An organization’s finance and tax functions are closely related, with the tax function relying on finance data and systems to support accurate tax calculations and compliance procedures, and the finance team relying on tax calculations for financial reporting, cash flow analysis, forecasting, and modeling.
Failing to align the finance and tax functions can lead to presenting the C-suite with inaccurate information or hindering how quickly leaders receive information. That in turn can affect a company’s efficiency and reputation.
This co-dependency is probably why more businesses are giving their tax functions a seat at the decision-making table. According to the most recent BDO Tax Strategist Survey, 90% of tax leaders say they are invited to weigh in on business decisions and that their recommendations carry significant weight.
Why Align Your Tax and Finance Functions?
Finance teams might not realize how heavily the tax function depends on their data and systems to perform accurate and timely calculations. Examples of finance and other company data the tax function requires include that from enterprise resource planning systems and general ledgers, customer relationship management platforms, human resources and payroll, and much more. If a company wants robust forecasting and modeling capabilities, its finance and tax functions must be properly intertwined.
The tax function requires timely access to accurate data to provide the C-suite with information about how best to serve stakeholders. With data and systems aligned between finance and tax, tax professionals can gain real-time access to essential financial information. That allows them to react quickly to business- or finance-related requests and serves as a value-added arm of the financial structure. Without access to necessary data, tax teams must rely on placeholders or less than ideal estimates that can lead to inaccurate and late calculations.
Cross-functional alignment benefits an entire company. The tax implications of a business transaction or strategy might not ultimately affect the decision whether to execute the transaction, but they certainly can help a tax function provide leadership with a transaction’s potential tax benefits or pitfalls. Business leaders need well-structured and timely data to make informed decisions, and any tax implications should be part of that analysis.
Close collaboration between the tax and finance functions can also improve a company’s ability to scale up and adapt to growth, whether organic or via acquisitions. With a strong tax data management strategy in place, tax functions will be able to provide their decisionmakers with the material needed to make informed decisions. In fact, 60% of tax leaders are heavily involved when their companies are considering strategic transactions such as restructuring, mergers, and acquisitions, according to the BDO Tax Strategist Survey.
A comprehensive data management strategy also allows businesses to react quickly to changes in tax policy and regulations by modeling any impacts and identifying mitigation strategies. Tax plays a crucial role in business resilience strategies and organizational risk management, with 63% and 58% of tax leaders surveyed, respectively, very involved in strategic discussions with business leaders on these topics.
How to Align Your Finance and Tax Functions
A company’s first step in aligning the finance and tax teams is evaluating its current state: How mature, connected, and collaborative are tax and finance across their processes, technology, and data dimensions? In conducting that assessment, it might be helpful for an organization to map its progress using the tax innovation maturity levels below.
- Level 1 — Baseline: Organizations with baseline levels of tech maturity tend to rely on manual data entry, do not have a data management strategy, and have limited transparency and information sharing.
- Level 2 — Enhanced: Organizations at these levels have standardized data and some automation for routine tasks. They might also have robust data management strategies.
- Level 3 — Collaborative: Organizations at higher levels of maturity begin to realize synergies between finance and tax. The two functions are in sync and use common dashboards, analytics, technical solutions, and data. They automate tasks and collaborate.
- Level 4 — Smart and Cognitive: The most mature businesses have almost perfected the cross-functional alignment of their data, processes, and technology. Finance and tax work seamlessly with one another and with other business functions. Enhanced dashboards contribute to business intelligence and provide company leaders with the latest key tax figures. Technology integration provides a holistic view of total tax liability, allowing teams to engage in real-time monitoring, receive automated alerts, and use predictive modeling.
After completing the assessment, organizations with lower levels of maturity should develop strategies to manage their technology and data as a first step toward cross-functional cooperation. All organizations, regardless of maturity, should consider how processes and people can work in sync to support collaborative, proactive, and agile tax and finance functions.
BDO’s tax transformation and finance transformation professionals work hand-in-hand to help organizations understand how to integrate their finance and tax processes.