Information gathering, technology, and enterprise systems.

• Author: Arlinghaus, Barry P.

In their quest for more timely and relevant information companies are implementing enterprise systems, data warehouses, and other forms of technology. This technology affects how companies are organized and managed and how people obtain and use information. Tax departments are not immune from this process.

Obtaining information for tax compliance and planning has become an even more daunting task in today's complex global environment. Information systems have always been designed, first and foremost, to provide information for management decision-making and financial reporting. In order to obtain the information needed for tax compliance and planning, tax departments have either maintained dual systems or made adjustments to financial accounting information. To learn more about how tax departments obtain, use, and retain information in today's age of technology and high expectations, the author conducted a survey of senior tax persons at the 2001 Fortune 1000 companies. This article anayzes the responses to this survey.

Methodology

Information for the study was obtained through a questionnaire mailed in May 2001 to the senior tax person at the 2001 Fortune 1000 companies for which a respondent and a mailing address could be identified. As a result, questionnaires were mailed to senior tax persons at 751 companies. The first mailing was followed by a second request. There were 121 responses to the first request and 38 responses to the second. The overall response rate was 21.2 percent. This was a satisfactory response rate given the length of the survey instrument and the number of open-ended questions.

Some respondents answered only part of the survey, but most responded to the majority of questions. Comments were solicited about a number issues and the responses are reflected in this article.

To develop a meaningful questionnaire, the author conducted personal interviews with 18 tax professionals at five corporations, an enterprise systems consultant at one international accounting firm, and a tax-systems professional at a different international accounting firm. In addition, the author conferred with a tax-systems consultant at another international accounting firm via telephone and a tax-systems professional at a large corporation via e-mail. The author sent a draft of the questionnaire to these individuals and modified the questionnaire based on their recommendations. Developing the survey instrument itself was a significant learning experience for the author.

Profile of Respondents

Tax executives from a broad cross-section of companies responded to the survey. A profile of the respondents by size of company, as measured by revenue, assets, and number of professional tax staff, is summarized in Tables I, II, and III. Table IV shows the number of respondents by the broad industry group that accounts for the greatest percentage of a company's revenue.

Gathering Tax Information

Respondents were asked whether the parent company and its subsidiaries use the same basic chart of accounts. (In other words, were the same account numbers used by parent and subsidiaries but unique digits assigned for use by or identification of the subsidiaries' activities?) Doing so will facilitate the compilation of data for tax compliance as well as the implementation of an enterprise system (if a company moves in this direction) and technology for data management and retention.

Ninety-five of the 157 respondents that answered this question indicated that all their company's domestic subsidiaries use the same basic chart of accounts as the parent corporation. Another 46 indicated that some of their domestic subsidiaries use the same chart of accounts. Unsurprisingly, only 43 of the 118 firms responding to this question for foreign subsidiaries indicated that all foreign subsidiaries use the same chart of accounts as the parent company. Respondents at 47 firms indicated that some of their foreign subsidiaries use the same chart of accounts.

Systems of Providing Information

Participants were asked to pick which of several approaches most closely described a parent company's system of providing information for U.S. federal income tax compliance and reporting purposes. Participants were also asked to pick which of several approaches best described the parent company's approach to obtaining information for U.S. federal income tax compliance for most of its domestic and foreign (non U.S.) subsidiaries. Table V summarizes the responses. As shown, few companies have separate accounting systems for tax compliance and reporting. More than half of the firms make a significant number of adjustments to financial accounting information to convert it for tax compliance and reporting purposes. For these firms this is generally true regardless of whether the information is from the parent company, domestic subsidiary, or foreign subsidiary. About one-third of the respondents indicated that the company's and its subsidiaries' charts of accounts and accounting systems are designed to capture most of the information needed for U.S. federal income tax compliance and reporting purposes.

Participants were also asked about the parent company's system of providing information for U.S. state income (franchise) tax compliance and reporting. The responses were similar to those for U.S. federal income tax. Of 157 respondents, 95 indicated that their company's chart of accounts and accounting system are designed to provide information primarily for financial and management reporting purposes. As a result, a significant number of adjustments are made to convert financial accounting information for state tax compliance and reporting. A significant number (48) said that their company's chart of accounts and accounting system are designed to capture most of the information needed for state tax compliance and reporting purposes.

Foreign subsidiary company systems for providing information for foreign country income tax (local country) compliance and reporting purposes, for the most part, mirror the approach used for U.S. federal income tax. Sixty-six of the 118 respondents who answered this question reported that foreign subsidiary companies make significant adjustments to convert financial accounting information for tax reporting. Forty indicated that the company's chart of accounts and accounting system are designed to capture most of the information needed for local country tax compliance and reporting. Twelve reported that foreign subsidiary companies have separate financial and tax accounting reporting systems.

Subsidiaries

Most subsidiaries, whether domestic or foreign, do not have their own tax departments. Only fifteen companies reported that some of their domestic subsidiaries have tax departments. Four companies reported that all, and 38 reported that some, of their foreign subsidiaries have tax departments. Domestic subsidiaries that have tax departments typically work on payroll, property, and sales and use tax compliance. Foreign subsidiary tax departments generally prepare U.S. tax-reporting packages and address local income tax and VAT compliance.

Much of the information needed for U.S. federal income tax compliance and reporting is either accessible at the parent company's headquarters independent from the subsidiary's accounting department or is provided via tax reporting packages. Thirty-four companies reported that all domestic subsidiary information is accessible at headquarters without the use of tax reporting packages. Forty reported that all domestic subsidiary information is provided in electronic tax packages, and eight reported that all domestic subsidiary information is provided in manually prepared tax packages. The remainder of the 154 respondents indicated that tax information is developed by combining records accessible at company headquarters with information obtained from manual or electronic tax reporting packages.

Only seven respondents indicated that all...