What is a Tax KPI?
A Tax Key Performance Indicator (KPI) or metric is a clearly defined quantifiable measure that an organization, or business, uses to measure the success of its Tax Function over time. Since every organization has its own manner of operation, the KPIs or metrics used for tax will vary from one organization to another. For an organization to be successful in their tax function, they need to evaluate the performance of their tax function using a variety of KPIs and metrics, ranging from traditional KPIs such as effective tax rate, filing timelines, financial risk management, etc.; to non-traditional KPIs including reputational risk management, efficiency and effectiveness of processes, innovative use of technology, etc.
KPIs for Tax Accountants – Tax Cost
Managing tax cost involves reducing the financial impact associated with taxes. This makes minimizing tax impact an important aspect of tax KPIs. Most of the priority is usually given to the provision for income tax. While the income tax provision is a crucial part of the income statement, other taxes also have a significant impact on tax cost. Excluding income tax, the other direct and indirect taxes such as property tax, sales tax, use tax, goods and services tax (GST), and finally, value-added tax (VAT), can be a large portion of the tax cost. In order to effectively manage tax cost, it is important to look at the tax KPIs that will help the tax function measure their effectiveness.
1. Effective Tax Rate: Since the Effective Tax Rate (ETR), is the primary KPI when it comes to tax–it is considered to be the most obvious metric of how well the tax cost of an organization is being managed. ETR remains prominent in financial statements, which makes it an important tax KPI. By using the ETR, an organization can measure their success by evaluating against the benchmarks for their particular industry. However, this metric should not be relied on by itself. Organizations should use it in conjunction with other metrics beyond their industry standards–since the standards can vary, especially for the companies that operate on a global scale.
The ETR can be tied to technological advancement/enhancement, as well as to the measures of progress in the organization. If an organization’s tax functions focus on technological advancements, then it can impact the factors that directly affect the ETR. If the technological enhancements entail the procurement of better data, then it can help support the organization’s tax positions. Good quality data can help the organization avoid audit adjustments.
2. Cash Taxes: Evaluating the financial statements tax impact has been the primary means of establishing an organization’s cash position. In recent times, more consideration is being placed on the actual cash tax expenditures that impact the cash position of the organization. This tax metric includes the costs associated with indirect tax along with the expenditure on direct tax. Tax must evaluate the cost pertaining to both indirect tax as well as direct tax because a large volume of transactions/payments are made to several different taxing authorities.
If an organization has a property, then it is important for them to be sure the correct amount of property tax is paid according to its assessed value. They should also keep track of the indirect taxes–such as VAT or use tax–are appropriately paid. There are certain indicators to answers questions pertaining to these specific scenarios:
- The total taxes actually paid by the organization vs. the predicted tax amount provided to the treasury.
- The prepayment of tax as a part of the income tax liability of the organization.
- The ability of the organization to repatriate cash–in an effective manner and with low tax cost.
While tax costs represent one aspect of the tax function, internal efficiency and effectiveness can also have just as large an impact. Here are some tax KPIs that your accounting department should be looking at.
KPIs for Tax Accountants – Efficiency and Effectiveness
Organizations operate in a complex environment, and their tax function emulates the setting as well. The tax function of an organization should strive to execute the tax life cycle perfectly. It is one of the keys to the organization’s success–how effectively and efficiently are the various processes executed when implemented together. The purpose of tax KPIs, in this instance, is to measure whether the various factors of processes, technology, and the employees of the organization are working synchronically to achieve the organization’s desired results.
3. Efficient and Effective Use of Technology: Technology, and the processes related to it, is one of the crucial considerations in an organization’s functioning. The tax function, therefore, also relies on technology–and it is important to verify that a tax function is using the proper technology to fulfill its tax activities, or compile data. Both the internal technology used by the organization, and the external technology available, needs to be considered. Currently, there are technological processes available that may revolutionize your tax function. The rise of artificial intelligence and robotic process automation gives a hint as to where machine learning capacity is headed towards.
Advancements in technology are rapid, and it is the duty of the organization to consider if their current processes are the most efficient and effective–or if a change is in order. The metrics of technology use by tax function that may be considered are:
- The frequency at which the organization adopts technological enhancements and new processes.
- Whether the most current technology for tax function is widely adopted by the organization.
- Whether the people of the organization are trained in using the current technology.
- Has the adopted technology been used in effective and innovative ways–to fulfil the tax function and to enhance the processes that are already in place?
4. Efficient and Effective Process: While the tax function has always been a crucial part of any organization, the manner in which it operates needs to be revisited. There has been a shift towards choosing managed services, shared services, and centers of excellence. Using these services can help the organization streamline their tax function and may also help reduce redundancy and costs. The tax metrics that should be used by an organization to improve the efficiency and effectiveness of processes are:
- Use of Shared Services, Centers of Excellence, or Other Arrangements That Outsource the Tax Function: It is important to compare the cost incurred by shared services/third-party services to the cost incurred by full-time providers required to fulfill the tax function (including the use of office space used for tax).
- The Time Spent by the Organization on Tax Compliance and Financial Reporting: This KPI for the tax department is used to track the resources spent by a company on compliance and reporting. If a company is able to streamline its financial reporting, more resources can be allocated to other strategic initiatives. The resources used by the organization on tax compliance and reporting include the time and cost required to implement tax changes, regulatory changes, and to integrate acquisitions. This process is best streamlined using a reporting solution.
- The Operating Costs of the Tax Function: The tax function of an organization may use up a significant amount of resources. To determine the efficiency and effectiveness of the tax function, it is important for the organization to compare the total costs incurred by tax with other functions of the enterprise, as well as the provisionary budget.
Another overlooked aspect of efficiency and effectiveness is whether the higher-paid workers are assigned to high-value activities. Since the compensation they receive is higher, it is crucial for the organization to assign them to assignments that can generate more revenue.
For the tax function to be efficient and effective, it is essential that other factors work in harmony with it. Data flow, proper use of technology and resources, and matching the right workers to the right task. These employees can impact the working of the organization, and therefore, its tax function.
5. Promoting Efficiency and Effectiveness in People: An organization is driven by its employees. The workers of a business are its greatest resource, and unless their needs are addressed, the business cannot function efficiently or effectively. The needs of workers keep evolving, and an organization should have measures in place that can observe and address their concerns.
The relationship between an organization’s people and their process is a complicated one, and is subject to consideration including hiring, sourcing, training, rewarding, development, and progression within the organization. For a tax function to be effective, it is essential for the organization to be effective. To accomplish that, the organization should attract and retain talented workers as well as execute a tax strategy that helps the business operate better. The people tax metrics that are important when it comes to promoting efficiency/effectiveness are:
- Job satisfaction and job engagement displayed by employees.
- Whether employees receive recognition for their efforts and are rewarded appropriately.
- Low turnover rates. Try comparing the accounting department to the overall turnover rate of the corporation.
- Availability of appropriate and relevant training for the job – including training in new technology, soft-skills, communication, and new processes.
- Availability of guidance, mentoring, and development programs.
- Promotion of inclusion and diversity in the workplace.
- Leadership initiative–shown through engagement with key figures, participation, and overall effectiveness in executing strategies pertaining to peoples well as the tax function.
We have now covered a variety of different ways in which a company can evaluate its efficiency and effectiveness. We will now talk about how a company can actually increase its efficiency using technology.
Streamline Your Reporting with Technology
The use of specialized software can help your organization with the collection of data pertaining to KPIs and its reporting. insightsoftware’s business intelligence software has been designed to help corporations improve their tax function with these key features:
- Automated Data Collection. With insightsoftware’s reporting solution, the data from your existing enterprise resource planning (ERP) software is collected automatically. You don’t have to transfer the data manually – an inefficient process that uses a ton of resources. You can have access to KPI analysis, and reports, without any trouble.
- Centralized Data. By opting for insightsoftware’s tax KPI dashboard, you can have one consolidated location for all your data. With a centralized location, accessing any data that you require is easy and painless.
- User-Friendly Interface. insightsoftware’s KPI dashboard has KPI templates built into it that can collect data from your existing ERP and transfer them to one place. With our prebuilt templates, you save time and resources by not having to manually transfer them bit by bit.
- Receive Reports Instantly. With our tax reporting solution, your reports are only a moment away from you. By consolidating all your data in one place, and constantly updating it, we ensure that you can have the most up-to-date report instantly.
KPIs for Tax Departments – Tax Risk
It is crucial for an organization to manage their tax risk–more so than reducing their tax burden. The efficient management of tax risk is important to the tax function–and the focus on it has been gaining traction in recent years. Managing tax risk can be broadly divided into two categories–financial risk and reputational risk. Financial risk management is a critical tax metric when it comes to risk management, and managing reputational risk is becoming just as crucial.
6. Financial Risk Management: Risk management, when it pertains to taxes, use financial measurements as the most common approach. Financial metrics are typically used because they are a widely available and considered standard across most industries.
- Decreasing or increasing reserves to account for uncertain tax positions.
- Decreasing or increasing reserves for non-income related purposes.
- The magnitude of the audit adjustments, and how frequently they are performed.
7. Reputational Risk Management: The tax function of an organization can be impacted by its corporate image, as well as the brand that it tries to embody. Managing reputational risk has become an important concern when it comes to taxes. If an organization receives negative publicity, it can cause damage to their brand and lead to negative financial consequences. If there is a spotlight on the brand’s tax position in the public, that can also impact the business of the organization.
Currently, there is an increased focus on the “morality” of brands, and it can impact the perception of the organization significantly. In order to maintain their morality in the eyes of the public, the organization should strive to incorporate reputation into their tax function. Accounting for potential reputational risks is an effective way to gratify the shareholders as well as maintain the integrity of the organization’s brand.
An organization can consider the following tax metrics when accounting for probable reputational risks:
- Releasing the Organization’s Tax Positions in an Appropriate Manner: Frequent public statements, or a complete lack of them, can be a cause for concern and damage the reputation of the organization.
- Calculating Total Tax Contribution: The total tax contribution (TTC) of an organization, either by country or globally, includes the total amount of taxes paid by them. It includes direct taxes, as well as indirect taxes. It also takes other factors into consideration, such as how the organization contributes to the society or how many jobs they create.
8. Risk Management – Quality and Controls: A failure of quality and controls could have a significant impact on an organization’s success. Both quality and controls that are in place affect several factors that can lead to the organization’s success, such as cost, sustainability, effectiveness, and the efficiency. There are tax KPIs that can help identify the scope of failure of quality/controls, and how to effectively manage the risk associated with it:
- Instances of late filings, and of error penalties incurred.
- Instances of tax statements that had to be re-submitted because of errors incurred.
- Outdated or missing controls within the organization that review and update documentation, with appropriate frequency.
- Lack of response or responding insufficiently/inappropriately to transparency requirements by global jurisdiction.
- Instances of deferred taxes, payable taxes that remain unreconciled, and outstanding account balances within the company.
- Tax planning or the Tax operations of the organization fail to meet the acceptable limits of the risk parameters or operate outside the organization’s risk profile.
It should be very apparent that risk management plays a large impact on the tax function of any corporation. While many people view risk management as something that hinders growth and progress, its real function is ensuring sustainability.
KPIs for Tax Departments – Sustainability
Short-term success is not a true measure of how an organization is performing. The primary objective behind tax KPIs and tax metrics is to ensure the long-term success of the organization. With the metrics to measure tax functions being influenced by many factors, it is important for an organization to prioritize sustainability when it comes to success.
Tax KPIs and tax metrics can help an organization plan for the future–if due diligence is applied when observing and implementing the measures that work. If a certain tax KPI has proved itself to be less than useful in measuring success of the organization, then its use should be reevaluated so that the tax function remains optimized.
For the sustainability of an organization’s efforts, certain metrics can be considered:
- The effective tax rate remains stable, or within the targeted range, over a considerable period of time.
- There is a reduction in the risks associated with the tax function.
- The planned technological enhancements–process and training–gets implemented.
- The efficiency improves, and the associated cost is reduced.
- Employees report satisfaction with their jobs–and worker turnover rate is low.
Now that you have reached the end of this post about the best tax KPIs and metrics for 2021 reporting, it should be extremely evident how important the tax function is to any company. If there is one piece of advice you take away, just remember that the best way of implementing the appropriate tax KPIs is by understanding what works for your organization–and that reporting software is the best method of streamline your reporting process.
If you have any questions or would like to know more about what insightsoftware has to offer–please contact us. One of insightsoftware’s reporting experts will help you out.