Understanding and Enhancing the Return to Provision Process

This blog is the first in a three-part series on the Return to Provision (RTP) process. In this initial blog, we cover the fundamentals of RTP, offering a high-level overview. The second blog will explore common complexities Swiss companies may encounter during the RTP process, including the added importance of the RTP in relation to the requirements under Pillar Two of the Global Anti-Base Erosion Model Rules, and the third will focus on leveraging technology to support and streamline RTP as well as share our views on the important role of data and process in an efficient and effective RTP process.

Navigating the complexities of tax accounting requires a clear understanding of the RTP process—a crucial step that ensures financial statements accurately reflect a company’s tax position. This blog discusses the fundamentals of RTP, highlighting why differences arise between tax provisions and filed returns or final tax assessments, and how timely reconciliation can prevent surprises. Discover how aligning processes, leveraging technology, and proactive planning can transform RTP from a year-end challenge into a streamlined, manageable part of your tax cycle. Whether you’re looking to improve accuracy or enhance efficiency, mastering RTP is key to confident and compliant tax reporting. 

What is the RTP Process and Why is it Important?

The necessity of an RTP process arises because the taxes recorded in the financial statements during the year-end closing for a fiscal year often differ from the tax balances reported in the tax return filed with the tax authorities for the same period. These differences typically affect both the income statement and the balance sheet, resulting in a true-up of tax expense and tax balance sheet accounts that should be recorded in the year the tax return is filed. For example, the RTP adjustment for fiscal year 20x1 would be reflected in the financial statements in 20x2, when the 20x1 tax return is submitted to the authorities.

An RTP process typically aims to:

1. Understand the differences between the tax provision and the tax return 
2. Make the appropriate adjustments to tax expense and to the tax balance sheet accounts
3. Identify ways the tax provision can be more accurately calculated in future periods 

It is important to recognise the inherent differences between the objectives of the income tax provision and the income tax return. The tax provision’s objective is to efficiently estimate income taxes payable and deferred tax consequences for inclusion in the financial statements, within a reasonable margin of error and under tight time constraints. Conversely, the tax return aims to calculate the exact amount of income taxes currently payable to the tax authorities for the relevant year. Given the additional time generally available to prepare the tax return, this calculation is more thorough and precise. In summary, the tax provision prioritises efficiency and material accuracy across both the income statement and balance sheet, while the tax return focuses on accuracy for the current tax liability. For instance, underestimating non-tax-deductible expenses during the provision calculation can lead to a higher tax liability when the return is filed, necessitating an RTP adjustment.

Additionally, differences may arise not only between the tax provision and the filed tax return but also between the filed tax return and the final tax assessment made by the tax authorities. When the final assessment differs from the filed return, the tax provision must be further trued up to reflect this assessed position. This final true-up ensures that the financial statements ultimately present an accurate and complete picture of the company’s tax liabilities.

Alignment and Consistency:

In practice, differences can arise because the tax provision and the tax return calculations are often prepared separately, sometimes using different methodologies or assumptions. This can lead to the tax being calculated twice in slightly different ways—once for the tax provision and again for the tax return—resulting in unexplained variances, additional reconciliation efforts, and inefficiencies each year. To improve efficiency and reduce rework, it is important to treat the taxable income calculation for the tax return as a natural extension of the tax provision process rather than as a separate exercise. Technology solutions—such as integrated tax and accounting software, automated reconciliation tools, and centralised data repositories—can enhance alignment by reducing manual effort, minimising errors, and providing real-time visibility into tax calculations. We will explore this in more detail in the third blog in the series.

Timing and Follow Through:

If RTP calculations are not updated progressively as tax returns are finalised, teams may struggle to complete the year-end provision alongside RTP adjustments within tight deadlines. Effective planning and adequate resourcing enable a company to calculate, review, approve, and record the RTP adjustments within the same quarter that the tax returns are filed. This approach helps to alleviate the pressure that would otherwise be concentrated during the year-end provision process.

After completing the RTP, tax accounting and compliance teams should conduct a detailed analysis to understand differences between estimated and final tax balances. This review should identify whether adjustments stem from changes in estimates or errors, informing improvements to the tax provision process and reducing future RTP adjustments. Minimal RTP adjustments reflect a robust tax provision process.

Deloitte's view

Just as careful planning yields a successful outcome, advancing the RTP process earlier in the year fosters a more effective tax accounting cycle. This proactive approach results in more reliable workpapers, smoother workflows, and fewer unexpected challenges during the year-end provision. Addressing potential issues early helps tax teams avoid “late surprises,” allowing them to close the year with confidence. Ensuring the provision is trued-up to the latest tax return and final tax assessment guarantees accuracy, providing a reliable and accurate reflection of the company’s tax position. Embracing this forward-looking approach transforms RTP into a seamless and manageable part of the tax calendar.

Authors: 

• Brandi Caruso
• Victoria Botros
• Brice Clier
• Andrew Chancellor

Contributors:

• Matt Brooks
• Mario Nivelnkoetter