More and more companies are revamping and rationalizing their tax IT infrastructure with an eye to getting more value out of their ERP and business performance management (BPM) systems by “tax sensitizing” them. I asked Christopher Iervolino to explain some of the nuts-and-bolts challenges in these projects. Iervolino is senior managing director at Itec Inc., a financial software consulting firm.

Cummings: What’s involved in sensitizing a software system for tax?

Iervolino: Tax often requires more granular account data at a legal entity level. Tax may also require data collection at specific points in the process — for example, when transfer pricing requires that the sale and purchase price be recorded at time of shipment. Intercompany activity, especially when dealing with additional unique tax roll-ups, also may provide unique, but workable, challenges. Often, financial data collection and consolidation systems haven’t been designed with tax in mind. Organizationwide planning systems commonly overlook tax planning needs as well.

Tax reporting, planning, and compliance systems also need to be included in an organization’s metadata strategy to help ensure overall efficiency and to avoid the proliferation of financial data silos. ERP and financial reporting and planning systems can be leveraged to feed tax packages, but without a solid metadata management approach, ETL efforts between these systems will eventually grind to a halt, and tax will be back on their own. [ETL: extract, transform, and load — technologies that enable the transfer of information from one database to another.] Changing tax laws also underscore the necessity for well-conceived metadata management and ETL approaches.

Cummings: Can companies capture the tax data they need by expanding their ERP systems?

Iervolino: It depends. The ERP system will typically have a good deal of the legal entity data tax needs. The problems typically occur across different legal entities. If an organization has a standardized G/L across legal entities, expanding that G/L and related ERP modules to satisfy tax is possible. When an organization doesn’t utilize a single G/L (a very common situation, for various reasons) or when extensive M&A activity makes this type of standardization impossible, expansion of the ERP systems isn’t going to do the trick.

Cummings: What are some of the other source systems companies can pull from, apart from the G/Ls?

Iervolino: Tax systems may require data from systems that track tax information for sales-and-use, inventory, bad debts, foreign source income, transfer pricing, and many other areas. As a result, companies can be pulling data from anything from transactional systems to analysts’ spreadsheets. This range of need highlights the wisdom in considering tax needs when planning any financial data system effort.

Cummings: Did companies somehow overlook tax when implementing ERP and BPM systems? Are they basically playing catch-up now?

Iervolino: Possibly; this is common, but understandable. ERP and BPM projects can be difficult to execute when you’re trying to fully satisfy all project stakeholders. You need reasonable project scopes to ensure that the implementation gets done predictably. Phasing in other functionality over time is a common approach.

The only way to make sure that these projects don’t avoid tax and other critical needs is to ensure they’re not conceived of and executed in a vacuum. It’s true that too many decision-makers will hamper a project’s process, but you need an informed steering committee with appropriate project stakeholders to ensure that the cost-benefit decisions regarding ERP and BPM project scoping are understood by all. ###