A tax provision is the estimated amount that your business will pay in income taxes for the current year. Let’s face it: The process of estimating this amount, also known as corporate income tax provisioning, is complicated. And it can have enormous implications for your business.
That being said, many large enterprises keep this process siloed in the tax department. Because this operation requires input from outside of the tax team, and the output of this operation is highly regarded by stakeholders outside of the tax team, it begs the question: Is that really a best practice?
Let’s take a look at why tax provisioning matters, especially to investors, and how you can optimize your corporate tax provisioning workflow.
Why Tax Provisioning Matters
What is a tax provision? Tax provisioning is the process of estimating the amount that a business expects to pay in income taxes for the current year. This involves calculating the value of current and deferred tax assets and liabilities.
At face value, corporate tax provisioning may seem like a simple enough accounting process that can be siloed away in the tax department. However, your company’s income tax report shouldn’t matter just to the tax department—it should also be a top priority for every stakeholder.
That’s because the total expense of a company’s corporate tax provision isn’t set in stone. With a bit of time devoted to tax planning, your organization can significantly lower the total expense of its corporate tax provision. But although skilled tax planning and provisioning can make a noticeable difference to your company’s bottom line, the process is often permeated with regulatory risks and operational challenges.
Tax Provisioning Challenges Faced by Modern Businesses
Corporate tax provisioning represents a key consideration of every company’s profitability planning; however, the process presents some unique hurdles. Here are a few of the most pressing challenges faced by companies looking to optimize their income tax provisioning.
The Increasing Complexity of Tax Provisioning
Even in the best of circumstances, corporate income tax provisioning is a complicated and risk-laden task. And in recent years, the complexity of tax provisioning has only grown. This is primarily due to increasing international regulatory scrutiny, the growing complexity of tax law, and rigid deadlines for company income tax reports.
This is especially true in today’s global economy, where more and more businesses seek to compete at an international scale. Companies are running into regulations from a greater number of countries as they seek to expand their supply chains or acquire foreign competitors.
As a result, an organization’s tax department can no longer be siloed. For companies to stay competitive and compliant, they must give the tax department a more central role. This should include opening the lines of communication between the chief tax officer and the CFO as well as the CEO and the rest of the C-suite.
Reconciling Different Reporting Approaches
Regular communication between your tax department, office of the CFO, and C-suite can go a long way. But this won’t help if there’s a fundamental disconnect between the stakeholders in your company.
A company provides value among a wide range of stakeholders, including investors, shareholders, employees, customers, suppliers, and even society at large. It can sometimes be difficult to balance these competing interests.
When it comes to tax provisioning, this can manifest itself in different (and sometimes conflicting) reporting approaches taken by internal stakeholders and investors. For investors, the tax provision is often viewed through the lens of the profit motive and the belief in shareholder primacy, whereas internal stakeholders may take a more purpose-driven approach.
Striking the right balance will require investors, the board, and management as well as community members to work together to define the company’s purpose and how they will measure success outside of traditional financial indicators. In terms of corporate tax provisioning, this represents a significant challenge, but it can be done.
Balancing interests isn’t just about philosophical differences between stakeholders. If you get this balance wrong in the case of your corporate tax provision, it could invite regulatory scrutiny and do lasting damage to your company’s reputation.
In the last several years, there has been an ongoing discussion in the media about large companies participating in tax avoidance. Tax avoidance differs substantially from tax evasion. But the legal practice of minimizing your tax burden can be detrimental to your company’s public image when taken to the extreme.
A number of high-profile cases involving multinational companies such as Amazon, Starbucks, and Google have made headlines and ignited a new public debate on how to define an acceptable level of corporate tax payment.
The bottom line is that an aggressive tax avoidance approach can result in a public relations nightmare. Your organization’s tax and accounting decisions should be aligned with overall corporate goals and image in mind.
Using the Right Tool for the Job
These challenges require significant transparency and flexibility in order to adhere to tax laws, meet the needs of every stakeholder, and avoid public and regulatory scrutiny. But even simple mistakes made during the income tax cycle can lead to financial statement errors, repercussions from Wall Street, and potential regulatory enforcement actions.
Finding the right tool for the job is a key step in optimizing your tax reporting process. Fortunately, new improvements in automation and connectivity mean you can significantly reduce provisioning challenges and risks for your organization.
DIY Tax Software
Most companies are still relying too heavily on Excel spreadsheets to connect their tax and financial reporting. But using more modern, specialized tax software can help ease the pain of tax provisioning and bridge the gap between finance, tax, and the rest of your stakeholders.
If you’re still relying on spreadsheets, you may have considered building your own software solution to support the tax function. Your company might think it can save on costs by designing a custom solution built to its specific needs. But a custom software design and build can be time-consuming, requires significant IT resources, and doesn’t necessarily eliminate the risk of formula or regulatory errors in a meaningful way.
Out-of-the-box software offers several advantages over DIY solutions. Once installed, out-of-the-box software is ready to go with the ability to adapt to the needs of your business. This plug-and-play usability saves your tax team significant time up front.
Out-of-the-box tax solutions can also help you stay seamlessly up to date when it comes to the constantly changing tax code with the flexibility to address specific jurisdictional needs. And cloud-based software makes it easy to share your tax data with different stakeholders across the company, getting everyone in your organization on the same page.
The biggest concern is often cost, but significant benefits can be realized with a relatively minor investment. Cloud-based software—which is quickly becoming the new standard—can be implemented affordably.
The more important question may be, “What will be the cost if my company chooses to do business as usual?” With a faster time to value, an out-of-the-box tax solution is likely to be the most cost-effective and least risk-laden option in the long run.
Clear Your Tax Provision Hurdles with an Elevated Tax Solution
Corporate tax provisioning is a complex process that can have a real effect on your company’s bottom line, but it can also be fraught with challenges. Finance professionals face significant hurdles in the tax provisioning process, including increasingly complex tax codes at home and abroad, heightened scrutiny from the public and regulatory agencies, and the need to balance the interests of investors with those of other important stakeholders.
How do you strike a balance? Modern tax management software solutions can help your tax team eliminate the burdens of data gathering and validation, stay ahead of regulatory changes, and keep your stakeholders informed and up to date.
Still on the fence about whether to build or buy a more advanced tax solution? Take a look at our guide To Build or Not to Build?, for a more in-depth discussion on whether your organization should build or buy software to support the tax function.