best tax answer will not be the easiest to implement and the benefits must be sold to other groups in the organization. b) Developing — Once you have hired a good tax person, no matter what level they may be at, there must be a constant process of improvement and development. Continuing education, varying work challenges, and networking, both internal and external are all necessary to ensure a tax person continues to progress. • Education — Formal education can be obtained through reading, self-led courses and participation in external courses and conferences. Self-led education is useful for building a particular skill but doesn’t allow for the benefits of learning with a group of people. External courses and conferences also afford the opportunity to network with others in the industry and quite often more is learned from sharing tax experiences with others than listening to a speaker. Tax courses and conferences are not cheap and often require travel but the funds must be made available. The direct value benefits to the organization obtained from these experiences usually far exceed the costs. • Work Challenges — Tax people develop most of their knowledge from direct experience so it is important to ensure that tax personnel are exposed to as many areas as possible. People’s creativity and initiative are stifled if they are doing the same things day in and day out. Although from a manager’s perspective for the sake of continuity it may appear to be beneficial to have the same person doing the same job for years there is usually a cost in terms of improvements that could be made. A tax group where people are continually growing and developing by moving to new challenges is usually the most efficient and effective. The ability to keep the information flow moving is of course limited by size and corporate requirements but the leader of the function should strive to keep some movement present. • Networking — The importance of developing networks in the tax community cannot be over-stressed. It seems that one of the first things to go when we get busy are the networking events. Unfortunately, it often becomes habit and then a level of communication is lost. Discipline should be used to ensure regular attendance at industry events even if the topics that are sometimes presented are not very relevant to your work at the time. Meeting with others and listening to presenters helps to keep the creative juices flowing. Equally important are the networks within the organization. Internal networking is just as important to help ease the path when the tax group is trying to accomplish its objectives. However, in today’s age of email and voice-mail, which is so efficient, personal contact, which is the foundation of good relationships, gets put on the back-burner. Make certain that you and your staff get up from your desks and maintain the personal contact with other parts of the organization. CONCLUSION While this article is not meant to be an all-inclusive answer to the question of how to manage a tax function it does provide food for thought. As we have already indicated there is no right answer. However, we do believe that the more that you do to increase the profile of the tax function within your organization the more successful you will be in creating value for the organization and motivating the people involved. Attachment I Tax Savings The value of actions taken by taxation for the purpose of either: 1. reducing the amount of tax expense of the company, 2. deferring the recognition of income for tax purposes or the acceleration of deductions such that taxes become payable in a later period than would otherwise be the case had no action been taken; 3. successfully defending a filing position that, at the time of filing the return, was not felt to be contentious but was raised in the course of an audit. Tax savings will be recognized only after they have been accepted by the government or when acceptance is not an issue. A position shall be considered as having been accepted by government either when it has been allowed by virtue of the appeal process or when the government is precluded by statute from assessing or reassessing the issue. Any issue raised during an audit will not be considered as having been accepted until a reassessment has been issued or there is virtual certainty that a reassessment will not be issued. The value of a tax saving will include: 1. the tax itself where the amount of the tax is reduced, and/or 2. the net present value of future tax benefits in situations where there is a forward benefit to be realized, and/or 3. the after tax interest earned as a result of deferring or eliminating the tax payments. Tax savings will be reduced by the amount of tax cost associated with error or omissions within the control of the tax division. Tax costs for this purpose will be defined as negative tax savings. It should be noted that the value of “tax savings” does not reflect the savings that will result from the forward planning of projects that require considerable thought as to structure, etc.