Some practical insights on how to access and manage important data for Tax functions, and the need for a web-based solution for effective Tax Management.
There are an increasing number of Tax-related obligations which require groups to file and disclose more data than ever before. Internationally the focus is on Corporate Tax Transparency, with the OECD’s BEPS initiative being adopted by many countries. These initiatives significantly increase the burden on Tax functions to compile and keep track of data at a detailed level, and to make it available to Tax and other authorities.
In addition to the global imperatives, we are also witnessing an increase in regional and local initiatives. The EU has introduced mandatory disclosure and has proposed to make BEPS Country by Country reporting (“CbC”, BEPS Action 13) publicly available. At the national level, some countries such as China will require groups to file information including types of related party transactions, information on intangible assets, and equity investments in their CbC reporting, all to be reported in advance of the global CbC reporting deadlines for many countries.
These additional obligations place increased responsibility on a modern Tax function to implement efficient solutions to gather, store and analyze data which is typically difficult to get hold of through normal financial reporting processes or other means. In this article, we share our experience regarding the challenges faced by Tax functions and explore how a system solution for managing Tax-related information can help address these challenges.
The main source of information for managing Tax figures is normally the group’s accounting system and the financial reporting process including Tax reporting. In some cases, the accounting system might provide the Tax function with most Tax figures. In other cases, neither the accounting system nor the reporting structure are set up in such a way as to make this possible, without a large amount of manual work being done to access the relevant Tax figures on a current basis.
The Tax function also needs information to manage Tax risk and for other purposes, such as reporting, planning and forecasting, and contributing to the strategic decisions of the group; this requires additional data not typically found in the group accounting system nor collected in a financial reporting process. The type of information needed varies between different groups and purposes; in discussions with our clients we have identified that the following information is typically required:
- The legal entity structure, including permanent establishments
- Information relating to what activities are performed and where
- Relevant Tax figures for analysis of the Tax and compliance situation
- Information and documentation on specific transactions, both internal and external
- Additional documents, both Tax and legal, such as service-level agreements
- Current and historical information on Tax risks
- Information regarding significant events in the group
- Information on cross-border transactions
- Information on Tax compliance obligation fulfilment by group members
We refer to this information as data which is in “No Man’s Land”. It is often held by different functions, companies or in the hands of specific individuals. Accessing and managing it without coherent systematic processes and solutions is, in our experience, one of today’s principal challenges for a Tax function. Implementing a solution to gather and store this data increases efficiency and avoids duplication. Key data is kept readily available, allowing various functions to work with and be able to access the data they need from one source. This increases quality and effectiveness, and contributes to creating structured, systematic and accountable processes for any required purpose.
Below we will discuss some of the topics that are important to think about when implementing a solution.
Basic features of a solution
When implementing processes for collecting of the above-mentioned types of data, it is recommended that they are built around the legal and organizational structure of the group and the people who will be responsible for managing the information and performing related tasks.
Thus, some basic features which should be built into a system solution are:
General data and administration
- The solution should secure the availability of necessary entity data, including both the legal and operational structure, and include historical changes
- It should gather and store the required data
- It should help to allocate roles and responsibilities for different Tax areas (and other functions)
Main Tax areas
- It should support different processes within different Tax areas of concern
- It should support the gathering of data and documents related to these processes
- It should provide a means of analyzing the data and creating the necessary Tax reports
The platform should be flexible to support current and future requirements and processes and to give the Tax function control of its data
General Data and Administration
Entity data and legal ownership structure
The first thing to consider is how to put in place a process to manage data and documentation regarding legal entities and the ownership structure. The responsibility for such a process could rest with one department or be a shared responsibility. It may be the legal department, company secretary or the group accounting department, and in some cases the Tax function may have or share this responsibility. It is important to clearly define who is responsible for maintaining this data from the start.
Many groups have a significant number of entities within their legal entity and ownership structure. These entities generate a lot of data (and supporting documents) which is important to manage, such as company numbers, Tax and VAT numbers, name history and, importantly, updating changes in the legal ownership structure.
In a group, many functions and people within functions require access to the same data in order to complete the various tasks for which they are responsible. Working with a platform where everybody can share the same base data on entities saves time and provides a source of accurate, consistent and up-to-date information.
Often the corporate structure found in the accounting system is based on the operational or line of business structure and does not reflect the legal entity/ownership structure, which is required for most processes within the Tax domain. A system solution which creates a bridge between legal entity and operational structure can therefore provide a useful tool, allowing data to be gathered and analyzed on a legal entity basis. In addition, the necessary data on permanent establishments often may not be found in an accounting system and therefore requires a separate process to be kept accurate and current.
When you have an established process for collecting and maintaining data on entities, it is possible to keep track of the data over time, since the process will build history on all data points. Building history will allow access to historical data on the group structure for any period or at any point in time. Questions from authorities often concern data from several years back, and therefore a solution which provides efficient access to historical data will save time and ensure that data is accurate and enquiries are handled quickly and effectively.
With the increasing regulatory demands and obligations of Tax Transparency initiatives, it becomes even more important to keep track of the historical legal ownership structure. For example, CbC data could be reported after the financial year-end process is closed, working with the structure as of year-end for CbC purposes until that process is closed. Making a dry run during the year will require the current legal ownership structure to include all relevant entities. In order to answer questions from tax authorities which relate to how figures have changed over several years, it is important to be able to go back and review old structures even if the group has changed, due to spin offs, acquisitions, mergers or restructurings.
Gathering the required information
As referred to above, the required data is likely to be in many different places. It is important to collect it from the person who is responsible for its maintenance, while ensuring the right person remains responsible for its maintenance and accuracy. At the same time, the gathering structure must be as efficient as possible and set up in such a way as to avoid duplication.
Some data may already be held or could be collected at a group level and some may need to be complemented with data from a local source. The solution should support a combination of collection and merger of data from different sources. It should therefore be capable of the following:
- Collection via integration with other systems
- Collection via data import, e.g. from Excel
- Collection via manual input
- A combination of points 1-3
Roles and Responsibilities – Users and Reporters
A system solution must not only allow the management of data, it must also facilitate engagement with the people who are responsible for it and the different tasks and many processes which they would like the system to support.
A Tax function normally consists of one or more people who work full time with Taxes in different areas, both in terms of subject matter and in geographical areas. At the same time, many Tax-related tasks are often performed outside the Tax function, such as in a group or operational function, at divisional, country or company level. At the same time, data to which the Tax function needs access is often found on a local level. This means that a platform which supports different processes must be fully flexible when it comes to allocating roles and responsibilities for different tasks, irrespective of where they belong organizationally.
What Blika has created is a platform where other functions and/or local managers are able to work in their own part of the system, but with a central oversight role for the Tax function. Such a structure, set up properly, will give the Tax function the ability to allocate responsibility where appropriate, while at the same time retaining overall control to ensure that other functions and/or local managers perform their Tax tasks. Our solution enables granting of rights to perform different tasks, sign-off control functionality, and the ability to manage access and to grant viewing rights to data on a detailed level.
In addition, some information might be managed by another department but is still needed by the tax department. A solution should be able to grant administrator rights for certain types of information for another department to manage and even allow that department to decide who else gets access to “their” data. In essence, that department will have their own system in the same platform utilizing the power of having the base data such as entities always up to date.
Main Tax Areas
With firm reporting processes for entity data and a flexible structure for adding reporters and allocating users to different tasks, it is possible to decide which Tax areas the group Tax function will need to focus on. Below we have commented on some basic areas that could be supported by implementing our solution, but there are many other areas which could benefit as well.
Analyzing Tax figures
In many groups, the accounting system does not support the gathering of all relevant Tax figures that the Tax function requires to perform its analysis. For example, accounting systems and Tax reporting processes do not always include local GAAP figures, which in many cases are needed to do a relevant company and country analysis. In other cases, the Tax function may need data to perform an analysis that is only accessible on local level, and by legal entity, which is not suitable to be included in a financial reporting process. Being able to create a separate process for gathering certain Tax figures is therefore an important feature in a system solution.
Since the Tax figures needed for analysis are normally found in different sources (the accounting system, the Tax reporting process, and any separate processes for gathering Tax figures), the solution should be set up in such a way that it can serve as a gathering point for all this information, irrespective of source. The solution should also contain the functionality for data analysis and visual presentation.
Risk Management, Tax Compliance and Tax Transparency
In addition to the Tax figures, there is other data which needs to be collected in order to be compliant. This is easiest to explain by giving a few examples within Tax Transparency reporting and Tax Risk Management. Future Tax Transparency reporting will include more than just Tax figures. There will be a need to gather data on internal and external transactions such as description of transaction types, agreements and counterparties. Internal transactions such as dividends, liquidation proceeds and capital gains/losses will also be an area where we envisage increased reporting requirements. An important area will also be in relation to significant and strategic events within the group, such as:
- Acquisitions and disposals
- Mergers and liquidations
- Intragroup transactions of business lines
- Start-up of new business lines and in new jurisdictions
- Capital injections
- Changes in permanent establishments
It is therefore of vital importance that the solution includes a process for keeping the legal structure and transactions related to shareholding up to date. Such a process should also include the option to gather and store relevant documents related to these events (e.g. contracts), link them to each transaction and make them easily accessible.
A system solution which creates a comprehensive source of necessary, accurate, and current data, as well as documentation and reporting functionality, will provide a significant contribution towards implementing a robust control framework for the effective management of Tax Risk.
From a risk management perspective, it is important to keep track of transactions such as dividends, shareholders’ contributions, mergers and other transactions that affect the legal entities of the group. The underlying documentation will also be required for all transactions, as well as transaction-related Taxes, if applicable.
A platform must be able to collect and manage transaction data, including documentation for each transaction. It should enable compilation and analysis of transactions for any given time period. As part of the entity data it should be possible to gather and compile management information, e.g. number of employees, members of management and formal office-holders such as directors, including when they are appointed and resign.
Another example of an area where a compliance solution could facilitate your work, is compliance concerning uncertain tax positions and the gathering of data and contracts for IFRS 16 leasing. A platform which could easily be adapted to include such reporting would not only facilitate the tax department but would also be able to support other departments allowing you to have one source of truth which is easily accessible for everyone.
There are other areas, from a content and reporting perspective, where groups will need to include not only figures, but also narrative information, such as management and ownership details, including changes over time.
The data requirements will inevitably vary between jurisdictions. This will demand a flexible platform that can be adapted to collect different data in different jurisdictions, while at the same time being able to efficiently present it on a global level, ensuring consistency between data which is filed locally, and by the group.
Tax Risk Reporting
One of the key information areas is risk reporting. Most groups include figures-based reporting of Tax risk exposures in the financial reporting process. However, this process does not always contain the data that makes it possible to follow and manage risk over time.
A reporting process for Tax risk issues and exposures should therefore support the gathering of relevant documentation related to the reported risk issues (decisions, memos, calculations), together with the ability to describe how risk issues are being mitigated and resolved. Revaluations and changes (including documentation) should be made and recorded in every reporting period for each legal entity to allow the Tax function to be able to follow how the identified risk develops over time, the amounts at stake, provisions, and settled amounts. In 2019, IFRIC 23 came into force which requires the collection and keeping track of additional information concerning uncertain tax positions.
As part of the risk management process, some groups would benefit from setting up a tracking and sign-off process for other parts of the Tax risk and control framework. Such processes could be set up in different ways, such as through questionnaires, self-assessments or as a filing tracker, and could be built into the existing processes for Tax risk management and reporting, or as a separate process.
Tax and Transfer Pricing Compliance Management
Making sure that the group has fulfilled its Tax compliance requirements in different jurisdictions is an important monitoring and risk management responsibility for the Tax function. There are two main areas that a solution can support in gathering relevant information in this respect:
Ensure and centrally record that all necessary filings have been made accurately and on time
Gather documents filed and make them accessible to the right people
The solution should be flexible enough to enable the set-up of compliance processes for managing different areas. As the Tax compliance requirements vary between different jurisdictions and/or companies, the solution should be able to support implementation of local processes in different jurisdictions/companies.
For Transfer Pricing purposes, the Tax function needs to be able to validate that every entity in the group has a local file that meets both the OECD and local requirements regarding documentation of intra-group transactions. Furthermore, the Tax function must secure and have access to the underlying documentation that is linked to transactions.
Increased corporate Tax Transparency reporting obligations introduced by, among others, the OECD (CbC reporting), require a firm process to gather relevant data for reporting purposes and data conversion to XML. It should be noted that some groups might need data in order to make a value chain analysis. Many of the processes required to make this analysis are mentioned in the section “Risk Management, Tax Compliance and Tax Transparency”.
A natural and necessary capability of any solution is the possibility to store legal and tax-related documents and to make them easily accessible for the relevant users. As mentioned above, documents will be gathered through different processes, and they should be accessible to the responsible persons for the respective process within the respective entity. Key information from these documents must be searchable and be linked to appropriate companies, periods, Tax areas, and, where relevant, transactions. It should also be possible to store documents not linked to a certain process, and thus a solution should be flexible enough to allow linking to companies, functions or users.
A document management function should be able to help you to confirm that you have the required documentation in place for all entities. This help could entail a function for filtering out documents of a certain type, such as income Tax returns, that have been filed for a certain period, together with information on which entities have not completed their filing requirements. To facilitate the review process, the system should enable tracking of missing documentation and automatically notify the people responsible for completing the missing data.
The platform should allow you to be in control of your data. It should provide flexibility to add new analysis possibilities, or to quickly gather additional data that may become a requirement, by using the basic structure you have already set up.
The system must be able to handle exceptions in a structured way which enables the Tax function to keep track of them and manage them properly, such as determining if there are some entities present at the year-end which should be excluded from reporting in the CbC data.
The solution should be built using current technology and allow easy integration and interface with other systems. It should also contain an interface which allows selection of certain data to be made available for other people who may not have access to the solution. For example, if CbC reporting needs to be made public, you may want to publish these figures on an intranet page which your investor relations department has access to. They may then publish these figures on your public website.
A solution should also allow flexibility to scale up when new needs arise, and to include new processes and change old processes. A modular approach can add new modules which address new areas of interest but at the same time utilize the processes and data already built into the solution.
Although the Tax function can access necessary data, it is rarely centralized or supported by automated or structured processes. The information usually comes in different forms and from different sources, and often relies on the Tax function making periodic requests which are difficult to formalize in processes and are prone to error and inaccuracy. The data and required processes must be based on the legal structure, and be supported by a solution which is flexible, and can easily be changed to implement new requirements and handle exceptions. It is therefore difficult to build a process for gathering, storing, and analyzing this data into an accounting system.
A separate system solution acting as a single source of truth for Tax, legal and other data can turn the “No Man’s Land” into a clear and structured landscape, providing accuracy, consistency and accessibility, and is something which every organization and Tax function should consider as an indispensable tool for the future of Tax Management.