TEI Roundtable No. 9: Technology Standards & the Tax Function
Hosting issues, cloud-based data aggregation, and cybersecurity protection — mixed in with corporate tax requirements — are among the key concerns.

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Kelly Necessary | Stephen McGerty | Luis PerezAs technology standards continue to change, so do their impact on the tax function and corporate tax professionals. Tax Executive convened a roundtable to discuss the burgeoning relationship among technology standards, tax requirements, and the changing dynamics of tax professionals. Kelly Necessary, senior director of tax at Time Warner Cable; Stephen McGerty, head of ONESOURCE Firm Edition at Thomson Reuters; and Luis Perez, senior manager of global tax automation and operations at Dell, participated in the discussion. Roundtable No. 9 was moderated by Tax Executive Senior Editor Michael Levin-Epstein.

Michael Levin-Epstein: What are the technology standards that impact the tax function?

Stephen McGerty: You’re likely to encounter a variety of technology standards from one organization to the next. Working at Thomson Reuters has given me the opportunity to help many companies with their direct income tax challenges, mostly through implementing ONESOURCE. You can categorize these standards into different levels. At the lowest level, you’re concerned with where your tax technology solutions reside. Most ONESOURCE solutions are hosted in the cloud. Your IT groups are going to be concerned about the security of any cloud-based solution. So, like many vendors, Thomson Reuters puts in place sensible, modern protection mechanisms around the data and the servers that make up our cloud offerings.

As part of that process, we also have independent audits of that security, and these audit results are provided on request to our customers. If you’re caught between wanting the convenience of a cloud-based software solution and your IT group’s concerns about data security, these audits are often what’s needed. In the circumstance where people are putting software on servers in their own environment, as opposed to the cloud, there tend to be a different set of standards to comply with, often focused on how the software is installed and maintained, as well as how it is administered.

At the higher levels, there are often standards around what software is preferred and how it should integrate with existing software in the organization. You’ll often have situations where there is a preferred vendor for a certain type of solution because companies are looking to standardize the way they do things. There is often a desire to buy a software suite from one vendor to avoid challenges of integrating solutions from a variety of vendors. You may encounter a desire to use a specific piece of software for a particular function across the organization, common examples being document management and workflow. The noble goal of a standard is to ensure consistency, but sometimes individual standards don’t work too well for tax departments, given the particular challenges they face.

Kelly Necessary: I think of two items: one which leverages what Stephen said, and the other around hosting rules. We have a standard acceptable-use policy for technologies that impact tax in our use to house sensitive, private, confidential, or restricted information, whether company or customer data. As I perform my duties in income tax, we often use potentially sensitive information, whether it be for tax reporting, in preparation of some of our credits and incentives, or even in defense of our tax returns when we’re dealing with the audit authorities. We have a cyber risk team that monitors our use of tax databases to store this type of company or customer information needed for tax. In particular, beware of restrictions for use of certain third-party, cloud-based databases. We often speak to our technology department about the possibility of company-
owned cloud-based technology solutions, given restrictions that may impact us if we try to use a third-party-vendor, cloud-based solution. In fact, our accounts payable department often monitors the invoices coming in and will question anything that looks like it’s generated from a third-party database vendor. This policy can impact our access to information and the ability for us to use it and/or to timely import it into our tax system.

The second technology standard impacting our tax function concerns the hosting of tax software. Any tax process that ties closely to our critical company processes or customer data must be hosted in-house on our server. This is troublesome for some areas of tax, such as sales tax, given the magnitude of taxes and fees on our customer bills. We needed a tax system in order to assist us in making the appropriate tax determinations for the offerings to our customers, and we were required to build a custom solution hosted and owned by us. Alternatively, as Stephen alluded to, in an area like tax provision, where we use the ONESOURCE tax provision software, there is no option to host the system on our company server. In this instance, we had to work with our technology group to implement additional controls and Sarbanes-Oxley (SOX) testing around the system, in order to confirm to our technology group that the system is sufficient to sustain confidentiality and adheres to all of our technology standards.

Luis Perez: There generally are a set of standards that IT is working from, for example, trying to leverage enterprise resource planning (ERP) as much as possible in tax or finance and avoiding additional costs, licenses, or what they consider customizations. There are projects where one would need to evaluate whether it is the best fit for the tax department and the company is best-served, long term, by enabling it in the ERP itself from a compliance perspective. Either there are instances related to differences in the functionality of the solutions in consideration, or, more importantly, where third-party tax technology solutions provide functionality beyond the ERP, with additional benefits due to included research and content. Just the ability to maintain, upgrade, or incorporate future legislative changes is a point worthy of evaluation in its own right; not “bolting it on” to the ERP, but instead leveraging the cloud, has inherent benefits to the business, particularly when we expect future changes. Traditionally the expectation was that most data would stay in-house, close to the ERP, but we face demands to transfer the data outside the company, either to the government or for consulting purposes, a co-sourcing agreement, or because new options are now cloud-based by vendors. Those solutions in the ERP are not something that is going to be manageable or maintainable in the long term necessarily every time. In these projects, we see a constant back-and-forth of ideas, with what they deem to be a standard solution from an IT or finance perspective versus particular tax technology needs you have that perhaps the entire project team is not up to date on, that perhaps were not part of those standards they’re working from to start. It’s going to be a constant challenge, or a constant education, to put it another way, that you’re going to need to go through in trying to get those standards to account for whatever tax needs you are trying to address due to compliance or tax-technical functionality that’s not fully accounted for in the ERP, the standard.

Collaborative Effort

Levin-Epstein: When you’re trying to resolve issues that impact the tax function, and you’re working with your vendor and your IT department, is the best approach to try to get a collaborative team together to deal with it?

“What I’ve observed as a vendor implementing tax software is that the tax department is often unfamiliar with the technology standards, largely because they just haven’t come across them before.”
—Stephen McGerty

Necessary: We spend a fair amount of time documenting and maintaining our control environment in order to obtain technology group buy-in of our tax systems. Under company policy, we are not allowed to transfer the required controls to a third-party vendor. In other words, we can’t rely on a vendor to maintain the security and SOX controls that we are responsible for internally. This could involve our reviews of the third party’s SOX reports. For example, Thomson Reuters might get a third-party report on the controls of its system. We are required to do an independent review of that study to apply our company SOX standards, to ensure that whatever information and data that is being relied on or used in the third-party vendor’s system, we can rely on based on our controls. Once we perform that task—and it does take a fair amount of work at the onset, and it’s also an annual re-look every time our vendor gets a new SOX report—we report the findings and recommendations to our technology group. With this information, they can be comfortable knowing that the nonhosted system controls are as adequate as our internal controls. While arduous, this work performed by tax tends to provide us a lot more flexibility when working with the technology group to obtain approval to use third-party, nonhosted systems.

Second, Time Warner Cable technology standards include a robust project management process for large capital projects. So if tax undertakes a large capital-intensive software implementation to be capitalized on our books, tax integrates directly into that project management team. Tax benefits from this process, as the technology group handles the procurement of our servers, the setup of our servers, plus they make sure we are following all of the implementation testing and controls, and that the information is ultimately secure. We are required to do all of the control testing up front, and the company’s internal audit team provides an internal control report prior to going live. Technology may also assign a project manager to help us throughout the implementation, as some of these can take over a year to implement and is workload in addition to the day-to-day tax responsibilities.

Perez: I guess, on my end, speaking more broadly beyond an individual scenario, yeah, it is always a collaborative effort. At the end of the day, IT needs to provide input because there are “certain technology standards” that we are going to need to adhere to at a minimum, for example, security or in relation to the financial source systems that at the end of the day are the system of record for tax. It is a dual software strategy that you are after. You consider the project team from tax, IT, and other groups, to assess whether they have the right background and experience. There is a risk that if you do not have the people with the right tax technology background, the point of view or the recommendation will be driven off of what the finance standard system of record might be—the ERP—not necessarily a system that’s best at addressing the tax department’s or company’s needs at the end of the day. Again, I say that from a maintenance perspective as well as just the functionality of the tool. There’s a risk that you can get into these discussions back and forth with the team members. Either from a tax point of view or from an IT point of view, both solutions technically address the requirements, just go about it differently, but perhaps they are only the immediate needs. What does that mean for the company going forward, as it’s assured that new unforeseen demands, new legislation not accounted for, then will come up? Ultimately, what is the best for the company in question? It is a collaborative effort, but there definitely needs to be an assessment of the team’s background.

One of the other things we touched on in the panel in D.C. at the Midyear Conference was for executives or leadership in a tax organization to make sure they are getting the individuals engaged on general IT projects within the corporation. Otherwise, the IT standards, as they are the ones that are usually driving these larger projects, may not account for these demands from tax, as many can impact tax.

McGerty: What I’ve observed as a vendor implementing tax software is that the tax department is often unfamiliar with the technology standards, largely because they just haven’t come across them before. When new tax technology solutions are investigated, these standards sometimes become unwelcome issues that tax professionals must cope with. I’ve attended meetings where the tax and technology people are mutually confused and frustrated. In these situations it’s my job, as the software vendor, to be a diplomat between the two disciplines and help broker a sensible outcome. I’ll compliment both Kelly and Luis here—I think they’re both particularly adept at brokering those discussions. It’s a skill set they’ve learned the hard way, and their respective organizations are fortunate to have them!

If you’re faced with setting up such a meeting, I’d encourage appointing someone to be that broker or diplomat—ideally it is someone who is sympathetic to the challenges of both tax and technology. Neither side should overwhelm the other.

I’d also like to reinforce a point Luis made: the tax department should be cautious of acquiescing too quickly without realizing that these standards were probably put in place without much regard to the specific needs of a tax department. You’re balancing between the risk profile of your technology standards and the risk profile of adhering to the tax filing requirements that the various governments and jurisdictions place on a company. Tax often needs a nimbleness that technology standards don’t facilitate.

Necessary: Stephen, you like the word “broker.” I like the word “translator.” The IT and tax languages are definitely two separate and distinct languages that often don’t coordinate efficiently with each other.

McGerty: I’m reminded of the expression, “Men are from Mars and women are from Venus.”

Necessary: Yeah.

Conflict Between Regulatory Requirement and Technology Standard

Levin-Epstein: Could you cite a specific example of where a technology standard might push up against a regulatory requirement?

Perez: I don’t know if I would talk about a specific example, but I would on the theme that we are going to face this more going forward, as governments update legislation and their regulatory requirements to account for technology that didn’t exist before. There is a shift, a transformation, of the laws themselves, of what it means to be in compliance, which in turns means a change in the industry and tools available. And that means more and more things we talk about are going digital. The legislation coming out of more governments is now highly technical in a sense that you need someone with that background to be able to address it. Whatever we are accounting for now is one thing, but there are quite a number of initiatives, from the Organisation for Economic Cooperation and Development (OECD) and base erosion and profit shifting (BEPS), to indirect tax filing and electronic invoicing, or electronic tax and accounting records, that various governments are in different stages of adopting. Whatever standards we have been working from are changing and going digital. There will be a large data and electronic records mandate, leaving the company to meet these new compliance demands. Meaning, governments then create databases. This knowledge is historically kept inside the company. This will shift how we handle audits, how compliance functions, how we work within the corporation, and what type of skills the executives need to have in their tax organization to address them going forward.

Necessary: I am sure as people look at their cable bill, they see a host of taxes and fees line by line. A customer bill in North Carolina is going to look drastically different than a customer bill in New York. It is the tax department’s responsibility to ensure all of the taxes and some of the fees are adequately reflected. The company needs to make sure these items are calculated and presented correctly, as obviously the customer is the most important aspect of our business. However, there is no out-of-the-box tax technology that can handle our industry’s need to compute the different federal, state, and local fees and taxes. As a result, we’ve had to spend a lot of money and time to figure out how to comply. We hired two full-time tax IT professionals who worked directly with our billing system to build a customized company-hosted tax solution. These professionals have spent a majority of their time on the management of these taxes and fees on the customer bills.

Immovable Deadlines

McGerty: The reality in the world of tax is that you’ve got deadlines that are not movable in any way, and you incur fines and penalties when you miss them. Sometimes the deadlines come at inconvenient times. For example, you may not be allowed to install software in the last month of the year because technology teams are afraid of making changes right before the financial close. But yet, you have no choice, because some country or state has issued a new set of rules on what you must deliver to them to be compliant. It may not be the greatest example, but there are circumstances where you have to essentially work around things on the basis that tax deadlines are not movable.

“The IT and tax languages are definitely two separate and distinct languages that often don’t coordinate efficiently with each other.”
—Kelly Necessary

Perez: I think that is a good example, actually. We have a rather global footprint on the indirect tax side, given the number of countries where we’ve implemented a tax determination engine. At any given point in time, we are going to have some legislative changes to account for, and the standard before for a basic rate increase or decrease used to be that it had to go through an IT change management process with no involvement by tax, given it was “hard coded” in the ERP. There is a certain level of control that you design into the process, including testing before making the change. I do not disagree with that, but with the introduction of a business-configurable tax engine that tax could plan and execute on this changed with little disruption to the business or impact to the systems. That’s one example where we essentially stepped in and took over that maintenance of the tax engine and all those updates that go along with it, so that we could assess on our side. Because ultimately, all you are doing is updating the rates in the system with very minimal to no impact, very little risk. Whereas traditional change management standards say that taking action can create a risk, and you must avoid it, when it comes to compliance not taking action and missing a compliance deadline, which is just not an option, creates the risk. It goes to your point—if we need to, at the end of the day, invoice a customer correctly in any of these countries, we need to do that rate change. Having the tools and those skills within the tax department gives you that flexibility. Just an example where we stepped in and we changed the standard, right. The standard would be to go through an entire IT-governed change management process that, while it still got us to compliance, was highly disruptive to other in-flight projects. So, you have to question these standards as new technologies are introduced, with an expectation that the personnel with those skills are available, of course. You need to have somebody who can ask to reassess how you can keep the needed controls in place, from, say, a SOX perspective, but perhaps take control of it in a way that you still get there and meet the deadline.

McGerty: I totally agree. I think there’s a tinge of “How do you bring common sense?” into an environment and not necessarily mindlessly stick to some rules. It’s worth keeping in mind that the rules were made by humans, and some of them might be better than others.

Necessary: I would add to that point, in our tax provision process we often have a four-day window to complete our quarterly or annual tax reporting. Yeah, it’s fine to try to do that in Excel if you don’t have a system that meets the standards of the technology, but when you do everything in Excel, it invites human error, it takes a lot longer, it’s not efficient, and your people aren’t working on the value-add. Your team is just cranking numbers and spending their time trying to confirm that the information in Excel is correct. This is another reason why we’re able to go in and sell to our executives certain tax software, even if it’s not hosted internally, because it does increase our controls and allows us to do the job we need to do in some of those unreasonable time windows.

What Should CEOs Know?

Levin-Epstein: You’re riding in an elevator with the CEO—what is the most important thing you think he or she ought to know about the relationship between technology standards and the tax function?

McGerty: The CEO is tasked by the shareholders with running the company in an efficient fashion and ensuring there is a strategy to grow the business. This should extend to every aspect of the company, including the tax department, which should be ensuring the company is meeting its legal obligations, minimizing expenses, and supporting growth. I’m not sure a CEO is going to be particularly focused on the challenges of technology standards as they apply to the tax department, but I’d suggest that they should be aware that there can be friction there, and that exceptions may need to be made and standards refined given the complex landscape of global tax compliance. Interestingly, the profile of tax compliance has been raised in recent years, sometimes to boardroom levels, so it’s possible the CEO is more sympathetic than in the past.

If I were sharing the elevator with the VP of tax, who is probably a little bit more concerned with being able to answer hypothetical questions about restructuring, my answer would be a little different. I would remind them that they really should aim to have a well-run process that leverages software efficiently and allows the tax department to take the time to do these hypothetical analyses of matters like mergers and acquisitions.

If my elevator ride was with a director of tax, who is often responsible for ensuring compliance with a set of tax types, I’d try to encourage them to empower their teams with technology solutions that can help automate common processes so you reduce risk around compliance and free up some of your people’s time so they’re not doing tedious, manual data entry or cutting and pasting, and so they can do the more cerebral work, like the intellectual work of analysis of those numbers rather than the preparation of those numbers.

I know I dodged your question a little bit, but I think the spirit of your question was “What should leadership know?” I know my colleagues have an opinion as to what they would want their senior leadership to know, so hopefully I’ve helped frame it in context.

Necessary: I would add that company CEOs or CFOs may view tax departments as compliance shops or cost centers. However, a great tax leader will insist on running an effective and efficient tax department focused on bringing tax benefits to the company’s bottom line. Only when a tax department is capable under the company technology standards to utilize the technology that makes the function the most efficient and effective can tax bring above- and below-the-line savings to the company. Otherwise, your tax function will be absorbed with the compliance side, in complying with all the rules and regulations. I think most CEOs and CFOs would prefer a department to add financial value to the company.

Perez: I think touching on two key drivers from the tax perspective—the compliance side of the house and the operations of the tax team members to deal with all those demands, both external, legislative, and internal, business changes, merger and acquisition activity, and so on—I would put an emphasis on getting the right folks in place, with a background that can deal with those types of new demands. It is a matter of technical and systems skills; it may be reporting, change management, or a general IT background—skills beyond a traditional tax profile. In a way, we are in a transition period right now, with quite a number of demands, as far as the legislation that I mentioned coming out of governments that will require a different level of expertise and skills. Traditionally, you needed an accounting, economic, or legal background to understand what the government was asking for in the legislation, but now you have another facet, in that you need people who can understand, for example, what the technical specifications of a given XML data requirement are. This is not necessarily a replacement of the traditional roles; it is an augmentation of the traditional tax roles. Whether transfer pricing and upcoming BEPS, indirect tax compliance and electronic invoicing, or general compliance and electronic records requirements, a team needs to account for both the tax and the technical demands faced going forward. With standard audit file for tax, while it may be called a standard, it is not necessarily so when looking at the particulars of the legislation country by country. They may be asking for different sets of data when you look at the specifics. I guess an emphasis I would put forward for the leadership of a company, up and down the management chain, is that you need to have the right folks in place who can deal with these new demands. Internally, it is kind of the same, getting the right folks in place as Stephen and Kelly alluded to.

However, there are also projects you can take advantage of going at a multinational corporation, and you need the right people in place to get things working from a tax perspective, to make things more efficient for your tax department, if possible. Then, on top of that, as we discussed, enabling third-party software or providing some other solution that would make your tax department more efficient than they were. We tend to see tax team members handle things in Excel, Access, or maybe SharePoint, but be limited in what they are able to do because they have a limited set of tools, skills, or background, let alone the time to step back from their day-to-day responsibilities. There is a need for individuals with certain technical skills, not historically in tax, who can introduce new technologies, make the process even more efficient and productive, with potential cost reductions, and generally augment the capabilities of the tax department. It is an entirely new era where electronic records requirements are a force reshaping traditional tax roles, the operations of the tax departments themselves, and their role in the corporation, presenting new challenges, but also new opportunities.

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