The growing convergence of finance and tax - what it means for the future of tax technology.

• Author: Viglione, John

Times have changed for corporate tax and financial executives. Once considered more of a departmental reporting function, the tax effect of actual and forecasted financial results is now a key point of integration between two historic neighbors--finance and tax. In fact, despite Herculean efforts to comply with the Sarbanes-Oxley Act (SOX), accounting for income tax remains the leading cause of SOX 404 deficiencies, constituting 24 percent of overall deficiencies in 2008, according to a recent KPMG tax study.

Corporate tax and financial executives are now dealing with increased board visibility and SEC scrutiny on the financial reporting of income taxes and related internal controls. At the same time, they are faced with global accounting standard changes that could match, and for some companies exceed, SOX-related workload. Couple this with chronic talent shortages and reduced timelines for corporate closes, and the pressure on tax departments has never been greater.

Today's reality is that tax reporting requires the same level of transparency and integrity as financial reporting. Considering that tax is typically one of the largest expenses on corporate income statements and that the effective tax rate is much more volatile than in the past, finance and tax must now live virtually in the same house. The result is a major transformation in not only how tax gets its job done, but when, and by whom.

Because of these trends, the bar has been raised significantly on corporate tax operations--most notably in the area of global accounting for income taxes. As demands continue to grow, today's array of tax technology solutions simply will not be able to provide the necessary control, transparency, efficiency, and management capability needed to meet new demands. These departmental point solutions for provision, compliance, and data management, even when loosely connected together with portal technology and custom integrations, end up creating disparate sources of data, require manual spreadsheet workarounds, limit scalability across a global enterprise, and are prone to audit exposure. In addition, these products are oriented toward supporting a single department rather than the whole enterprise at the same time many companies must deal with increasingly global operations with multiple locations, enterprise resource planning (ERP) systems, and jurisdictions to manage.

For this reason, enterprise-level automation, process improvements, and training innovations will be required to address the current and upcoming challenges facing corporate tax departments. Consequently, a new class of enterprise-level tax systems is emerging that when combined with process and resourcing improvements create a new industry category called tax performance management (TPM). Solutions that enable TPM process all tax types on a single, integrated web services platform that's tightly integrated with ERP and corporate performance management (CPM) systems. TPM addresses the whole spectrum of managing direct and indirect corporate tax performance from financial reporting to compliance, planning, and defense--all on a global basis.

The goal is simple: reduce the operational complexity of managing all aspects of the global tax process and build tighter integration between financial and tax data so that tax professionals can focus on higher [logical not] value planning and risk management activities, and Chief Financial Officers can see effective tax rates and cash taxes in real [logical not] time. This is a state where, when the books close, tax closes with the accuracy required for financial reporting and tax compliance--and with complete transparency and significantly reduced audit risk.

By tightly integrating ERP financial applications with enterprise tax solutions, companies offering software solutions (such as Vertex) have transformed indirect taxes (such as sales, consumer use, and value add taxes) from an overwhelming process and reporting effort to a seamless, automated, and efficient process. The end result is a function that is under control from a tax governance and risk management perspective.

With respect to income taxes, a trend will emerge where global companies will move from today's departmental tools to more...