There’s often a disconnect between a tax department’s view of its role and how a company actually puts its knowledge to work. Close this gap and you’ll be on your way to unlocking hidden value. It’s no secret that many tax professionals are keen to play a bigger role in shaping their organization’s strategy. And most chief financial officers (CFOs) would be thrilled to leverage their tax team’s knowledge in a way that would create more value. So why isn’t it happening? CFOs and tax vice presidents sometimes talk a good game when it comes to getting tax more involved in business decisions, but few companies have been able to put these ideas into practice. Blame the “tax gap.” Do an Internet search on this term and you’ll probably come across a discussion of the difference between how much taxpayers owe the government and how much tax they actually pay. But that’s a problem for the Internal Revenue Service to tackle. In the executive suite, there’s a different kind of tax gap developing. And it may be preventing you from unlocking hidden value in your company. Roughly speaking, this new tax gap is the difference between the value that the corporate tax function believes it could deliver and the value it actually is delivering. There also is a difference of opinion between tax executives and nontax executives about the ability of tax to deliver additional value. To some degree, it’s a perception gap. A 2006 survey, conducted by CFO Research Services (part of the Economist Group) in collaboration with Deloitte Tax LLP, found that tax and nontax executives alike want tax to play a greater role within the organization. But when asked whether tax should play a “leadership” role in business decisions, tax executives were much more eager to play that role than their nontax colleagues were to have them at the table.  Not enough resources
There’s also the question of resources. In recent years compliance demands have increased dramatically. Just keeping up with Sarbanes-Oxley, Financial Accounting Standards Board's Interpretation No. 48 and a tidal wave of other changes in the tax law at the federal, state and international levels, has many tax departments struggling to stay afloat. As a result, there’s less time to think about the tax aspects of business planning, and fewer opportunities for tax to weigh in on value-added projects and initiatives.
That’s a shame, because those are just the sort of decisions that could benefit from tax input in the early stages. I’m familiar with one instance where a tax professional came forward with a business case for SAP implementation. The idea was simple: By configuring the company’s source data systems in a way that is tax friendly, the number and quality of potential tax strategies would increase dramatically. With more relevant and specific data, the tax planners could unlock hidden value that would hold up under review and be sustainable over time. The finance people thought that the tax specialist did such a great job that tax played a significant role in the massive project and the tax value generated by collaboration totaled in the tens of millions. Closing the gap
The bad news is the tax gap can’t be closed overnight. But there are some important steps that CFOs, senior management and directors can take to close that gap. Start by identifying your top corporate initiatives and make sure that tax is plugged into the discussion before it’s too late. Next, ask your tax team to come up with a list of potential planning opportunities that have been passed over because of lack of data or corporate collaboration. The most complex and valuable tax strategies — such as tax-aligned supply chain planning or credits and incentives — require a “teaming” approach that includes collaboration among the tax area, other finance functions and operational units. For example, your tax people can’t get the highest credits for job creation or capital expenditures unless you are capturing and cataloging those costs in a way that makes sense from a tax perspective. That data capture requires cooperation from many functions in the company. In addition, ask for a scorecard from tax, which identifies how it is using its resources. Challenge tax on the ratio of resources dedicated to compliance versus planning activities. The ratio itself is not that important. The point is to spark the debate. Compliance is important, but it’s also important to realize that the burden of these duties can prevent your tax people from adding value through planning and connecting with the rest of the organization on more strategic topics. Invest in tax
In the long run, getting the most value out of the tax function means investing in the development of your people. If you really want tax to add value, your tax professionals need a broader perspective. An effective way to gain that perspective is by working in other areas besides just tax. Establish rotation programs with other functions. This can create short-term inefficiencies but is well worth it in the long run. There are no shortcuts here, but I believe it’s worth the effort. With your existing people, it’s important to get them involved in other areas of the business. I’m familiar with one case where the executive vice president of tax at a consumer products company spent almost a year outside the department participating in a major strategic initiative. The experience gave him a much better understanding of the needs of the business — and a fresh perspective on what tax could do to enhance the bottom line. That’s an extreme example, but the message is clear: Get your tax people out of the back room and more involved in the business. Trouble is, many CFOs continue to hire technicians rather than people who combine both tax knowledge and business skills. The CFO Research survey mentioned above shows that technical knowledge is still the most important criterion for hiring senior tax executives. The least important? Industry experience. Although compliance and “ivory tower” tax planning may demand sheer tax brilliance, excess emphasis on technical knowledge can prevent your tax people from seeing the practical side of your specific operations and developing brilliant tax planning strategies that can actually be implemented and sustained. Stop hiding behind spreadsheets
Likewise, tax executives who wish to move up the ladder also need to do their part. This means developing broader business knowledge, sharpening communication skills and making a real effort to break the old habits of working in isolation. It also means taking the initiative and putting energy toward value-enhancing initiatives before being asked. Traditionally, tax doesn’t influence enterprise value until something goes wrong. Under this old way of thinking, if the tax team is doing a great job, it should get no attention. No news is good news. But those days are over. A new breed of tax professional is emerging — one that combines technical excellence with the leadership skills necessary to play a broader role in the organization. If this doesn’t describe your tax people, you may need to pay more attention to their development. Or start hiring some that do fit this profile. The new tax gap is real — and you can’t afford to ignore it. The tax department has a lot more to offer your organization than you might think. Compliance will always be important too, but you can’t let the regulatory climate stand in the way of your efforts to create long-term value. Connect tax with other functions and occupational units. Make target investments in tax — and develop your most effective people into more well-rounded leaders. Eventually, you’ll close the tax gap. And you’ll be happy with the results. This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. Written in association with the Economist Intelligence Unit (EIU) Related Content Subscribe to Breathing Lessons
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