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Building a More Effective
Tax Function A report prepared by CFO Research Services in
collaboration with Hudson Financial Solutions
Building a More Effective
Tax Function A report prepared by CFO Research Services in
collaboration with Hudson Financial Solutions
CFO Research Services and Hudson Financial Solutions developed the hypotheses for this research jointly. Hudson funded the research and the
publication of our findings, and we would like to acknowledge the members of the Hudson team—Andrea Gronenthal, Jack Finley, Nikki Leonardi,
and Patrick Petschel—for their contributions and support. At CFO Research Services, Celina Rogers directed the research and wrote the report.
Building a More Effective Tax Function is published by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210. Please direct inquiries to Lisa
Nelson at (617) 345-9700, ext. 249 or [email protected].
CFO Research Services is the sponsored research group within CFO Publishing Corporation, which produces CFO magazine in the United States,
Europe, Asia, and China. CFO Publishing is part of The Economist Group.
October 2006
Copyright © 2006 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No part of this report may be reproduced,
stored in a retrieval system, or transmitted in any form, by any means, without written permission.
Building a More Effective Tax Function 1
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Contents
Introduction 2
About this Report 3
The State of the Tax Function 4
The Path Forward 10
Conclusion 16
Sponsor’s Perspective 17
Introduction
For Kansas City, Missouri-based tax preparer H&R Block,
few things are as critical to company performance as
maintaining credibility. This made the blow especially
hard to bear when the company announced in February,
2006 that it was restating earnings for 2004, 2005, and the
first two quarters of 2006 due to mistakes it had made in
calculating its state effective income-tax rates. H&R Block
had understated its state income tax liability by about $32
million as of the end of April 2005. These errors, said the
company, were uncovered as part of its ongoing effort to
remediate control weaknesses in the tax function.
H&R Block’s announcement—paired with a report of a 68
percent drop in third-quarter profits and lowered earnings
expectations—wreaked havoc on H&R Block stock; the
company’s share price fell almost nine percent in a single
day. More difficult to measure, however, was the effect of
the restatement on the company’s position in the market-
place: would this restatement undo the years of marketing
and advertising that had established the company as the
trusted tax preparer of millions of Americans?
The nature of H&R Block’s business no doubt made the
company exceptionally vulnerable to the embarrassment
of public restatement due to tax accounting errors. But
H&R Block has plenty of company—a long list of firms
including Kroger, Tyson Foods, Conagra, and Fortune
Brands have disclosed errors in tax accounting in the last
two years. Recent work by research firm AuditAnalytics
has made it clear that no company is immune to the risk
of exposure of tax accounting weaknesses; the firm
routinely cites tax accounting problems as the most
prevalent cause of material weaknesses reported under
section 404 of the Sarbanes Oxley Act. Mainstream
media outlets have also identified the trend: according
to newspaper reports, 183 companies identified tax
accounting errors in 2005, compared with 87 in 2004, 80
in 2003—and a mere 27 in 2002.
A recent study by shareholder advisory firm Glass, Lewis
& Co. LLC demonstrates the connection between reports
of material weakness in tax accounting and market
capitalization. According to a late 2005 letter from Glass,
Lewis to the SEC Advisory Committee on Smaller
Public Companies, companies that report material
weaknesses in tax accounting lose an average of nearly 6.8
percent in their stock price within 60 days of the
announcement. “I think it has surprised a lot of people
that accounting for income taxes has been the most
frequent reason for companies to fail in their Sarbanes-
Oxley compliance efforts,” says Charles Gilstrap, director
of tax at privately held manufacturer Dresser, Inc. “A lot
of well-known companies that did everything else right
had problems with their accounting for income taxes.
I think that’s been a kind of wake-up call for many
companies to focus more attention on these issues.”
Why has tax figured so prominently as a source for
material weaknesses? One reason, say analysts and
observers, may be the relative isolation of the tax function
from the rest of finance. In the past, tax reporting and
compliance have been considered distinct from other
financial reporting and compliance activities. Widely
accepted methods of tax accounting have, until recently,
treated many matters as subject to judgment rather than
accounting rules. And, as markets heated up in the
eighties and nineties, some companies had even shifted
the focus of their tax functions from controlling the cost
of tax liability to affirmatively extracting value by taking
aggressive tax positions.
All of this changed, however, with the massive accounting
scandals that marked the early years of the new millennium
—and with the advent of the Sarbanes Oxley Act. Sarbox
requires public companies to document and attest to
the controls of their finance processes—including tax
processes—with a high degree of precision. Many
companies, however, had never fully documented their
internal controls for tax. Accounting standards and
oversight boards also wasted little time in promulgating
new rules to place tax accounting in line with the
heightened regulatory environment. The rash of
restatements due to tax accounting errors indicates that at
least some companies are still struggling to catch up.
2 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Study Methodology
About this Report
In the spring of 2006, CFO Research Services launched
a study of the tax function’s priorities and challenges.
Our task? To learn how tax is meeting the challenges
posed by an increasingly complex, competitive, and
risky regulatory and business climate.
Because the traditional arrangement in which the tax
function carries on its activities at some distance from
finance appears to be coming under pressure as
regulatory reporting and tax accounting regimes
change, this study explores the priorities and challenges
companies face in tax from two perspectives—from the
point of view of tax executives, and from the point of
view of senior finance personnel. We expected to find
points of difference as well as points of alignment
between the two groups; the results of the study,
however, showed a startlingly wide gap between the
perceptions of tax professionals and their colleagues in
finance.
Broadly speaking, the study reveals that the tax func-
tion is indeed responding to a series of difficult chal-
lenges. Heightened regulatory reporting requirements
and accounting standards changes for tax have been
layered on top of increasingly aggressive state and
federal tax enforcement activity. Tax executives have
also come under pressure as their companies
undertake increasingly complicated—and increasingly
global—business activities. It’s widely understood that
effective tax planning can free up cash and reduce
future tax liabilities. In a highly competitive global
business environment, such gains are more important
than ever, and we found that tax executives are keenly
interested in pursuing them.
But while both tax executives and their peers in finance
are feeling the pressure from investors and regulators,
the results of this study show that finance underestimates
the pressure on the tax function and the urgency with
which tax seeks to meet its challenges. Because the
very nature of these challenges—including the movement
toward transparency in tax accounting and the
increased intensity of regulatory and investor scrutiny
of tax reporting—demands close collaboration between
tax executives and their colleagues elsewhere in
finance, it is important for each group to understand
and respond to the concerns of the other.
To examine executives’ views on the corporate tax function,
we executed a research program among senior finance
and tax executives, as follows:
To gauge aggregate opinion on the state of the tax function,
we surveyed senior finance and tax executives at North
American companies by invitation through an electronic
questionnaire. In total, we gathered 336 responses, 36
percent of whom are tax executives, 64 percent of whom
are finance executives outside the tax function. A majority
of responses come from public companies. Respondents
come from a broad cross section of the U.S. economy, with
particularly strong representation from the manufacturing,
financial services, and wholesale/retail industries. Nearly
two-thirds of respondents are from companies with more
than $500 million in annual revenue.
To supplement this quantitative research, we conducted a
series of interviews with senior finance executives at the
following companies:
• The Mentor Network
• Vertis Communications Inc.
• Dresser, Inc.
• The Manitowoc Company, Inc.
• Millipore Corporation
• Pratt Industries
• Square D, a Division of Schneider Electric SA
• Several other companies that asked not to be cited by
name in this report
3
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
The State of the Tax Function
What is the primary focus of your company’s tax
function—compliance or planning? In which areas is
your company’s tax function performing well? Where
is there room for improvement? We posed these and
other questions to senior finance and tax executives to
gauge the current state of the tax function—its strengths,
as well as its weaknesses. The portrait of the tax function
that emerged from this inquiry reveals opportunities for
improvement and increased collaboration as companies
build the tax function of the future.
Tax compliance mastery
Survey results show that tax compliance—not planning
—is the primary activity of most tax functions. Eighty-
four percent of all respondents said the tax department
at their companies devoted most of their resources to
tax compliance—activities such as preparing returns,
record keeping, and so on. Only 16 percent said their
tax departments committed most of their resources to
tax planning. See Figure 1.
Although survey results show that most resources flow
to tax compliance at many companies, the CFOs and
tax directors we interviewed were quick to point out
the critical role of tax planning at their companies,
even as they strongly emphasized the importance of
compliance with tax regulatory regimes. Both sets of
activities, interviewees agreed, had an important role
to play in helping companies reach their ultimate
goal—maximizing shareholder returns.
A well-managed balance of tax compliance activities,
tax planning, and risk management is in fact the core
work of the tax function, according to those we
interviewed. “The key drivers of what we do in the tax
area are the need to minimize the level of taxation
within the law and to do all the tax planning connected
to that—as well as the need to make sure the tax risk
environment is well within acceptable bounds,” notes
Carl Laurino, CFO of heavy equipment manufacturer
Manitowoc. “That’s the essence of our structure, and
I think that this balance has become even more
nuanced in the context of heightened regulatory
compliance.”
Survey results indicate that, in general, the tax
function performs its tax compliance activities well.
Respondents note that tax is performing particularly
well when responding to challenges to the company’s
tax positions and complying with income tax
regulations. But respondents are much less likely to
say that their tax function is performing well at less
structured general business management activities,
such as managing business risk and supporting day-to-
day business decision making. See Figure 2, next page.
It makes sense that the tax function would seek to
perfect critical tax compliance activities; these results
suggest, however, that many companies would realize
gains by expanding the scope of the tax function’s
attention to include more of these general business
management activities.
4 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Tax compliance—not planning—is the core activity of the tax function.
The tax department at my company devotes most of its resources to ______________.(Percentage of respondents)
Compliance (e.g., preparing returns, recordkeeping, etc.)
Planning (i.e., analyzing tax consequences of business decisions)
FFiigguurree 11..
Indeed, an analysis of survey results reveals a broad tax
performance continuum. When the tax function is
called upon to perform clearly identified, assigned
duties such as routine tax compliance, it performs
extremely well. The tax function performs well—
although somewhat less well—in the role of a structured
business partner, when it provides support in relatively
circumscribed situations such as major transactions or
corporate restructuring. Performance declines further,
suggests the survey data, when tax is asked to take on
the role of an ad-hoc, unstructured business partner—
for example, by taking on a leadership role in key
business management and risk management efforts.
The less structured, familiar, and defined the activity,
the less frequently respondents say their tax functions
are “performing well”—and the more frequently
they say there is “room for improvement” in tax.
See Figure 3.
5
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
The tax function is doing best at core tax compliance activities.
In your opinion, does your company’s tax function perform the following activities well, or is there room for improvement in its performance? (Percentage of respondents)
0 20 40 60 80 100
Room for improvementPerforming well
Advising business management on taximplications of day-to-day business decisions
Managing exposure to business riskassociated with tax
Contributing to non-tax regulatory compliance efforts(e.g., Section 404 of the Sarbanes-Oxley Act)
Participating in deal structuring formajor transactions
Complying with non-income tax regulations
Complying with income tax regulations
Responding to tax-authority challengesto the company’s tax position(s)
FFiigguurree 22..
The performance continuum: tax function performance declines when tax is called upon to act as an ad-hoc, unstructured partner in business management.
(Percentage of respondents saying their companies are “performing well”)
0
20
40
60
80
100
Advising business management on tax implications of day-to-day business decisions
Managing exposure to business risk associated with tax
Contributing to non-tax regulatory compliance efforts (e.g., Section 404 of the Sarbanes-Oxley Act)
Actively seekingopportunities for tax reduction
Participating in deal structuring for major transactions
Complying with non-income tax regulations
Complying with income tax regulations
Responding to tax-authority challenges to the company’s tax position(s)
Routine tax compliance
Structured business partner Ad-hoc,
unstructured business partner
FFiigguurree 33..
6 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Survey results suggest that many companies would ben
fit from a tax function that acts not just as the steward
of tax accounting and compliance, but as a true business
partner. But what would such a partnership look like—
and what is the role of tax and finance function leadership
in promoting collaboration between tax and other
functional areas of the business? At Baltimore-based
marketing communications, printing, and consulting firm,
Vertis Communications, the tax function has moved well
beyond the traditional bounds of the tax department,
says vice president of tax Myron Vansickel. “More and
more, tax directors are being tapped to develop different
business initiatives,” says Vansickel. “It’s becoming
clear that tax directors aren’t simply tax technocrats.”
This shift, Vansickel continues, is due at least in part to
heightened accounting standards and more intense
regulatory scrutiny: “I think that Sarbanes-Oxley and
the level of detail that’s now required in tax accounting is
going to force CFOs and CEOs to see that the tax director
or the VP of tax has a great deal of valuable knowledge—
information about the organization and insight into how
business issues have to be approached from a tax
perspective.”
Although he notes that the tax function’s profile has been
raised by regulatory shifts in the last few years, Vansickel
emphasizes the importance of leadership in the tax
function. A willingness to take the lead on important
management initiatives and adopt a proactive stance
with respectto business issues is, he suggests, as
important to raising tax’s profile as external forces such
as the heightened regulatory environment. And with the
tax function’s higher profile come opportunities to build
strong relationships between the tax function and other
critical business constituencies—between the tax
function and the C-suite, other functional areas in finance,
business unit heads, and even the board of directors.
The heightened regulatory environment has, for example,
contributed to greater collaboration between the tax function
and the audit committee at many companies, Vansickel notes.
“With Sarbanes-Oxley, the audit committee has become very,
very attuned to the tax department, especially with evaluating
risk,” said Vansickel. “There’s more interaction at the
audit-committee level, which means that the CFO and the
CEO need to know more—so that heightened their level of
scrutiny.” This dynamic, he notes, has begun to elevate
corporate tax functions to the highest levels of management.
“In the last several months, I’ve worked with the VP of
finance and the CFO on all major transactions,” says
Vansickel. “I have a seat at the table because they see
that I’m asking questions that need to be asked. Before
we do a transaction, we need to understand the tax
implications—the GAAP accounting changes, the after-
tax cash flow, and so forth. The tax function needs to
work with the controller and with VPs of finance to work
through these issues—to be at their level and
understand what they do and what they need.”
Vertis Communications:The tax function asbusiness partner
These results suggest that there is an opportunity for
many companies to realize substantial business bene-
fits by setting the conditions for the tax function to act
as a true partner in the business. (See sidebar, “Vertis
Communications: The tax function as business
partner,” below.)
When asked to assess their companies’ processes for
managing and complying with assorted tax regimes,
respondents were mostly likely to say their processes
for complying with federal income taxes, payroll and
benefits taxes, and state income and franchise taxes
were “excellent.” See Figure 4. But processes for
compliance with sales and use taxes, foreign tax
regimes, and excise tax ranked far behind.
Why this difference? The executives we interviewed
cited the prominence of federal enforcement efforts—
and the high stakes of non-compliance with U.S.
income tax regulations. “Federal tax is always a prior-
ity,” says Charles Gilstrap, tax director at manufacturing
company Dresser, Inc. “It’s more complex, and there
are larger dollar amounts involved—and the possible
exposure if a company is not fully in compliance is
much higher there. Other areas such as sales and use
tax are certainly important, but they often take a back
seat to federal income tax at many companies.” All the
executives we spoke with emphasized the importance
of fully complying with all applicable tax regulatory
regimes. Some of those regimes, they noted, command
more time and attention due to the nature of a
company’s business—the number of state and local
taxing jurisdictions in which a company operates, the
composition of its customer base, and so on. But as
regulatory and investor scrutiny intensify, it may well
become necessary for companies to devote as much
time and attention to areas that have historically
featured less prominently—such as sales and use tax or
foreign tax—as they currently devote to federal income
tax matters.
Performance perception gap between
tax executives and their peers in
finance
A comparison between tax executives’ evaluation of tax
function performance and that of their finance peers
reveals a substantial difference in their perceptions.
Nearly across the board, tax respondents are more
likely to say that their tax departments are performing
well than their colleagues in other functional areas
in finance. The distinction is particularly evident,
however, when respondents assessed the tax function’s
performance in business decision support, regulatory
compliance, and risk management matters. See Figure 5.
7
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Companies are most confident in their compliance processes for federal income tax.
How would you characterize your company’s processes for managing and complying with each of the following items?
0 20 40 60 80 100
Excellent Unsatisfactory Satisfactory
Excise tax
Foreign tax
Sales and use taxes
Non-routine tax events (i.e., major transactions, earnings repatriation, etc.)
Real and tangible personal property taxes
State income and franchise taxes
Payroll and benefits taxes
Federal income taxes
(Percentage of respondents)
FFiigguurree 44..
Nearly across the board, tax respondents have a more positive view of tax function performance than their peers in finance.
In your opinion, does your company’s tax function perform the following activities well, or is there room for improvement in its performance? (Percentage of respondents saying the tax function is “performing well”)
0 20 40 60 80 100Finance Tax
Advising business management on tax implicationsof day-to-day business decisions
Participating in deal structuringfor major transactions
Complying with non-income tax regulations
Managing exposure to businessrisk associated with tax
Actively seeking opportunities for tax reduction
Contributing to non-tax regulatory complianceefforts (e.g., Section 404 of the Sarbanes-Oxley Act)
Complying with income tax regulations
Responding to tax-authority challenges tothe company’s tax position(s)
FFiigguurree 55..
Why this gap in perception? Because tax executives are
closer to the activities of the tax function, it would be
entirely reasonable to attribute the difference in
performance assessments to differences in knowledge
and access between the two groups. The possibility that
tax respondents have different standards from their
finance colleagues for what constitutes good
performance in decision support, compliance, and risk
management should not be overlooked, however. These
results indicate that tax executives—pressed for time,
short of resources, and responding to substantial
changes in the regulatory and business environment—
believe they are exceeding expectations. Survey results
tend to show that their colleagues in finance, however,
would benefit from more support from tax in decision
making, regulatory compliance, and business risk
management—areas traditionally viewed as outside of
tax’s purview. So, no matter what the source of the
perception gap, these results point to an area where
further discussion and increased collaboration between
tax and finance executives may yield substantial benefit.
Increased communication, say the executives we
interviewed, should be an important element of such an
effort. “We’ve been on a communication campaign
for a few years now, to raise the awareness of various
parts of the business as to the kinds of thing they could
do that would impact tax considerations,” says Kathleen
Allen, CFO of biopharmaceutical manufacturer
Millipore. “Our vice president of tax, Paul O’Connor, and
his team have proactively gone out to spend time with
senior business leaders in the company—with leaders
in manufacturing, with our R&D organization—to
educate them on how the things they do affect the tax
accounting in the organization,” Allen continues. “It’s
very healthy for them to be sensitized to the possible tax
impact of their decisions. We always want to make
business decisions for the right business reasons, but
we need to think about the financial impact of
decisions holistically—including the tax ramifications
of those decisions.”
The perception gap between tax executives and their
colleagues in finance especially pronounced when
respondents are asked to assess the impact of the most
important regulatory and market developments of the
last three years on the day-to-day activities of the tax
function. More than half of all tax respondents said that
the Sarbanes-Oxley Act had greatly impacted their
company’s tax department over the last two years. A
majority of tax respondents also said that time, budget, or
resource constraints had had a great impact on the tax
function over the last two years. Rounding out tax
respondents’ top three concerns, 30 percent of tax
respondents cited increased overseas business activities
as having a great impact—and more than a quarter of tax
executives said increased investor scrutiny had greatly
impacted their tax departments over the last two years. In
general, tax respondents indicated that broad business and
regulatory developments had affected the tax function
even more than the tax-specific developments of the last
few years, including very prominent changes such as more
aggressive enforcement of rules and regulations by taxing
authorities. See Figure 6. Their finance colleagues,
however, hold very different views on the subject.
Respondents from other functional areas in finance
perceived the tax function as relatively unaffected by
recent developments like Sarbanes-Oxley, increased
investor scrutiny of financial reporting, and changes in
their companies’ overall risk profile. Nearly half of all
finance respondents from outside the tax function said
that Sarbanes-Oxley had had “little or no impact” on
the tax function over the last two years. Fifty-five
percent of finance respondents said increased investor
scrutiny of financial reporting had had little or no
impact on the tax function, and fifty-four percent of
finance respondents said increased overseas business
activities had had little or no impact.
8 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Survey results tend to show that the tax function’s colleagues in
finance would benefit from more support from tax in decision
making, regulatory compliance, and business risk management—
areas traditionally viewed as outside of tax’s purview.
These results reveal a critical point of difference
between the actual experience of corporate tax
directors and the perceptions of their colleagues
elsewhere in finance. A variety of forces both within tax
and in the larger business and regulatory world have
affected the tax personnel much more than many of
their peers in finance appear to realize. Tax must adapt
to these changes and address a broad array of new
challenges. But the lack of awareness within the larger
finance community of the many pressures on the tax
function point toward a question: Will tax have
adequate support for its efforts?
9
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Tax executives and their counterparts in finance assess the impact of broad regulatory and business developments on the tax function very differently.
In your opinion, how much have the following items affected the day-to-day activities of your company’s tax department over the last two (2) years? (Percentage of respondents saying “great impact”)
0 10 20 30 40 50 60Finance Tax
Change in the company’s overall risk profile
More aggressive enforcement of rules andregulations from taxing authorities
Rules and standards limiting taxguidance from external auditors
Increased investor scrutiny of financial reporting
Increased overseas business activities
Time, budget, or resource constraints
Sarbanes-Oxley Act+ 34% points
+ 25% points
+ 17% points
FFiigguurree 66..
The Path Forward
External business forces and regulatory changes are
pressing the tax function to stretch beyond its traditional
bounds to participate in broad business management and
risk management initiatives. The results of this research
program indicate that many tax executives are already
moving beyond their traditional roles. But survey
responses also show that, as the tax function is called to
aid or drive decisions that extend outside its closely
circumscribed, traditional tax compliance activities, its
own assessment of its performance tends to decline.
Recent developments in the regulatory and business
environment have presented an opportunity for the tax
function to take on a more wide-ranging role in broader,
less-structured management efforts. As we shall see,
survey results show that tax is aware of the opportunity—
and even the necessity—for change. But given the wide
gap between tax and their finance colleagues’ perceptions
of the tax function, its performance, and its current state
of flux, are companies setting the conditions for the tax
function make an successful transition?
The tax function agendaWhen asked to rate the tax function’s priorities among
several broad business initiatives, we found that tax
respondents were keenly interested in risk management
activities. Indeed, tax executives’ highest priorities were
preventing public restatement of earnings projections
and financial statements, and, more generally, protecting
the company’s reputation. See Figure 7.
These results may, at first glance, seem unremarkable
given the current regulatory and business climate. But
tax executives ranked risk management priorities well
ahead of managing the company’s effective tax and
cash tax rates—even though the effective tax rate and
cash tax rate are often considered key indicators
of the tax function’s overall performance, and an
important component of many tax directors’ incentive
compensation calculations. Eighty-one percent of tax
respondents said preventing public restatement is a
high priority, and an equal number of respondents said
protecting the company’s reputation is a high priority.
But only fifty-nine percent of tax respondents said that
managing the effective or cash tax rate is a high
priority. These results confirm that the tax function
and its agenda are in a state of transition.
What is the nature of that transition? Few would
dispute that the tax function acts as the steward
of tax controls and compliance within the company.
Tax planning—including decision support, deal
structuring, and the search for both short-term and
permanent tax savings—is also an important part of
the tax agenda. Forty-three percent of respondents to
our survey said, for example, that contributing to
business decision making is a high priority; 46 percent
assessed management reporting for internal decision
making as a high priority. Tax respondents’ intense
interest in risk management priorities, however,
indicates that tax is poised to take on a broader role
within the company—if it hasn’t already. Indeed,
survey responses, taken as a whole, show that tax is
10 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Risk management initiatives are among the tax function’s highest priorities.
In your opinion, how high a priority are the following activities within the tax function at your company? (Percentage of tax respondents)
0 20 40 60 80 100Low priorityMid-level priorityHigh priority
Contributing to a company-widerisk management effort
Contributing to business decision making
Providing useful tax estimates to companymanagement for internal decision making
Complying with non-income tax regulations(e.g., Sarbanes-Oxley)
Managing effective tax rate and/or cash tax rate
Preventing public restatement of earningsprojection and/or financial statements
Protecting the company’s reputation
FFiigguurree 77..
firing on all cylinders in almost all categories; from the
point of view of tax executives, it seems that there are
no low priorities within the tax function. But when we
queried executives from other areas in finance on tax's
priorities, a different perspective emerged.
Nearly across the board, there were striking differences
in the assessment of broad priorities in tax between tax
executives and their colleagues in finance. The gap was
widest, however, when respondents addressed priorities
like preventing public restatement, non-tax compliance,
and protecting the company’s reputation. Only
48 percent of executives from other functional areas in
finance said that preventing public restatement of
earnings projections or financial statements was a high
priority for tax at their companies—as compared with
81 percent of tax respondents. While 81 percent of tax
respondents also said that protecting the company’s
reputation was a high priority in the tax function, only
64 percent of their counterparts in finance said the
same. And while a clear majority of tax respondents—
56 percent—said complying with non-tax regulations
like Sarbanes Oxley was a high priority for the tax
function, only 25 percent of their finance counterparts
believed non-tax compliance to be a high priority for
tax. See Figure 8.
These results suggest that, broadly speaking, the
tax function’s current agenda may not be widely
understood within the larger finance function. Tax
executives indicate that risk management and financial
reporting and compliance have been layered on top of
the tax department’s traditional duties, including tax
compliance, planning, and decision and transaction
support. And, it seems, tax executives feel the pressure
of this newly expanded agenda much more keenly than
many of their colleagues in finance realize.
Responding to this expanded agenda will require a
commitment of time and resources, executives note.
“Minimizing the level of taxation within the law, doing
all the necessary tax planning attendant with that
effort, and making sure you’re in an environment of
acceptable tax risk—those are some of the key drivers
for new initiatives in tax,” says Manitowoc CFO, Carl
Laurino. “The single biggest driver of risk in the tax
area is, without question, growth in the organization,”
Laurino continues. “As a company grows, it obviously
becomes much more complex from a taxation
standpoint—and opportunities change as you bring on
new businesses in different geographies. The resources
devoted to tax need to be appropriate for the size of the
organization, and that resource issue should be
constantly reviewed as the organization changes. If
you’re not sizing the organization and the resources
you bring into it appropriately, you won’t be able to
take full advantage of opportunities to enhance
shareholder value by minimizing tax payments within
the bounds of the law.”
11
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Risk management initiatives are among tax executives’ highest priorities. But their colleagues in finance underestimate the urgency with which tax is pursuing its agenda.
In your opinion, how high a priority are the following activities within the tax function at your company? (Percentage of respondents saying “high priority”)
0 20 40 60 80 100Finance Tax
Contributing to a company-wide riskmanagement effort
Contributing to business decision making
Providing useful tax estimates to companymanagementfor internal decision making
Complying with non-income tax regulations(e.g., Sarbanes-Oxley)
Managing effective tax rate and/or cash tax rate
Preventing public restatement of earningsprojections and/or financial statements
Protecting the company’s reputation+ 17% points
+ 33% points
+ 30% points
FFiigguurree 88..
Pursuing the new tax agenda—
improving management of people,
processes, and technologyTo learn more about how the tax function proposes
to realize its broader objectives, we queried executives on
their priorities among a wide array of people, process,
and technology improvement initiatives. As companies
assess the strengths and weaknesses of their tax
function—and as tax takes on a more expansive role
within the business—the results of the survey shed light
on how the tax function will choose among many
competing tax initiatives over the next two years.
Tax’s highest-priority initiatives focus on process
improvement and technology upgrades. Tax respondents
were most likely to cite process improvement for income
tax accounting and tax contingencies as a high priority;
nearly three-quarters of tax respondents listed this as a
high-priority initiative. Tax executives also showed a clear
interest in improving the quality of the information used
for tax purposes; half of tax respondents labeled
adopting new technology to improve information quality
as a high priority, and 41 percent of tax respondents said
that implementing new processes to improve the quality
of financial information used for tax purposes was a high
priority within tax. Nearly half of tax executives—
47 percent—said improving processes for routine tax
activities such as tax returns, routine filings, and
payments to taxing authorities was a high priority.
Despite a number of high-profile reports in the business
media of a shortage of qualified tax professionals,
improving talent management ranked lower on tax
executives’ list of improvement priorities. See Figure 9.
While it may seem difficult at first glance to reconcile tax
executives’ priorities for improvement—which seem, in
general, to be tightly focused on improving core tax
compliance activities—with the expanded agenda they
identify for themselves, close observation shows that
tax’s improvement priorities in fact track very closely
onto the tax function’s broader, more risk-sensitive
agenda. Process improvements for tax accounting and
contingencies, as well as information-improvement
initiatives, are direct responses to heightened accounting
standards—which require more accurate information
to support certain tax positions and more detailed
accounting treatment for tax matters—and to the
Sarbanes Oxley regime, which requires tax accounting
processes to be thoroughly documented. But a
comparison of tax executives’ views on the highest-
priority initiatives within tax with the views of their
finance counterparts reveal another wide gap in
perception between the two groups.
12 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Process improvement for core tax activities and technology upgrades are tax executives’ highest-priority initiatives over the next two years.
Looking forward over the next two years, how would you rate the following initiatives within the tax function? (Percentage of tax respondents saying “high priority”)
0 10 20 30 40 50 60 70 80
Revising variable compensationplans for tax professionals
Improving processes for responding to taxingauthority requests and challenges
Collaborating more closely with other functionalareas in finance (e.g., internal audit)
Improving processes for non-routine tax activities(i.e., major acquisition or divestiture, repatriation
of earnings, etc.)
Improving talent management for taxprofessionals (i.e., recruiting, training, etc.)
Documenting and/or remediating tax accountingprocesses in order to comply with Sarbanes-Oxley
Implementing new processes toimprove the quality of financial information
used for tax compliance and analysis
Improving processes for routine tax activities(i.e., tax returns, regular filings and
payments to taxing authorities, etc.)
Adopting new technology to improve the quality(i.e., accuracy, reliability, and timeliness) of financial
information used for tax compliance and analysis
Improving processes for income taxaccounting and for tax contingencies
FFiigguurree 99..
Again, nearly across the board, tax executives identify
more urgent priorities within the tax function than
their colleagues in finance. The difference in the level of
priority assigned to tax executives’ highest priorities
is striking: 74 percent of tax respondents said that
improving processes for tax accounting and
contingencies is a high priority within tax—but only
26 percent of their finance counterparts said the same.
Half of all tax respondents said that adopting new
technology to improve the quality of information used for
tax purposes is a high priority; only 25 percent of their
finance colleagues said the same. And, while 47 percent of
tax respondents said improving processes for routine tax
activities is a high priority, only 24 percent of respondents
from other finance areas agreed. See Figure 10.
The differences between tax executives and their finance
colleagues are not limited, however, to process and
information technology improvement initiatives. There
are also sharp differences in the two groups’ assessment
of “people management” priorities. Tax executives, for
example, are much more interested in collaborating more
closely with other functional areas in finance than their
finance peers seem to realize. This openness may point
the way to a more collaborative approach between tax
executives and their finance colleagues as they take on
challenging improvement initiatives.
Conversations with tax and finance executives suggested
that personnel management and risk management often
go hand-in-hand. Tax personnel skilled in a variety of tax
specialties—and able to grasp the broad business implica-
tions of tax decisions—are an important part of tax risk
management efforts. “Tax is one of the areas that has—
from a talent perspective—definitely been impacted of the
new regulatory environment. Our goal, of course, is to
hire the best talent we can, and these people are in increas-
ing demand,” says Millipore CFO Allen. “People who
understand this very complex area and all the regulatory
forces at play between the various tax jurisdictions, U.S.
GAAP accounting, Sarbanes-Oxley internal control con-
siderations, and so on are very valuable resources, and
they’re getting increasinglycompetitive in the marketplace.”
Risk analysis led Manitowoc to make changes in
governance and in resource allocation, says CFO
Laurino. “Our tax people went through a risk analysis,
and some of the changes we’ve made—such as including
our director of tax on the audit committee—were
actually not specifically requested by the audit chair
until he became part of the tax risk process.” Manitowoc,
Laurino noted, has also made a significant resource
commitment to tax in recent years, adding specialized
tax staff including a head of global taxation and a
specialist in transfer pricing. “I think all of this is an
evolution reflecting not only changes in our organization
and the need to make sure we’re changing with the
organization, but also our need to make sure we’re not
leaving opportunities on the table or creating more risk
for the organization from a tax standpoint,” he says.
13
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Tax executives and their counterparts in finance assess tax improvement initiatives very differently.
Looking forward over the next two years, how would you rate the following initiativeswithin the tax function? (Percentage of tax respondents)
0 10 20 30 40 50 60 70 80Finance Tax
Revising variable compensationplans for tax professionals
Improving processes for responding to taxingauthority requests and challenges
Collaborating more closely with other functionalareas in finance (e.g., internal audit)
Improving processes for non-routine tax activities(i.e., major acquisition or divestiture, repatriation
of earnings, etc.)
Improving talent management for taxprofessionals (i.e., recruiting, training, etc.)
Documenting and/or remediating tax accountingprocesses in order to comply with Sarbanes-Oxley
Implementing new processes toimprove the quality of financial information
used for tax compliance and analysis
Improving processes for routine tax activities(i.e., tax returns, regular filings and
payments to taxing authorities, etc.)
Adopting new technology to improve the quality(i.e., accuracy, reliability, and timeliness) of financial
information used for tax compliance and analysis
Improving processes for income taxaccounting and for tax contingencies
+ 48% points
+ 25% points
+ 23% points
FFiigguurree 1100..
Obstacles to changeWhat challenges does the tax function face as it
pursues a new and expanded agenda? We asked
survey respondents to identify barriers to changing
the tax function at their companies, and we found,
unsurprisingly, that time, budget, and resource
constraints rank high on tax executives’ list of
obstacles. Three quarters of tax respondents said that
time, budget, or resource constraints stand in the way
of change in their tax functions. A majority of the tax
executives we surveyed said that the tax function’s lack
of stature or influence poses a barrier—and more than
half of tax respondents said that difficulty recruiting
and retaining qualified tax personnel is an obstacle to
change. See Figure 11.
Tax respondents experience these barriers more
acutely than their finance colleagues; they are more
likely, across the board, to affirm that resource
scarcity, the tax function’s lack of stature or influence,
and recruiting and retention difficulties pose
significant obstacles. Most notable is the gap in
perception regarding tax’s stature or influence within
the company: 54 percent of tax respondents said that
the tax function’s lack of stature or influence in their
companies is a barrier to change. Only 35 percent of
their colleagues in finance perceived tax’s lack of
stature or influence as a barrier. See Figure 12. In a
separate question, 77 percent of tax respondents said
that their company’s most senior tax executive should
report directly to the CFO—but only 66 percent of
their finance counterparts agreed. These results tend
to show that tax executives are dissatisfied with
the perception of tax as less central to business
performance than other finance activities—and a
reporting structure in which the most senior tax
executive reports directly to the chief of the finance
function may well symbolize tax’s desire to move even
closer to the very center of the business.
14 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
Resource scarcity tops tax respondents’ list of obstacles to change.
Looking forward over the next two years, how would you rate the following initiatives within the tax function? (Percentage of tax respondents saying “yes”)
0 10 20 30 40 50 60 70 80
Desire to keep the tax function separatefrom the rest of the business
Lack of communication between tax andother functional areas in the business
Difficulty recruiting/retaining qualified tax personnel
Lack of stature/influence of the tax function
Time budget or resource constraints
FFiigguurree 1111..
Tax respondents experience barriers more acutely than their finance peers.
Do you perceive the following items as barriers to changing your company's tax function?(Percentage of respondents saying “yes”)
0 10 20 30 40 50 60 70 80Finance Tax
Desire to keep the tax function separatefrom the rest of the business
Lack of communication between tax andother functional areas in the business
Difficulty recruiting/retaining qualified tax personnel
Lack of stature/influence of the tax function
Time budget or resource constraints
FFiigguurree 1122..
A comparison of tax executives’ responses with those of
their peers in finance indicates that many representatives
from both groups agree that a lack of communication
between tax and other functional areas in the business
poses a barrier to change. This result tends to affirm
the notion that companies would realize substantial
business benefits if communication and collaboration
between tax and other parts of the business were
encouraged—if tax, in other words, were drawn closer
to the center of business activity.
The tax and finance executives we interviewed for this
report echo survey respondents’ concerns with respect
to obstacles to change in the tax function. “We’re
working to become even more efficient, and we’re
continuing to try to cut back on the manual component
of what happens in the tax area,” says Manitowoc’s
Laurino. “You have to think not only of what’s
appropriate for the organization at that time, but what
resources you can put into place that will fit what you
need today, that will also be beneficial to you as the
organization continues to change. That takes a little
more up-front time and planning, so that’s one
constraint. There’s often some inertia that also needs
to be overcome, but that’s natural—certainly it’s
something we work through, but it always needs to be
managed.” And, as Dresser CFO Bob Woltil points out,
it can also be fruitful to think of obstacles as challenges:
“There are a lot of competing priorities and competition
for resources, just because there’s a lot going on and
everybody is busy. We don’t think of this as a barrier;
we think of it as a series of challenges in keeping
everybody moving in the same direction and on the
same set of priorities.”
15
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Conclusion
The tax function at U.S. companies has been buffeted
by a series of difficult challenges in recent years. The
combination of new regulatory scrutiny, more intense
enforcement from taxing authorities, and increasingly
complex business operations have all brought new
light and new oversight to the corporate tax function.
Pressure from taxing authorities, regulatory regimens,
accounting bodies, and external auditors has made
the core work of the tax function—balancing tax
compliance, planning, and risk management activities
—even more difficult in recent years, according to this
research program among senior tax and finance
executives at U.S. companies.
The good news, say survey respondents, is that the tax
function is performing its core tax compliance activities
effectively. And while finance and tax executives say
the tax function’s performance erodes somewhat when
tax professionals are called upon to contribute to more
general business decisions, this research identifies a
path to improved performance.
Study participants say their tax teams devote the vast
majority of their time and attention to complying with
tax regulations—completing tax returns and interacting
with taxing authorities—and to tax record keeping and
accounting. As members of the broader finance
function, tax executives are often called on to render
opinions on day-to-day operating decisions, to
participate in major transactions, and to help make
decisions to manage and mitigate business risk. It is in
these unstructured, ad hoc business partnership
activities, study respondents say, that the tax function
will likely find the most room for improvement.
It may well be that performing these unstructured
activities is fundamentally more difficult than carrying
out well-honed, well-documented processes such
as corporate tax return preparation. Indeed, the
requirements and deadlines involved with advising on
transaction structures or on operating decisions from
a tax point of view are quite different from those of
tax returns, audit responses, and so on. But the tax
function—particularly in today’s regulatory and
business environment—will be called upon to handle
all of these types of activities, and many more.
How will the tax function respond to these challenges?
Participants in this study agree that information
sharing between tax and other functional areas in
finance—and also between tax and broader business
constituencies including the C-suite, business unit
heads, and the board of directors—is critical to striking
the optimal balance between tax compliance, planning,
and risk management. But survey results show that tax
executives and their peers in finance have very
different perceptions of the tax function’s agenda,
priorities, and challenges. This marked gap in
perception between the two groups strongly points to
a strategy for improvement based on closer
collaboration between the finance and tax functions.
The difficult part, of course, is how to cultivate this
closer collaboration. This research program suggests
that the right combination of governance of the tax
function, effective talent management, and resource
commitments commensurate with a high performance
tax function will yield business benefits. Proper
governance, interview program participants note, is
less an aspiration than a necessity in light of
recent regulatory shifts. Taking an additional
governance step, however, by formalizing the tax
function’s relationship with the audit committee is one
way to encourage communication, enhance planning,
and reduce risk, according to participants in the
interview program. Recruiting and fostering tax
personnel with sophisticated tax technical skills—and
a broad perspective on business issues—is also high on
the tax function agenda. But most critical to meeting
companies’ tax challenges in coming years, say
interview program participants, is committing the
required resources—that is, the necessary time,
attention, and budget—to this effort as companies
grow, change, and respond to new business challenges.
16 Building a More Effective Tax Function
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
In the current business environment, closer integration
between the tax and finance functions is more critical
than ever before. As a result, companies that synchronize
the two functions will reap significant benefits in both
areas. From the finance perspective, closer alignment will
result in better information for capital markets and other
users of the company's financial statements. From the tax
perspective, it will result in enhanced tax reporting and
compliance, as well as improved management of tax risk.
Overall, collaboration will result in more effective
financial disclosure, financial reporting, budgeting and
forecasting, and will provide companies with an effective
comprehensive risk strategy.
Historically, tax and finance have operated independently;
however, a myriad of nascent factors now point to the
need for change. Among these factors are a major shift in
the role of the tax function, changes in the regulatory
environment, increased investor scrutiny, heightened tax
compliance enforcement, evolving interpretations of tax
and accounting issues, and the growing complexity and
speed of business.
During the past several decades, there has been a
paradigm shift in the way the tax function operates. Up
until the 1980s, tax's focus was on cost efficiency and
minimization. Its responsibility has since evolved to
driving shareholder value, increasing ROI and reducing
taxes in the 1990s; to proactively managing risk posed by
external drivers such as the Sarbanes-Oxley Act today.
Because of this shift, tax must be more engaged, proactive
and nimble than in the past. It must be involved at the
front end of business and financial decisions and have an
obvious presence throughout the entire organization.
This isn't optional; it is a necessity. Organizations that
don't migrate the tax function to a more proactive and
holistic approach will carry significantly more tax risk.
Tax must be more "finance-centric," and similarly finance
must be more "tax-centric."
Our study suggests, however, that collaboration is
hindered by a large disparity between the way tax
professionals and finance professionals view the
priorities and challenges facing the tax function. The
study shows, for example, that tax executives and
finance executives have different perceptions about the
impact of recent regulatory and market developments
on the day-to-day activities of the tax function. For
instance, more than half of tax respondents said that
Sarbanes-Oxley had greatly impacted their company's
tax department over the last two years, compared to
only 21 percent of finance respondents.
While companies may recognize the importance of
alignment between tax and finance, it will not happen
automatically. For alignment to occur, senior managers
and boards of directors must communicate to both
functions that better coordination between them is
critical.
Equally important, tax must be made aware of the
company's overall risk strategy and tolerance. Risk
policy guides complex business decisions, including
how tax is evaluated for financial reporting and
disclosure. Without a coordinated risk strategy, both
tax and senior management might take actions that
could negatively impact the other.
In addition to aligning the risk policy throughout the
company, minimizing tax risk also requires developing
and documenting internal controls to ensure that
processes related to the integration of finance and tax
are carefully followed. Those processes and controls
should include a formal communication system that
spells out what information each function requires
from the other and how it should be presented.
Ultimately, the goal is for each function to provide the
other with complete, pertinent and high quality data.
17
© 2006 CFO PUBLISHING CORP. OCTOBER 2006
Sponsor’s Perspective
New rules issued by the Financial Accounting Standards
Board offer an excellent example of why tax and finance
must be better integrated. Final Interpretation Number
48, Accounting for Uncertainty in Income Taxes (FIN
48), represents a sweeping change in the accounting and
reporting model for income taxes. It lays out detailed
rules that standardize how income taxes must be
disclosed in company financial statements. The rules
also will affect reporting of key financial measures,
budgeting, and how companies communicate with
financial markets. For the tax function to meet the
demands of FIN 48, it has to rely on finance for
information. Similarly, finance needs information from
tax to produce more accurate financial statements. The
functions will need to be more interdependent and
proactive to achieve high quality results.
Creating bridges between tax and finance will require
both functions to do things differently. External help is
available to integrate the activities of the two areas or to
conduct finance and tax activities during the process.
Organizations such as Hudson Financial Solutions that
offer tax risk management and tax advisory services can
help companies make a smoother transition to a more
coordinated model.
18 Sponsor’s Perspective
OCTOBER 2006 © 2006 CFO PUBLISHING CORP.
For additional information on Hudson Financial Solutions,
contact Andrea Gronenthal at [email protected]
or 312-416-8663.