Making a Business Case for Tax Transformation: How Do You Pay for It
As a result of legislative and regulatory changes, tax departments face more complex compliance requirements than ever before. This year’s BDO Tax Outlook Survey found that the top issues facing tax executives include adjusting to federal code changes (46 percent) and adjusting to state and local legislative changes like those resulting from Wayfair (31 percent). Tax transformation can help, but recognizing the potential value is only the beginning. The real challenge to executing a tax transformation strategy is often sourcing the necessary budget and resources.
Resource constraints can be one of the biggest roadblocks to progress, particularly in the middle market where budgets are tighter and there is less appetite for trial and error. To secure resources and funding, you’ll need to build a business case internally, focusing on how a transformed tax function fits into your organization’s strategy and goals.
For those who don’t deal with tax on a day-to-day basis, understanding the nuances and the complexities of the job can be a tall order. Many view the tax department purely as a cost center and may lose sight of the fact that the tax department’s main goal is tax minimization, which ultimately increases revenue.
When advocating to transform your tax department, few factors will be as convincing for company leaders as a compelling business case.
HOW TO MAKE THE BUSINESS CASE FOR TAX TRANSFORMATION:
Focus On Risk
Highlight the negative effects that inadequate tax processes have on the company’s business. Try to calculate hours lost on processes and tasks you’re aiming to optimize and explain the effect on the company’s bottom line. Consider obvious risks like late filing returns or the increased risk of audit from inaccurate or incomplete returns.
Don’t forget intangible risks like employee satisfaction, and customer, client, or shareholder trust. Consider an anonymous survey of tax professionals about where they struggle with their work or what processes generate the lowest ROI.
CASE STUDY
A retailer filing returns in multiple states submitted its data, including address information, to a sales tax software system. If the address was invalid, the software would mark the entire submission as an error and the tax team would spend hours reviewing and redoing the submissions. BDO developed an automated solution to review and fix address errors, and then resubmit a clean address file to the software tool. The time saved from eliminating manual work saves the company an estimated $20,000 per year.
Emphasize the Tax Technology Value Proposition
Tax can be a technical and murky area of a business, but understanding the value of reengineering the tax department doesn’t have to require years of study or technical know-how. When making the case for investment in tax transformation, fit your proposal into this simple framework:
- Greater efficiencies + lower risk of error – cost to implement = return on investment
Confirm That Cost Saving Is Not the Only Focus
Many fear transforming the tax department ultimately means reducing head count. Management should emphasize that the purpose of transformation is to allow professionals to do more valuable work, not to eliminate or replace them. Having before-and-after results of the employee satisfaction survey is one way you can prove the value. Ultimately, transformation, when done well, gives tax professionals the opportunity to focus their time and attention on high-value activities technology can assist with, but not replicate.
FUNDING TAX TRANSFORMATION
Making the business case for tax transformation internally will help secure the needed resources and funding, but transformation doesn’t happen overnight. Create incremental, measurable projects along each step of your transformation roadmap, and ensure you have a solid investment case for each one.
While most organizations understandably prefer to rely on internal sources of financing, in some cases, it may make sense to seek outside funding. One no-brainer for organizations exploring transformation financing options is maximizing federal and state tax incentives for R&D and innovation. In BDO’s Digital Transformation Survey, 40 percent of businesses cited plans to use R&D tax credits to finance future digital investments. Companies that take advantage of available credits and deductions have more cash, increased earnings per share, lower effective tax rates, and the opportunity to increase their investments in innovation. Think of it as akin to getting paid to ultimately save money in the future.
Funding can come from many sources, including:
- Internal Sources
- Retained Profits
- Working Capital
- Sale of Assets
- Tax Credits and Incentives
- Federal R&D Tax Credits
- State R&D Tax Credits & Incentives
- International R&D Tax Credits
- External Financing
- Debt Financing
- Government Grants and Subsidies
- Crowdfunding
- Partnering
- Joint Ventures
- M&A
- Public-Private Partnerships
For many middle market companies, the idea of transforming a significant area of operations can be an intimidating prospect, especially when considering limited financial and personnel resources. But transformation is a marathon, not a sprint. Value is created in different ways across the tax transformation maturity continuum, and progress must be rooted in incremental improvements to your current capabilities. The tax transformation journey should start small, with strategic pilots that deliver solid, quantifiable return on investment. It can start with a single improvement initiative. Even a small change has ripple effects throughout the tax function and beyond. Making the business case each step of the way can increase buy-in for transformation, and push your organization forward on its transformation journey.
For more information, visit BDO's tax transformation resource center.
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