Article featured on Thomson Reuters' Taxnet Pro, December 2020

With the continuous increase in complexities related to tax laws and regulations and the shortage of tax resources available, tax departments are expected to do more with less, which requires proper planning for each stage in the overall tax cycle. A critical component to effectively and efficiently operate in this ever-changing environment of tax laws and regulations is a well-organized step plan which appropriately integrates the automation tools available to a tax department. One of the most pressing issues for a tax department this month is the year-end tax provision.

Year-End Tax Provision – What are your plans to run a smooth provision process?

The year-end tax provision is one of the most critical components of the tax life cycle. Most companies struggle to adequately plan for the computation of the year-end tax provision, and as a result, do not spend enough time and resources on pre-closing activities. Therefore, companies are often catching up, with the activities that could have, and should have, been performed earlier needing to be done at the last minute, which results in unnecessary time being spent on non-value adding activities. This results in companies having minimal, if any, time to appropriately analyze and plan for the overall tax position (including their effective tax rate, utilization of their operating losses and releasing their valuation allowances). 

In order to avoid this result, companies should design and adopt a well-organized step plan that implements a holistic approach to the year-end tax provision.  This approach recognizes that the computation of the year-end tax provision should be broken out into four separate phases, including two that should be performed before the year-end. The phases are:

1. Pre-Close Phase: This phase occurs prior to the year-end and can be worked on throughout the taxable year. During this phase, a company addresses all of the critical activities that can be managed well in advance of preparing the year-end tax provision by incorporating entity structure changes, changes in tax rates, currency translation adjustments related to foreign exchange rates, new tax adjustments, new jurisdictions, updating chart of accounts, automation rules, as well as other relevant tax changes that have occurred throughout the year into their tax provision software systems.  This phase will help ensure that during the closing phase and footnote and journal entry phase, the appropriate baseline information has already been entered into their provision software and the process is streamlined.
2. Return-to-Provision Phase: This phase is a crucial component of the step plan and the overall year-end tax provision process and is often performed much later than it should be. With the appropriate support, this phase should be started once the tax return for the prior year has been filed. During this phase, the year-end tax provision from the prior year is adjusted to reflect what was actually filed on the taxable year’s tax return.  Therefore, activities during this phase include importing the tax return data into tax provision software to compare tax return amounts with tax provision amounts to compute the return-to-provision adjustments and leveraging the tax provision software to automatically post those adjustments to appropriately true-up the deferred balances, tax expense and overall payable balances going into the current year.
3. Closing Phase: This phase can begin once the post-close year-end trial balance becomes available. During this phase, companies bridge their trial balances into the provision software, automatically compute pre-tax book income and trial balance driven book-tax differences (schedule M’s) and import their tax payments and refunds received into the provision software. If the step plan has been followed, then most of the time during this phase can be spent on value-add activities for tax planning purposes, instead of having to rush to complete the pre-close phase and return-to provision phase activities.
4. Footnote and Journal Entry Phase: This is the final phase of the step plan. During this phase, companies leverage their provision software capabilities to bring everything together from generating the tax provision reports (e.g., Tax Provision, Deferred Balances Rollforward, Effective Tax Rate, and Payable Balances Rollforward) for audit purposes to producing final journal entries that need to be booked into their financial systems. Proper governance and control over these activities are vital as this is where the rubber meets the road.

A&M Taxand Says

Effective management of the year-end tax provision process can provide the incentive for comprehensive tax transformation initiatives to improve the overall tax processes and operations. It can reinforce broader enterprise-wide transformation efforts and help deliver valuable information for tax planning and reporting. Every tax department is different and has its unique challenges when it comes to year-end tax provision processes. A&M Taxand's Tax Technology and Automation group understands that there is not a one size fits all approach when determining the best strategy to manage the year-end tax processes and can help you develop a well-organized step plan for your company, as well as provide year-end support to help proactively manage the overall year-end tax provision activities, as well as other relevant nuances. We have diversified experience, including working with ONESOURCE Tax Provision, CorpTax and Oracle Tax Reporting Cloud, amongst others. For more information, please contact our Tax Technology and Automation subject matter expert Josh Din at jdin@alvarezandmarsal.com or 310-597-1976.