Tax Technology Today and Tomorrow
Corporate Income Tax Software Market Opportunity Analysis
The corporate income tax software market went through transitional phases similar to many other software market segments – fragmented development and, eventually, market consolidation. However, there is one more phase for development opportunity remaining in the corporate income tax software market – integrated content development.
Similar to financial data collection and reporting software, corporate income tax software should provide transformative functions – 1) collection of data elements based on specific business needs; 2) transformation of tax data elements to usable business information such as BEPS Country-by-Country reports, tax provision for 10K and 10Q, tax returns, and computation of estimated taxes; and 3) further conversion of business information to “cross-sectional” and “time-series” business intelligence.
Market consolidation failed to provide this transformative function to corporate income tax software users. Simply put, most corporate tax software today cannot produce business intelligence for its customers. This is because, in the past, tax software development was based on specific needs that led to market fragmentation. During, market consolidation, various tax software were simply strung together after acquisitions. This series of acquisitions by large software houses lacked integration of content. This gap provided the market opportunity for integrated content within corporate income tax software.
Similar to financial data collection and reporting software, corporate income tax software should provide transformative functions
Multi-Year Single Database Corporate Tax Software as a Basis for Content Integration
There are six key processes that are supported by corporate tax software - data collection, tax planning, tax provision, tax compliance reporting, audit support, and tax task management. Currently, each of these tax processes are supported by separate software. In some cases, they are strung together by a vendor after their acquisitions and integrated at the user interface level. In addition, vendors will release a new version of their software each year, and the data from each year’s version is stored in a separate database, even in the case of single vendor provided software solutions. This fragmentation not only prevents the corporate tax departments from providing transformative services but also creates inefficiencies and unjustifiable business risks.
Tax data collection is the key infrastructure that supports two other main tax processes - tax provision and tax compliance reporting. Many companies implemented “file” level data collection solutions. Although the implementation framework varies at the enterprise level (i.e. as SharePoint or Lotus Notes, or using email with data file attachments coupled with file storage in network drives), the result is the same – a centralized file depository. Under this approach to file level data collection, there is very little integration between the data collected and its beneficiary processes. This lack of integration between the data and processes makes it difficult to connect the relationship between the data collected and how it is used. Such a gap makes it impossible to provide data-level transformation for business information.
Most tax compliance software is developed based on year specific tax laws and is provided to clients on an annual license with each year’s application stored in separate databases. This is because corporate income tax laws change every year. In particular, most tax software was built to produce tax forms and a large portion of tax forms change each year. Tax provision software followed the same model as tax compliance software and is offered on an annual licensing agreement with each year’s application stored in separate databases. This is because of the inherent similarity between tax compliance calculations and tax provision calculations. This annual development with each year’s application and corresponding database for each year makes it impossible to systematically accumulate tax related business information and transform them into business intelligence.
Given the lack of ability to provide business intelligence from corporate income tax software, the question becomes whether the same information can be derived from financial reporting software. The answer is no. This is the reason why many tax technology professionals have been advocating the building of a tax data warehouse. However, building a tax data warehouse is an expensive venture, even though it is a good idea. The building of a tax data warehouse requires substantial subject matter expertise, which most companies do not have, and requires significant allocation of a company’s annual budget, which most companies cannot afford.
From the business risks mitigation perspective, integrated content development should also include computational synchronization across tax planning, tax provision, tax compliance, and tax audit defense cycles. Tax planning, tax provision, tax compliance, and tax audit defense computations require nearly identical calculations performed at different stages of tax life cycles. If the computations across the four cycles are not consistent, there are significant risks of producing different results across different tax cycles.
For example, tax planning is a predecessor cycle to tax provision and tax compliance. If the tax planning applies different computations from that of tax provision and tax compliance, the corporate tax planning may not be properly reflected on tax provision reporting (such as 10K and 10Qs) and may produce inconsistent results on their tax returns. Likewise, if the audit computation does not use the same as tax compliance calculation for the year being audited, it will produce inconsistent results between tax returns and audits. As the corporate tax audits occur few years after the filing of tax returns and across multiple tax years as one audit cycle, corporate income tax software must provide multi-year computations in a single application with multi-year computational capability.
Each of these four processes use inherited data from a previous cycle. For example, tax compliance inherits the data from tax provision, tax audit inherits data from tax compliance and so on. Thus, not having all of these computations in one application supported by a synchronized single database will cause significant inefficiency since the same data has to be recreated across different databases and reconciled. Hence, lack of a single database to share the same information across tax life cycles substantially increases the cost across the processes.
From the tax operational management and security management perspectives, having a single database application has distinctive advantages of applying consistent security implementations across various participants in tax cycles, simplifying related administrative functions, and providing transparency to global tax operations for improved operational efficiency.
As tax cycles apply across a large spectrum of jurisdictions, the number of tax tasks is exponential to the tax cycles and the number of tax jurisdictions. For example, tax compliance has to be performed for federal, state and local jurisdictions. With the introduction of BEPS compliance, corporations will also have to handle global level reporting. Similarly, the audit process will have to handle the same number of jurisdictions. Consequently, the number of tax tasks grows again because tax reporting has to be done annually, as well as, quarterly.
Fortunately, most tax tasks can be scheduled at the beginning of a tax cycle because most of the tax tasks have statutory deadline and internal due dates. Technically, there is no reason why the global tax calendar cannot be managed centrally. The reliance on people may lead to significant efforts to ensure completeness of timely task completion or it may result in unnecessary fines and penalties. Global tax task management implementation will also allow the companies to produce cross-sectional and time-series analysis on tax operations by allowing the task level data to be transformed into business intelligence. Therefore, integrated content development should also include the tax task management portion.
The transformation of tax data to business intelligence is crucial for the business decision making. Coupled with the economic realities of not being able to build an in-house tax data warehouse provides the opportunity for integrated content development to succeed in the corporate income tax software market. In other words, corporate income tax software should be integrated across all tax cycles and processes rooted in synchronized data rather than being subject to fragmented form-driven development. This integrated content development enables “cross-sectional” business intelligence. Tax software should also be built to support multi-year processes based on the same synchronized data approach. This will enable “time-series” business intelligence. In short, integrated content corporate tax software development is the tax technology for tomorrow.