Day after day, we read reports of disconcerting financial and economic events worldwide. Certainly, Europe takes the lead with its continuing problems of financial system instability. Capital is fleeing at-risk countries, putting further strains on already weakened capital bases of even the largest banks in the region. Unemployment for much of Europe is persistently in the ranges seen during the Great Depression. Countries outside Europe aren't immune from the economic turmoil, as we see economies cooling in Asia. Purchasing managers' indexes continue to be reported under the 50 percent mark that above which normally signals an economic expansion.
Here in the United States, we see disappointing jobs reports trigger stock sell-offs that result in the elimination of all of the 2012 gains year to date. Consumer sentiment is reported to be declining.
There continue to be other concerns too, such as the ever-increasing debt burden of students and parents for college debt, which continues to rise even as we see total credit card debt decline as households continue to de-leverage. While the housing market seems to be stabilizing nationwide, we read reports that as much as 25 percent of all home sales are foreclosure sales.
In Washington DC there continue to be calls for changes to the tax code in order to raise revenue as well as address what some perceive as unfair tax policies. At the same time as we read about tax code changes to broaden the tax base, we also hear calls to provide even more business incentives to create new jobs though the creation of new tax incentives. We also hear calls for the Federal Reserve to institute another round of quantitative easing.
Altogether the messages reverberating in the media would seem to signal that corporate America would be wise to "hunker down like a rabbit in a hail storm." Yet, that doesn't seem to be the behavior we see and the challenges facing corporate tax departments today. But perhaps that is because tax is a lagging indicator. Perhaps the current level of activity in corporate tax departments is the result of the burst of economic expansion experienced by many companies from late 2010 through 2011.
If tax is a lagging indicator, then it would seem to follow that perhaps 2013 may be a more problematic year for tax departments, if, as I suspect, their budgets get pared when finalized later in the year. Now may be a good time for tax leadership to anticipate that potential and plan on ways of communicating to management the beneficial impact of current tax planning. It is also a good time to sensitize management to the need to effectively lobby or plan for expected tax law changes.
So here is a list of things to consider that will hopefully allow the tax department to minimize any pending spending cuts that may soon be coming your way.
- If your department has recently invested in compliance process improvements, but that job is not complete, be prepared to measure the economic benefit that these improvements are intended to generate. For example, if one of the goals of such a process improvement is to file the corporate tax return by say June 30, can you measure the amount of time that acceleration "creates" or "frees up"? If yes, how much time is saved? What is the internal cost of that time? What is the incremental value of that time if it enables you to "in-source" work that previously went to consultants?
- Identify your high-risk compliance activities. Perhaps the most high-risk activity you conduct is accounting for income taxes. Or perhaps you have a situation where states are increasingly auditing your company and imposing positions that will require increasing attention by your staff. Do you have the right person(s) assigned to these tasks? Do you need to upgrade your staff to manage this risk? In an era of cost pressures, freezing headcount is a common management technique that we have all experienced. Now is the time to get approval for that expert hire you need. Get that position approved before freezes are implemented.
- Be aggressive in looking for ways to support discontinued operations. Frequently, these activities take a disproportionate amount of your time. Lobby now to have the costs that your department incurs in any disco-ops situation treated as one-off and outside your normal budget. Often times there are management reserves that can be used to help absorb these costs so that you don't have your budget eaten up by a one-time event.
- Recognize that when belt-tightening occurs, you will need to make sure that everyone in your department is as productive as possible. Consider some form of project reporting by your staff, and hold your managers accountable for the resources they manage. Budgeting internal time is never a pleasant exercise, but it is an important technique that may help you allocate scarce resources and keep from "gold-plating" relatively low priority items.
- Think about rebidding some of the work you outsource regularly. If the current provider has become unresponsive, or if you have seen significant changes in personnel, now may be a good time to evaluate competing bids. But don't approach this by simply using a competing offer as a stalking horse intended to drive a better bargain with your current provider. Service providers are leery of these situations, and if you signal that you are merely "testing the water," you might not get the attention to the proposal that you need to make an informed decision once all the bids are in.
- If you need to make a hiring decision, do it now. Do not delay. The reason here is more about quality than it is about budgets. Once employers face tight budgets and begin to scale back staff, of course the marginal players are among the first to go. So many candidates look good on paper, but will you really get a clear picture of a prospective candidate's professional and interpersonal skills, work ethic, etc., when their former supervisor is hoping to off-load them from their budget? Use a professional social site, use your contacts at professional societies and use your current service providers to help you assess the candidate.
- And finally, the flip side of the foregoing point about hiring is to recognize that sometimes addition is accomplished by subtraction. Plan now on the need to encourage a retirement or to otherwise reduce your current working staff. There are a couple of approaches to this task. One is to focus on cost savings, so naturally, high-cost personnel fall under the microscope with that approach. Another approach is to rank your personnel based on the pain that would be caused by their departure. However you approach this unpleasant but necessary management task, plan for it months in advance by making sure you have redundancy in place so as not to lose critical institutional knowledge.
Alvarez & Marsal Taxand Says:
Even if the pessimism that we hear and read about daily doesn't result in a return of an economic recession, or even if your company is perfectly aligned with a counter-cyclical profit engine, taking one or more of the steps outlined above will serve the best interests of the tax department in the long run. These steps can be seen as a part of continually improving the performance of the department, and doing so with the most prudent amount of expenditures for the task. Failing to anticipate the need to make changes may result in suboptimal changes that in fact do long-term harm to the organization. Using a scalpel now may help you avoid the fate of a meat ax later.
As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
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 advisors. 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 advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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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 advisors 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 US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.