Corporate tax departments manage and process large volumes of data, but that data typically is leveraged only in core compliance processes — generating tax filings and returns, and accounting for transaction taxes, income taxes, and transfer pricing.
If the use of all that data is limited to that compliance function, it’s a missed opportunity. More and more industries are fine-tuning the ways they use data to inform everything from everyday tactical marketing decisions to the most mission-critical strategic initiatives. Leaders now speak of building a culture of data-driven decision-making, replacing a long-time reliance on gut feelings, experience, habit, and anecdote across their organizations.
Recognition of the importance of data in corporate decision-making is growing, but there’s also a lack of concrete execution. In a recent EY survey, 81% of respondents agreed that data should be at the heart of decision-making, but only 31% had significantly restructured their operations to better enable it.
The tax function — sitting as it does on top of so much data about the company’s processes, finances, and operations — should be in an excellent position to leverage new analytical tools to mine that data in order to generate insights and make predictions about future outcomes.
Data, combined with the right tools and subject-matter expertise, allows tax practitioners to pivot from a backward-looking perspective (compliance) to a forward-looking, more prescriptive stance. It’s a powerful shift from “What have we done?” to “What should we do next?” Making that pivot enhances the value and the profile of the corporate tax function within the organization.
Tax analytics: What is it & how is it used?
Tax analytics is nothing more than the use of data to gather insights that are valuable to the organization and to make predictions about future actions or scenarios. Here are five ways tax analytics can help answer some of the biggest strategic questions facing corporations today:
Visualization & analytics: What’s our current situation?
Analytics tools can be used to create dashboards and other visualizations that can be designed to enable users to slice the data different ways. For example, one application might give a quick visual overview of the key metrics related to a firm’s indirect tax position, updated in real time as new data comes in. Visualizations also can provide easy ways for end-users to explore data by drilling down on specific jurisdictions or lines of business, or even down to specific individual transactions.
Issue identification & validation: Do we have a problem?
Data analytics, by normalizing and centralizing all sources of tax data, allows tax professionals to spot anomalies and problem areas. Parameters and alerts can be set to bring immediate attention to issues that might otherwise be overlooked and go unaddressed.
Inquiries & insights: What if we tried something different?
Tax analytics can help tax leaders effectively respond to inquiries from management and to proactively suggest measures that could improve the tax situation. When it comes to indirect tax, for example, querying the data can answer questions about effective tax rates, broken down by:
- entity, company, and jurisdiction;
- top transactions by gross and taxable amount; and
- percentage of exempt or non-taxable lines.
Analytics also can answer questions about past strategic or tactical moves: How did our recent push to reduce inventory change our tax position?
Where analytics really add value, however, is in answering questions about the future. This is where tax professionals can support teams that may be contemplating new business strategies. How will each of the proposed new directions influence effective tax rates as revenues, expenses, and currency fluctuations change the company’s tax liability picture?
Comparatives: What’s performing better, and why?
Analytics can identify and help shed light on differences in tax results for different business units, regions, and jurisdictions. It can identify key performance indicators (KPIs) and track performance over time.
Management reporting: How can we elevate the importance of tax data in the organization?
Ultimately, one of the most valuable aspects of tax analytics to tax professionals is that it illustrates to management the value of the data the organization holds. The knowledge also helps build support for the analytics tools needed to leverage the data.
Prerequisites for a tax analytics program
It all starts with data — and the analytics tools needed to manage all that data should ideally do two things well.
First, the tools must compile data from disparate sources into a single platform, normalize and clean up that data in an automated way, and have the capability to work with both structured and non-structured data. That is not just rows and columns, but also text and regulatory data from both inside and outside the company.
Second, the tools must have sufficiently robust and easy-to use applications to ensure that using and communicating the data — and its significance — can be accomplished quickly and clearly.
Not to be overlooked is the question of talent. Tax departments need tax analysts who can work with and manipulate the data, as well as data analysts who really understand how it should be managed and how to extract insights from it. Effective use of analytics will require tax teams to become more multi-disciplinary in their outlook, adding an analytics and data mindset to their tax compliance expertise.
Threats & challenges
As with most business activities involving data, if you are standing still, you are falling behind. Every function in today’s organizations are becoming more data-driven, and it takes the right tools and people to fully extract the value that lies in an organization’s tax data.
Finally, another important reason to adopt analytics: Regulators are using it! Tax authorities are using tax filing data and other third-party data about taxpaying organizations to extract their own insights and to look for enforcement opportunities.
A robust tax analytics program can keep corporate tax professionals one step ahead of the regulators.