As companies consider moving their finance systems to the cloud, they’re presented with a “once-in-a-generation opportunity” to get their arms around recent changes to corporate tax laws and regulations worldwide, according to one expert.
Companies need to choose cloud ERP (enterprise resource planning) and EPM (enterprise performance management) systems built to accommodate those tax changes—and having tax experts involved in the evaluation could reap big benefits, says Marc Seewald, senior director of product management for Oracle EPM Cloud.
If companies don’t get this right,” he says, “they’re going to face another 10 to 15 years of continuing to struggle with countless hours of reconciliations, manual reports, and consultant fees around the world in order to meet their increasingly complex tax obligations.”
Some recent tax changes are international in scope. Consider the Organization for Economic Cooperation and Development’s SAF-T (Standard Audit File for Tax), a new standard for reporting accounting data to tax authorities, as well as the OECD’s country-by-country reports, which require companies to break down key elements of their financial statements by jurisdiction. In the US, the Supreme Court’s recent ruling that online merchants must collect state sales taxes for the state in which purchases are made has merchants scrambling.
Then there’s the GST (Goods and Services Tax) in India, levied at every step of the production process; the new 5% value-added tax levied in the Middle East at each step in the supply chain; and the Making Tax Digital initiative in the UK, which will require more automation and transparency for sales taxes.
US-based multinationals face another big tax change: The 2017 federal tax reform legislation eliminated some of the tax advantages of incorporating offshore, so many US companies are incentivized to change their legal structure, which has a big impact on their finance and operations systems, Seewald says. (All of the above tax-change information was gleaned from the relevant organization, government, or other authorities.)
“Companies don’t change ERP and EPM systems every year—and with the kind of investment that takes, they need to choose technology that best addresses the international tax environment,” he says.
Don’t Give Away This Shot
Meanwhile, many companies that have grown through acquisitions are managing multiple ERP systems—which makes getting an accurate view of company finances a complex and often manual process. Add to that challenge the very real risk of incurring penalties and interest if a company’s financial reporting to any one of the above tax authorities isn’t accurate, and the pressure is on.
“If you’re spending a million-plus or several million dollars and countless hours trying to do reconciliations every year, multiply that by 10 or 15 or however long you think it will be until you upgrade your on-premises ERP system again,” Seewald says. “That’s part of the potential risk when you choose a new ERP system today.”
A fully integrated cloud ERP and EPM system can provide an audit trail that makes it much easier for finance to provide tax reporting without the manual work of piecing together disconnected systems.
“Tax scrutiny is a boardroom-level concern,” Seewald says. “It’s not just corporate income tax or sales tax. Because every country around the world has its own tax rules, you need to be able to trace all of your transactions all the way through the different systems in your business—from ERP to EPM to supply chain to sales.”
For example, an automaker that manufactures engines in Mexico and wants to incorporate them into cars sold in the US will need to follow that transaction through the supply chain; report it correctly in its ERP system; include it in the consolidated reporting it does in its EPM system (which is where country-by-country reporting comes into play); and follow it on through final sale, where sales tax is levied.
Smaller businesses face the same challenges. But because they have small finance teams, they need an EPM system that can handle this reporting, or they’ll have to rely on outside consultants, Seewald says.
“This constant churn of changing tax laws is not going to stop,” he says. “With globalization, most US companies will have to focus beyond just domestic sales. To be competitive, companies are incentivized to have a more global footprint, and that’s an opportunity for all of those emerging economies around the world to look for tax revenue as they fund the growth of a burgeoning middle class.”
Four Tax Commandments
As companies evaluate cloud-based ERP and EPM systems, Seewald recommends that they focus on four key areas to address tax changes that are coming non-stop:
1. Source data. Many of the new taxes introduce new data requirements. “There might be requirements for providing more detail in the chart of accounts or for how things are recorded in some of the operational systems, and it’s important that the technology you choose offers that flexibility,” Seewald says.
2. Data management and aggregation. “Your company needs to be able to take a step back and look at all of the tax activity from a country-level perspective,” he says. “And from a global perspective, you have to be able to reconcile your statutory reporting to your GAAP reporting.” The ability to aggregate data is especially important for income tax reporting, where the combination of multiple transactions determines the tax impact.
3. Calculations. If a company doesn’t have required financial calculations built into its EPM and ERP systems, the default calculation engine is an Excel spreadsheet—introducing the potential for human error and lengthy audits, Seewald says. “If you can’t point to an automated system and follow a number from a source transaction all the way out to the number you’ve reported on your tax return, you’re at risk,” he says.
4. Reporting. Your company’s EPM system must be able to format tax numbers so that humans don’t need to manipulate them for tax authority review. “It’s important that everything reconciles, because tax authorities are starting to build their own internal big data systems to start to connect all of the dots,” Seewald says. “So if you’ve reported intercompany transactions between Mexico and the United States, they have their own analytics that tie those numbers together and look for potential fraud or errors.”
Getting the system decision right can pay off quickly, he says. After one multinational pharmaceutical company deployed Oracle Tax Reporting Cloud Service to comply with country-by-country reporting requirements, it estimated it saved the cost of about 300 full-time-equivalent employees that year.
“That kind of cost savings basically paid for the implementation in year one,” Seewald says. “It’s a good example of the benefit you can get by automating the end-to-end process rather than paying big consultant firms millions of dollars to basically make up for shortcomings in your financial system.”