2016-Issue 24 – Every organizational event has a tax impact, yet tax is rarely integrated with other business functions within a company. Historically the corporate tax department, specifically, the indirect tax department, has operated as a function apart from other business functions such as business development, procurement, legal and IT. As a result, a company may see decreased synergies, which can lead to inefficient processes, manual manipulations, underutilized technology and fewer forward-thinking initiatives. Consider what an advantage it could be if the indirect tax team were in regular communication with and shared information with critical business units.
By characterizing themselves as “internal consultants,” the indirect tax team can ensure they have a seat at the table when major decisions and plans are discussed. Listed below are specific examples of how tax can integrate with other company business functions to drive value.
Business Development Group
Mergers and acquisitions are inevitable in the current corporate environment. By mandating that indirect tax be consulted on the “front end” of deals, the indirect tax team can ensure that adequate diligence has been performed to assess the risk of state and local tax exposure. During this time it would be advantageous to have the team perform a nexus analysis to confirm that any inherited compliance responsibilities are appropriately implemented. The team should confirm that the company is registered for indirect tax purposes in the appropriate taxing jurisdictions, and is collecting and remitting tax where the company has nexus. The tax department can also assist with analyzing indemnity provisions and reviewing or structuring tax sharing agreements. It is paramount that there are clear guidelines for how tax liabilities and potential refunds will be distributed post-acquisition.
When the tax department integrates with the procurement department, the benefits to the indirect tax team can be substantial. For instance, in many organizations, the tax decision on procurement of property and services is determined based on coding originating from a purchase order (“PO”). Therefore, setting regular meetings with those in charge of issuing the POs is a highly valuable exercise.
During this time the tax department can provide updated tax matrices for use by those in the procurement department (and by extension, the accounts payable department), set up materiality thresholds for when tax should be consulted on high dollar purchases, and provide internal training on the proper use of exemption certificates. In addition, during these meetings the tax department can establish what critical criteria must be included on the PO to assist the indirect tax team when the department is charged with confirming the taxability or when performing a real time evaluation of potential risk on a transaction. Examples of these criteria would be ship-to locations, detailed descriptions of the item being purchased, or a request for vendors to charge sales tax when applicable.
In many instances, an invoice selected for review during a sales and use tax examination may not contain sufficient information to determine taxability of the transaction. Therefore, the state and local tax team typically will refer to an existing contract (if the transaction is supported by a contract) to ascertain the nature of the transaction. If the tax department maintains a regular dialogue with the legal department, they should have a good idea of the tax clauses that are regularly utilized. If the indirect tax team does not interact regularly with the legal team, now is a good time to make the connection. As with procurement, the tax team should request that they be consulted regarding contracts of a certain type or over a certain dollar materiality. This will ensure that not only is tax signing off on the tax language, but the tax department is abreast of the capital spend that is occurring throughout the company. This allows the tax department to plan appropriately and ensure that the transactions receive the proper tax treatment when the invoices are ultimately received by the company.
In addition, the legal team may be responsible for negotiating tax credits and incentives in new jurisdictions or maintaining a legislative presence. Given that tax will be responsible for the compliance associated with new jurisdictions, the transfer of day-to-day knowledge between these two groups can help mitigate confusion related to new business activity.
Most indirect tax departments spend a significant amount of time and effort collecting, validating, analyzing and manipulating data to determine whether they have a good starting point when analyzing the application of tax on a transaction. Understanding the technology available and the various data systems utilized within a company can save the tax department countless hours and help streamline manual monthly processes related to compliance and controversy matters. When tax coordinates with IT, the tax team is able to create reports based on source data needed to begin analyzing book data or to design a sample population for state and local audits.
Acquiring this quality data in the format needed eliminates the use of error-prone spreadsheets and minimizes the risk of computation errors from manipulating multiple populations of data. In addition, data visibility allows the indirect tax department to quickly quantify potential risks by jurisdiction and entity as well as identify potential overpayments of tax.
Alvarez & Marsal Taxand Says:
The current state of the economy dictates that employees must identify practical solutions to increase production in a cost-cutting environment. Understanding how you can leverage information or resources from internal groups can assist the tax department with streamlining processes and making procedural improvements.
It has become increasingly important that the tax department demonstrate how it adds value to the company. Two key elements are defining and developing a tax strategy that aligns with the company’s mission statement and vision statement; and developing a strategic plan. Now more than ever, the tax department must ensure it is seen as more than just a compliance function or audit management shop.
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisers who are free from audit-based conflicts of interest and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the United States and serves the United Kingdom from its base in London.
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